The effect on MENA of a shredded Eurozone

Posted on November 15, 2011

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Caught between the impending European meltdown and the continuing global economic slowdown is the Middle East.

European Central Bank

Is it the twilight zone for the Eurozone? (Flickr)

With fiscal and monetary policies continuing to pull the peripheral states of the Eurozone in divergent directions, the very real fear of a crack-up is haunting markets across the world. Markets like certainty and they like the idea of a financial back-stop or rainy day fund for when things go pear-shaped. The Eurozone has no centralized rainy-day fund. Instead, as pressures in Greece, Ireland and now Italy have started to mount the EU authorities have instead put together piecemeal solutions — bailouts, emergency summits or hastily arranged austerity budgets. The market smells blood and unless there are some big changes in Europe then Italy and maybe Spain, possibly even France, could be next in the firing line.

The Eurozone’s rescue fund — the European Financial Stability Facility — is still only EUR 440 billion in size. If the European Central Bank, which is probably the only entity that has the power to do something, does not take some solid steps this month, we could see a banking crisis and credit freeze in Europe that would threaten global growth. The United States and the United Kingdom, which are not collections of heterogeneous fiscal entities like the Eurozone, have already taken massive steps to infuse capital into their economies through quantitative easing. The Eurozone has no mechanism to do that.

Caught between the impending European meltdown and the continuing global economic slowdown is the Middle East. A weak global economy will impact the MENA region as demand for goods (read oil) and services (read tourism) will weaken and it will be more difficult to access international financing and foreign direct investment. The faltering US and European economies and a slowdown in emerging markets, most notably in China, will have an impact on the Gulf economies in terms of oil prices, which are expected to head south next year, according to the International Energy Agency. This means a lower current account and trading account surplus, which will have a direct impact on economic growth rates.

Will the Middle Eastern companies now need to consider the break-up of the Eurozone as a very real possibility and look at coming up with a plan to protect profits in drachma, lira and Spanish peseta?

— Yazad Darasha

More intelligence on the effects of a possible Eurozone meltdown (Zawya.com):

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Posted in: Economy