Can the Middle East survive a Eurozone meltdown?

Posted on June 13, 2012

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Greece heads to the polls on June 17 in what is being seen as a referendum on Eurozone membership. Then there is the festering crisis in Spain’s banking sector. The unrelenting waves of bad news from Europe have resulted in volatility on global stock, commodities and currency markets. Clearly, Europe has some major problems on its hands and there are no easy solutions. So, if Europe does implode how does this affect the Middle East?

Firstly, through oil demand, says Kathleen Brooks, research director at Gain Capital’s Forex.com. If Europe breaks up or Greece is thrown out it could cause a global financial meltdown akin to the collapse of Lehman Brothers in 2008. Back then, the global economy suffered a massive shock and demand for oil fell sharply. This weighed on economic growth in the GCC, especially for the major oil producers. Saudi Arabia’s annual growth rate fell to 0.1% in 2009 after registering 4.23% in 2008. Kuwait wasn’t so lucky; its economy contracted sharply in 2009, before bouncing back in 2010 and 2011.

It’s not just oil, though. “A marked spillover of the current crisis of peripheral Euro countries into the core euro area and global financial markets could have major financial repercussions for the UAE and the GCC region, with particular contagion risks for economies that depend on foreign financing and that have financial links to Europe,” according to the IMF.

Waylaid by global concerns, GCC markets fell 6.1% in May, after erasing 3.2% in April. Dubai shed 9.8% for the month, followed by Saudi Arabia, which lost 7.7%.

While the news out of Europe continues to be grim, the oil exporters of the Gulf have deployed recent profits from high crude prices into growing their non-hydrocarbon sectors. Will this be enough to cushion a massive shock from a Eurozone break-up? Time is of the essence here — the longer the shock is delayed, the stronger the GCC economies will be to absorb it without cataclysmic consequences.

— Yazad Darasha

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Posted in: Economy