Is the eurozone hitting world growth?
World leaders at the G20 meeting in Mexico are queuing up to tell the eurozone its problems are beginning to hurt them. But are their problems home-grown?
According to Jose Angel Gurria, the Mexican head of the Organisation for Economic Co-operation and Development, Europe’s unresolved problems pose “the single biggest risk for the world economy”.
With Greece and Spain under pressure, and the future of the single currency at stake, world leaders are advising the eurozone to take decisive action to deal with its debts and placate the markets.
At the G20 summit European Commission President Jose Manuel Barroso defended the eurozone’s handling of the crisis, saying it had originated in North America, where bad loans led to the 2008 banking collapse.
‘Resolute action’
Jose Angel Gurria is not alone. Indian Prime Minister Manmohan Singh warned before the summit that Europe’s difficulties “will further dampen global markets and adversely impact our own economic growth”, adding: “It is our hope that European leaders will take resolute action to resolve the financial problems facing them.”
Mr Singh said what happened in the eurozone was of particular concern because it was India’s major trade partner.
China’s fear is that Europe’s problems have affected the demand for exports from emerging and developing economies, while damaging foreign exchange earnings and stock market confidence.
‘Lost confidence’
Brazilian Finance Minister Guido Mantega said: “The markets and the corporations have lost confidence in the solutions that are being implemented by the countries in the eurozone. That means the measures being taken are not enough to fix the problems.”
Russian President Vladimir Putin added his voice, arguing that protectionism could be needed to thwart another financial crisis, while World Bank President Robert Zoellick told the Observer that he was advising developing countries to “prepare for the uncertainty coming out of the eurozone and the wider financial markets”.
The World Bank has warned that growth rates in developing countries are likely to fall as a result, although it still expects output in 2012 to rise by a comparatively healthy 5.3 per cent, down from 6.1 per cent in 2011 and 7.4 per cent in 2010.
Strong words from across the world, but is the eurozone really dragging down other countries?
There are persistent rumours that Angela Merkel might say something that moves on the eurozone story, rumours too of a big coordinated central banks intervention. But the big picture remains that the eurozone is in a mess from which it will not crawl out any time soon. Read Political Editor Gary Gibbon's blog here.
<!–
–>
India, Brazil and Russia, along with China and South Africa, make up the BRICS group of countries – strong, emerging economies whose voices grow louder as they become more powerful.
Looking at these countries, it is clear that growth has been slowing in China, India and Brazil, although China and India are still achieving rises in output (8.1 and 5.3 per cent respectively) that the eurozone could not hope to attain. Brazil’s decline is more noticeable, down from 7.5 per cent in 2010 to just 0.8 per cent, according to the latest figures.
So is this all the fault of the eurozone? Not according to Neil Shearing, chief emerging markets economist at Capital Economics.
‘Losing their gloss’
He told Channel 4 News: “The BRICS have started to lose a bit of their gloss in recent months. If you look at the BRICS economies, it is less to do with the eurozone and more to do with local vulnerabilities. But the eurozone is exacerbating problems that were already starting to come to the fore.”
Mr Shearing said China’s problems were due to its property market, while Brazil had been hit by an over-valued currency and lower commodity prices. In India, bureaucracy had impeded invesments and Russia was grappling with falling oil prices.
But he warned that events in the eurozone still had the potential to cause problems elsewhere: “If things go from bad to worse and we get a break-up of the single currency, none of the emerging world will be immune to the fallout. In particular, eastern Europe is exposed.”
The BRICS have started to lose a bit of their gloss in recent months. If you look at the BRICS economies, it is less to do with the eurozone and more to do with local vulnerabilities. Neil Shearing, Capital Economics
Mr Shearing said eastern European countries, like Hungary, Poland and Romania, were particularly vulnerable because of the links between their banks and financial institutions in the eurozone.
‘Negative effects’
Turning to America, Mr Shearing’s colleague Jonathan Loynes, chief European economist at Capital Economics, said the assumption had been that “the US can carry on recording reasonable rates of growth even as the eurozone crisis escalates”, but this had now changed.
“The negative effects are starting to become clearer,” said Mr Loynes. “Go back a few months and there was little evidence of adverse effects, if you look at US growth and job creation. That has changed over the last few months, with signs of the US slowing.”
Mr Loynes pointed to Britain as a country that was outside the eurozone, but feeling the pinch – a point David Cameron and Chancellor George Osborne have made repeatedly, despite Labour’s arguments that this country’s lack of growth is caused by the government’s austerity policies rather than events outside.
It would be an exaggeration to say that the eurozone crisis is wreaking havoc across the world. It may be having an effect – America is a good example – but there is some way to go before countries like China can point to Greece and Spain and say definitively that they are hitting Chinese growth prospects. A break-up of the euro would be another matter entirely.
<!–
–>