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Effects of the Euro Crisis on Developing Countries

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Effects of the Euro Crisis on Developing Countries KFW-DEVELOPMENT RESEARCH Views on Development No 3, 9 July 2013 Real risks for developing and emerging nations Effects of the euro crisis on developing The ever-increasing integration of developing countries: Risks and future challenges and emerging nations into global trade does nonetheless also mean that they are not By Dr Kathrin Berensmann, Prof Helmut Reisen, entirely able to dissociate themselves from Dr Ulrich Volz what is happening in the industrialized coun- tries. Although the significance of south-south Kathrin Berensmann is a Senior Research Fellow at the German Develop- ment Institute (DIE). Helmut Reisen is Honorary Professor at the University of trade integration has greatly increased in Basel and a Senior Research Associate at DIE. Ulrich Volz is a Senior recent years (the share of south-south trade Lecturer in Development Economics at the School of Oriental and African now constitutes more then 50 per cent of Studies at the University of London and a Senior Research Fellow at DIE. exports from the south), the economic situa- tion of many developing and emerging coun- In the series "Views on Development“, KfW periodically publishes personal views from re- tries are still influenced by cyclical develop- nowned development researchers on current devel opment policy topics. The authors bear full ments in the major industrialized countries. responsibility for the contents of their texts. KfW does not necessarily share the views expres- For instance, to date, about two-thirds of sed. exports from Asian emerging economies have been linked to demand from Europe and the Four years have passed since Lehman Broth- exist. US. ers went bankrupt, and the world economy The new role of stabiliser for the emerging As a result, the euro crisis holds serious risks still has not fully recovered. Many parts of the markets for developing and emerging countries be- Eurozone are still stuck in recession and, cause the enduring problems in the Eurozone even in the US, the economy is only recover- In the wake of the global financial crisis, de- are not only having the effect of significantly ing slowly. By contrast, contrary to initial fears, veloping and emerging countries have taken slowing down the global economy but are also most developing and emerging countries had on an important role as stabilizing factors. affecting growth in developing and emerging until recently come through the global finan- Most developing and emerging nations recov- countries. In the Eurozone, growth rates are, cial crisis relatively unscathed. ered quickly from the global financial crisis and will continue to be, low. In its latest prog- and, already by 2010, had recouped and even The turbulences in the Eurozone, which are at noses for 2013, the IMF anticipates a drop in exceeded their pre-crisis growth rates, gener- least in part related to the distortions in global growth in the Eurozone by 0.3 per cent and a ating a large part of global growth. In particu- financial markets in the wake of the US sub- 1.1 per cent growth recovery in 2014. In a lar, emerging markets in Asia and Latin Amer- prime crisis, had thus far had only limited scenario such as this, the effects on develop- ica increased imports from industrialized effects on developing and emerging econo- ing and emerging nations should be limited, countries in line with their high growth rates mies. Although their real growth has also even if the recession in Europe and weak and thus supported their growth. Imports by recently collapsed, this has not diminished growth in the US have already led to a weaker developing countries formed a large part of their lead in terms of growth compared to economy in developing and emerging coun- export driven GDP in industrialized countries. industrialized countries; the convergence tries, with growth rates estimated at 5.1 per Around 63 per cent of German and French process is unabated. Thus, as a result of the cent in 2012 and forecast at 5.3 per cent in export growth to countries outside Europe in crisis, the world economic power structure has 2013. However, an unforeseen worsening of 2012 was attributable to exports to developing further shifted in favour of developing and the crisis (a scenario that unfortunately cannot and emerging markets and not to other indus- emerging nations, which are rightly demand- be ruled out) would again plunge the global trialized countries. The high domestic demand ing greater influence in international financial economy into a precarious position. A drastic in developing and emerging markets has institutions like the International Monetary fall in demand in the Eurozone would hit therefore constituted a significant growth Fund (IMF) and the World Bank. But, even emerging nations hard. Even now, global driver for the world economy in the past few though the emerging nations' assertiveness trade is struggling due to the growth problems years. The disconnection between growth has greatly increased and their growth trends in industrialized countries, especially the rates of industrialized and developing coun- are clearly outstripping those of the industrial- Eurozone, which is after all the largest trade tries has led to an ever-increasing role for ized countries: the continuing cyclical weak- block in the world: whereas global trade developing countries in global trade in both nesses in the world economy and the endur- growth in 2011 still stood at 6.0 per cent, in absolute and relative terms. According to ing crisis in the Eurozone imply a whole range 2012 it slumped to 2.5 per cent. That was the World Bank estimates, the share of develop- of risks for developing and emerging countries lowest growth since 2009. ing countries in global trade will be around 35 owing to the strong mutual inter-relations that per cent in 2015. 1 KFW-DEVELOPMENT RESEARCH Unabated protectionism is slowing down tries and poorer medium-income countries domestic exports. The upward pressure on global trade continue to be exposed to the danger of cur- the value of emerging nations' own currencies rency risks and maturity incongruences be- is also affecting their foreign assets, e.g. The growth problems and the attendant high tween borrowing and investment. foreign currency reserves for which invest- levels of unemployment in many industrialized ments were made in dollars and euros. If it countries are leading to more vociferous calls The US Federal Reserve's announcement in actually should end up in a currency war with to protect production at home from foreign June 2013 that it is likely to begin tapering its a battle for reciprocal devaluation of curren- competition and are thus posing the risk of quantitative easing program and moderate the cies and trade-protectionist measures, the new protectionist measures. The new protec- pace of bond purchases later this year dem- entire global economy would feel the effects, tionist measures introduced between October onstrates a further danger for emerging na- with unforeseeable consequences, not least 2011 and May 2012 are affecting 0.9 per cent tions, to which billions of dollars of portfolio for developing and emerging nations. of total global imports, according to informa- investments previously flowed. In the middle tion from the World Trade Organization. of June 2013, equity and bond funds under "Financialization" of the commodities the "emerging markets" label saw the biggest markets Monetary and financial risks for develop- outflows since the start of 2008, to the tune of ing and emerging countries A further consequence of the rise in global US$ 10 billion. liquidity as a result of the extremely loose Particular risks exist due to the extremely In addition, many European banks are being monetary policy practised by most industrial- expansive monetary policies of most industri- forced to reduce their balance sheets in the ized countries due to the sub-prime and euro alized nations. Considerable advances were wake of the financial crisis, which has led to crisis is its effects on prices on the interna- made in integrating developing (and espe- lower growth and higher equity requirements. tional commodities markets. In past years, cially emerging) economies into the interna- This "deleveraging" by the European banks there has been a "financialization" of the tional financial markets over the past decade. has contributed to intensifying volatility on the commodities markets, including the foodstuffs The large increase in liquidity on the global markets and poses serious risks to the finan- markets. This has led to prices developing in financial markets stemming from the low- cial stability of emerging economies, for which a manner that is unrelated to fundamental interest policies and unconventional measures European banks are a significant source of data and is clearly more volatile. The great adopted by the world's major central banks is credit. A renewed deepening of the European mass of liquidity on the international financial now having direct and indirect effects in de- banking crisis could thus lead to contagion markets has further aggravated this process, veloping and emerging economies. effects in emerging countries, whose banking which was triggered by deregulation of the Low interest rates in industrialized countries systems are intertwined with the European commodities markets. Although high com- are whetting the appetite for capital flows banks, and could cause liquidity shortages modities prices can have a positive effect for towards developing and emerging countries, there. The solvency ratio of large, systemically export countries through rising export reve- where both interest rates and economic relevant banks in emerging countries could nues, the effects among commodities import- growth are at much higher levels. At first sight, worsen considerably in the event they are ers are negative. They are particularly nega- this is no bad thing, though these capital flows unable to replace the capital from foreign tive in terms of price volatility, which has very also pose a number of potential risks.
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