EURO CRISIS:AN EFFECT ON THE DEVELOPING COUNTRIES
Dr.Debesh Bhowmik
International Journal of Business ,Management and Social Sciences,
Vol-II,Issue-3(I),November,2012,155-158
EURO CRISIS : AN EFFECT ON THE DEVELOPING COUNTRIES.
Dr.Debesh Bhowmik(International Institute for Development
Studies,Kolkata)
Key words:Euro crisis , spill over effects,JEL-E62,F13,F33,
Objective
Euro crisis has huge spill over effects on both developed and
developing countries through trade ,capital flows, finance , exchange rate
adjustment and employment opportunities and these phenomenon would be studied
in this paper.
The spill over effects.
As the global economy is rebounding from the crisis, there is
widespread belief that the worst of the global crisis is over as output and
trade are back to pre-crisis levels in 2010 in most of the emerging and
developing world. However, the OECD countries still suffer from low growth and
high fiscal deficits. The key issues that the world faces today are
unsustainable fiscal expansion, inflationary pressure in some countries,
deciding on the appropriate time to exit the extraordinary levels of public intervention
in the immediate aftermath of the crisis, global co-operation to check
macroeconomic imbalances and the quest for a new global economic regime.
Against this backdrop, ICRIER and Inwent jointly organised a
two-day conference on , “Policies for Growth and Financial Stability: Beyond
the Crisis – The Scope for Global Co-operation”, which brought together
distinguished policy makers, regulators, practitioners and academicians for a
dialogue on these issues. The conference focused on two specific issues. First,
it took stock of major reports on the reform of the global financial system and
the implementation of their recommendations through the G20 process. The second
was an assessment of major fiscal, monetary and regulatory initiatives
undertaken around the world after the crisis. The consensus was that the G20
had been quite successful in limiting the damage caused when the crisis
initially broke out as well as in ironing out medium term issues like IMF and
FSB reform.
A lecture on “Dealing with the Global Financial Crisis in
Developing East and Southeast Asia” was delivered by Mr. C. Lawrence Greenwood
at ICRIER on November 4, 2010. According to Mr. Greenwood, of the countries in
the developing East and Southeast Asia, the two countries that escaped relatively
unscathed from the crisis were India and Vietnam.
Mr. Greenwood pointed out that one of the continuing after
effects of the global crisis has been a sharp rise in inflation rates in
countries like China, India and Vietnam. This had prompted the adoption of
tight money policies, flexible exchange rate management and fiscal measures to
ward off a possible falling off in demand. He also pointed out that in
countries like China, where the savings level is considered excessive, measures
to transfer money to households have been introduced through increased
expenditure on health, education and social safety nets. While structural
reforms would take time to bear fruit, Mr. Greenwood said these, along with
measures to promote regional co-ordination and the opening of intra-regional
trade to reduce dependence on western economies, need to be pushed through to
ensure sustained recovery.
In Fig-1,it was
shown that on the inception of Euro crisis, the exports in intra-EU trade,
extra-EU trade, and with USA, Asia and OPEC have tremendously fallen and
started to increase since first quarter of 2010.In some trading partners , the
index rose above the baseline 2008.It was happened due to depreciation of Euro
in nominal terms. The most effected destination is USA and Japan but less
affected area is in Asia.
Fig-1,Euro Area export;2008=100
Low-income countries (LICs) are affected by developments in the Euro Area
(EA) through several channels. Direct channels include trade,
remittances, FDI and aid flows. At the same time, the EA also has indirect
spillover effects on LICs, especially through global commodity prices.
·
The EA receives about 20 percent of
LIC exports. About 30 percent of exports from LICs in Sub-Saharan Africa (SSA)
and 20 percent of exports from Asia and CIS countries go to the EA. Commodity
exports, in particular, play an important role in LIC bilateral trade links
with Europe where fuel and crude material make up roughly 60 percent of LIC
exports to Europe in 2008. Remittances
and FDI from the EA are particularly important for LICs in Sub-Sahara Africa. Over
30 percent of SSA’s remittance inflows originate from EA. In other regions, the
U.S.’s remittance role is generally larger. In addition, EA FDI dominates flows
to CIS and SSA countries.
·
The EA is the largest donor across
LICs, particularly for LAC and SSA where EA aid makes up more
than 40 percent of total aid to these regions.
Empirical evidence suggest that developments in EA could have significant
spillovers on LICs. Estimates from growth regressions suggest that trading partner
growth has a significant impact on LIC growth. An empirical study using
bilateral FDI data between EA and LICs suggests that EA growth is one driver of
FDI flows to LICs, although the effect is much weaker than the size of the
recipient economy. In addition, there is evidence that aid flows are pro cyclical
with respect to the donors’ business cycle and could be influenced by donors’
fiscal situation, particularly when donors face a large negative shock.( IMF
Country Report No. 11/185)
In analyzing data
of EU ,we can say that both export shares of EU and Euro zone started to
decline from 2005 which were 33.93% and 26.39% of the world respectively in
2010.Besides the import shares of EU and Euro zone reached the peak level in
2007 and then declined to 34.21% and 25.72% in 2010 respectively.(Table-1).
Table-1; Export and import of EU and Euro zone (value in million
US$)
|
|
1990
|
2000
|
2005
|
2007
|
2009
|
2010
|
|
Export/EU
|
1549094
|
2447635
|
4064021
|
5339902
|
4576065
|
5149361
|
|
% share
|
44.52
|
37.96
|
38.72
|
38.15
|
36.58
|
33.93
|
|
Euro area
|
1223684
|
1915380
|
3176885
|
4187862
|
3588796
|
4004355
|
|
% share
|
35.16
|
29.71
|
30.27
|
29.92
|
28.68
|
26.39
|
|
Import/EU
|
1606837
|
2508665
|
4131559
|
5515271
|
4632700
|
5253044
|
|
% share
|
44.78
|
37.65
|
38.25
|
38.70
|
36.56
|
34.21
|
|
Euro area
|
1250184
|
1900613
|
3103428
|
4123476
|
3513394
|
3949383
|
|
% share
|
34.84
|
28.53
|
28.74
|
28.93
|
27.73
|
25.72
|
Source-UNCTAD-2011
Moreover, it is
clear that the intra-trade of EU and Euro area had been fallen marginally with
respect to 2000 but slightly improved in 2010 compared with 2009 when crisis
began .(Table-2)
Table-2: Intra trade of EU(% of regional total)
|
|
1980
|
1995
|
2000
|
2005
|
2009
|
2010
|
|
EU
|
62.2
|
67.2
|
67.7
|
67.4
|
66.5
|
67.2
|
|
Euro
area
|
51.9
|
54.2
|
51.8
|
51.5
|
50.2
|
50.4
|
Source-UNCTAD-2011
The crisis has an
impact on developing countries too in terms of trade shares. The exports from
the developing economies to EU sharply fell to 16.2% and 14.7% respectively in
2010 in comparison to 18.2% and 16.5% respectively in 2005. Therefore, huge
loss in trade incurred with Euro crisis to the developing countries. The most
affected developing region is Asia whose exports to EU declined to 15.1% in
2010 compared to 17.0% in 2005 and Asia’s imports to EU fell to 12.9% in 2010
with respect to 14.8% in 2005.But, only 1% fell of both export and import
shares from Eastern, Southern and Southeast Asian nations were observed. But,
Western Asia lost too much as a result of Euro crisis. Because the export share
from the region to EU declined to 13.5% in 2010 from 19.6% in 2005 and import
shares fell to 27.9% in 2010 from 34.6% in 2005 respectively.
The export share
from African developing countries to EU dropped sharply to 34.3% in 2010 from
39.9% in 2005 .On the other hand, the import share from African developing
countries to EU fell down to 33.7% in 2010 with respect to 36.6% in 2005
respectively. On the contrary, the American developing countries lost only 1%
trade share both in export and import shares in 2010 compared with 2005. India,
too, confronted with severe effects of Euro crisis. Its export and import
shares have drastically fell down to 18.4% and 12.0% respectively in 2010
compared with 22.4% and 17.4% respectively in 2005.(Table-3)
Table-3:EU Trade with developing countries(% of total regional
shares)
|
|
Export/Import
shares
|
1995
|
2005
|
2010
|
|
Developing
countries to EU
|
Export/
|
18.7
|
18.2
|
16.2
|
|
|
Import
|
20.0
|
16.5
|
14.7
|
|
African
developing countries to EU
|
Export/
|
43.9
|
39.9
|
34.3
|
|
|
Import
|
43.5
|
36.6
|
33.7
|
|
American
developing countries to EU
|
Export/
|
16.9
|
12.7
|
12.6
|
|
|
Import
|
18.6
|
14.4
|
13.5
|
|
Asia’s
developing countries to EU
|
Export/
|
16.4
|
17.0
|
15.1
|
|
|
Import
|
17.7
|
14.8
|
12.9
|
|
Eastern,Southern,SouthEastern
developing countries to EU
|
Export/
|
15.8
|
16.4
|
15.4
|
|
|
Import
|
15.2
|
11.6
|
10.4
|
|
Developing
countries of Oceania to EU
|
Export/
|
18.3
|
19.2
|
15.8
|
|
|
Import
|
19.9
|
20.3
|
16.4
|
|
Developing
countries of Western Asia to EU
|
Export/
|
21.0
|
19.6
|
13.5
|
|
|
Import
|
37.9
|
34.6
|
27.9
|
|
India
to EU
|
Export
|
27.6
|
22.4
|
18.4
|
|
|
Import
|
26.9
|
17.4
|
12.0
|
Source-UNCTAD-2011
Euro Crisis: Impact on India
It is evident that the
crisis in the Euro zone has already impacted emerging markets in general and
India in particular. As global investors seek safe havens , liquidity has been
removed from emerging markets. Many emerging markets, and especially India are
dependent on this liquidity to finance the current account deficit and provide
capital for investment. India is particularly vulnerable due to its large
current account deficit which is financed to large degree by shorter term
portfolio flows. As these have dried up the equity market have struggled and rupee has depreciated
sharply.
“The Indian Government has introduced focused
market schemes to diversify exports. So, the crisis in Europe should be seen as
an opportunities for India to break into the market where they export”, says
Rammu Deora, chairman, All India Shippers council. If the Euro zone crisis is
not averted, India which has about a sixth of its total exports to the EU, will
face unemployment in the lower income category, such as textiles, one of the
biggest employers in textiles, including readymade garments, accounts for about
a fifth of the total exports to Europe. The Euro zone crisis has eliminated the
benefits of a weak rupee, which is down 20% in a year, to Indian exporters as
the spend-thrift consumers in the continent do something they are not used to
three decades-save.Companies that enjoyed cheap money from European Banks, such
as Deutsche Bank and BNP Paribus, for expansion and acquisitions are beginning
to feel the pinch as battered lenders in
the continent slam the doors on Indian firms.
If the Euro zone
collapsed the impact on Indian growth will be severe, said Enrico Atanasio,
Fiat India Automobile Ltd.
Table-4, Indo-EU Trade
|
|
Exports($million)
|
Growth
rate
|
Imports($million)
|
Growth
rate
|
|
2006-07
|
26831
|
15.51
|
29856
|
14.84
|
|
2007-08
|
34535
|
28.71
|
38450
|
28.78
|
|
2008-09
|
39351
|
13.95
|
42733
|
11.14
|
|
2009-10
|
36028
|
-8.45
|
38433
|
-10.06
|
|
2010-11
|
46819
|
29.95
|
44540
|
15.89
|
|
2011-12
|
26421
|
|
24473
|
|
ET-15/6/2012
The European Union
is a major trade partner accounting for as much as 20.2 per cent of India’s
exports (in 2009-10) and 13.3 per cent of India’s imports. European Union
countries imported roughly € 33.1 billion worth of Agriculture products, Fuel
and mining products, machinery and transport equipment, chemicals, semi
manufactured products textile and clothing products in 2010 from India. The EU
exports to India amounted to €34.8bl, majority of which was machinery, chemical
products and semi manufactured items which was almost 2.6 percent of EU
exports. Bilateral trade between the two has been growing on an average of 9.6
per cent during 2006-10. EU services exports to India during 2010 was €9.8
billion and EU imports from India was €8.1 billion. That apart, the total FDI
from EU during 2010 amounted to €3.0 billion while India also invested about
€0.6 billion in the EU. In other words, a slowdown in the euro zone and the EU
is likely to have a major adverse impact on India’s exports.
Moreover, Indian
exports fell 4.2% to $25.7 billion in May from a year ago, pilling on more bad
news for the economy struggling with the nine year low growth and facing rating
downward to junk status. The outlook for exports for the coming months is
uncertain as the Euro zone teeters on the brink of serious crisis, prompting
the government to announce sops last week to push up exports. Imports also
dropped 7.4% in May from a year ago to $41.9billion leaving a trade deficit of
$16.3 billion ,a higher than the $13.9 billion in April but less than $18.5
billion in May last year. To note that 51% fall in Gold and Silver imports in
May because of price rise.
The data suggest
that sharp rupee depreciation has not helped exports as it has coincided with
decelerated in global growth, particularly Europe. All the key exports sectors
engineering goods(-15.67%),petroleum products(-26.07%), gems and jewellery
(-9%) and readymade garments(-15.82%) reported negative
growth.(ET-15/6/2012).The top three exports to the EU are Mineral fuels and
products, electrical machinery and parts and apparel & clothing accessories
amounting to 8646.81 million dollar,3770.30 million dollars and 3147.17 million
dollars respectively in 2010-11.On the other hand ,the top three imports from
EU are pearls & semi precious stones, nuclear reactors, boilers etc and electrical
machinery & equipments amounting to 9417.56 million dollar,8844.84 million
dollar, and 5252.34 million dollar respectively in 2010-11.On the liquidity
issue, India’s external debt denominated in Euros was found as 3.8% and FDI
from EU is 3.0 billion Euro in
2010.Moreover,about 26% of India’s reserves are held in Euro. So, India would
face massive inverse effects due to break down of Euro in the offing.(ET-18/6/12)
Apart from trade,
the euro zone experience has some lessons for India. Whole sale debt funding
has been the unmaking for banks in the Euro zone. While it is difficult to
argue that banks should only raise debt resources through retail deposits, at
the same time, the current episode shows that large scale reliance on
whole sale debt, especially, from across borders may not be in the interest of
financial stability. In this context, the Indian banking system has
traditionally relied on retail deposits which despite higher cost; serve as a
stable source of funding. Without necessarily shunning the option, any
substantial shift towards whole sale debt funding may not be a desirable.
Conclusion
Euro debt crisis
turned into financial crisis in EU which spill over into the international
economies in which the developing countries had been suffering too much through
imbalance in BOPs between EU and developing countries including in employment
opportunities and exchange rate market which fell short of international
liquidity in terms of Euro.ECB-IMFs bail out package,Draghi’s bond buying plan,
banking union,restructuring convergence criteria might be likely to control
debt crisis and fiscal deficit which must have impact on debt financing in
developing countries too.
References
Bhowmik,Debesh.,2012,The
Euro crisis:An Overview.,Paper selected for presentation in World Finance and
Banking Symposium, Shanghai, China, Dec 19-20,2012
Eichengreen,Barry.,2011,The
Euro’s Never-ending Crisis.,Current History,March,91-96
ECB,2012,Eurostat,
and European Balance of Payments Statistics,March 2011AND
Economic
Times,15/6/2012 and 18/6/12 ,
IMF,2011,IMF
Country Report-11/185,World Economic Outlook-2011
UNCTAD,2011,UNCTAD
Report-2011
