EURO CRISIS:AN EFFECT ON THE DEVELOPING COUNTRIES

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