Fear of Contagion

The eurozone crisis will have an effect upon the MENA region

Europe stands at the precipice. With a near insolvent and debt-ridden Greece presenting the very real risk of an unmanaged default, the threat of 'contagion' spreading to other debt-laden euro-zone states looms large. These events threaten not only a Europe-wide banking crisis, but perhaps, as some analysts have suggested, the beginning of a new wave of international recession.

Few parts of the world stand to be unaffected by the current crisis, and the Middle East and North Africa are no exception.

“The failure of European decision makers to come up with convincing solutions to the debt problems in Greece and other euro-zone countries is putting pressure on Middle Eastern markets,” said Wajdi Makhamreh, CEO of Amman-based Noor Investments.

Global uncertainty has already, paradoxically, pulled capital back from emerging markets to the rich countries at the core of the crisis. Even prior to the onset of the euro-zone crisis and the destabilizing upsurge of the ‘Arab Spring’, statistics published by RGE Monitor show growth across the region lagging behind pre-2008 financial crisis levels. Now, with economic instability in Europe and political instability at home, MENA states are more vulnerable than ever, particularly the already weak economies of Tunisia, Morocco and Egypt, which are particularly exposed to continued deterioration in the euro-zone. Even with the expectation of stabilization in the euro-zone RGE Monitor predicts net regional growth rates for the rest of the year of around 3.8 percent with no expected acceleration in 2012.

[inset_left]A cessation of vital aid could indeed prove disastrous to the more vulnerable economies of the region[/inset_left]

“One possible scenario,” says Professor Simon Neaime of the American University in Beirut, is that, “a euro-zone increase in interest rates could occur, which could have negative implications here [MENA] because such an increase could lead to capital being diverted away from the region to Europe.”

Regarding trade, “A real crisis in the euro-zone will inevitably impact on the Middle East, as European economies provide a key market for many of the exports of this region,” says Professor Jan Toporowski of SOAS. A collapse in the euro-zone would almost certainly lead to quick devaluations across the continent, meaning decreased European buying power for MENA goods. Such events could prove devastating to certain areas of the region, particularly in net oil importers such as Morocco and Tunisia. Respectively, their trade with France amounts to 26.7 percent and 29.1 percent. Raza Agha, an analyst with the Royal Bank of Scotland noted recent financial models suggesting that a 1 percent change in EU real GDP leads to a 0.6 percent change in Tunisia, an economy that sends nearly 75 percent of its exports to the European Union.

At the same time, given that most currencies in the region are pegged to the dollar or basket currencies, Professor Toporowski points out that “if the crisis continues and the euro depreciates, then the Middle East could well benefit from lower inflation, cheaper imports.” Theoretically, this should benefit the economies of the Maghreb, all of whom import much of their goods from the euro-zone. But further internal destabilization and reduction in exports to euro-zone markets could well mitigate any possible benefits of euro depreciation.

However, the effects of the crisis could spell disaster for those states in the region reliant on the flow of developmental aid from euro-zone governments. “If there was a debt crisis in Europe then that would mean that it would have economic problems of its own to deal with and that could preclude financial aid coming to the Middle East”, reasons Professor Simon Neaime. Critically, a potential debt crisis could compromise the euro-zone G-8 countries’ pledges contained in the Deauville Agreement to supply a net USD 40 billion to support economic development and political reform in the countries of the Middle East and North Africa (particularly Tunisia and Egypt), of which €3.5 billion is expected to come from the European Development Bank.

A cessation of vital aid could indeed prove disastrous to the more vulnerable economies of the region, particularly those currently undergoing a fragile period of political transition, as for instance with Egypt. Held back by three decades of economic mismanagement under Mubarak’s rule, Egypt has seen its economy stall further in the face of internal social upheaval and market uncertainty. The exasperating impact of further economic crises in Europe could stall the effective transition to civilian rule and economic liberalization necessary for regional growth and stability.

In light of the current situation, the oil exporting economies of the GCC perhaps are in the strongest position. Short of the crisis stimulating a global financial meltdown, the present crisis is unlikely to substantially affect the economies of the major oil exporting states of the Middle East. As the Saudi American Bank Group recently highlighted in its report, “The EU is a relatively unimportant export market for Saudi Arabia. In 2010 its exports to the area were just SR89 billion, or less than 10 percent of the total.”

Added to this, economic instability is unlikely to significantly affect the euro-zone’s oil imports. Professor Toporowski again: “The demand for oil is remarkably inelastic. This is essentially because though economic activity may go up and down there is still a huge demand for petroleum for energy.”

Furthermore, as Professor Neaime highlights: “The potential depreciation of the Euro could impact positively on the oil exporting economies, contributing to a higher price for petroleum exports.”  Such a positive outcome does of course rely on the stability of GCC currencies and the continued high demand for oil in the euro-zone. Yet supposing this does occur and supposing there is depreciation in the euro, then, with the price of euro-zone exports falling, GCC petroleum imports would acquire a higher price in euros. This could prove to be of great benefit to GCC states wishing to purchase euro-zone exports or invest in euro-zone companies.

Conversely, a potential destabilisation in the euro-zone could derail long-term efforts by Saudi Arabia to establish a monetary union amongst GCC states, despite assurances as recent as September by Saudi Arabia’s Central Bank Governor Muhammad Al Jasser that such a process is still “on track.”

Perhaps more ambiguously, the euro-zone crisis could well bring significant geopolitical changes to the region. Professor Toporowski again: “These developments stand to make Europe much more introverted and less active in the Middle East. I suspect in this regard the vacuum will be taken up by China and Russia. We have already seen China and Russia veto the Us and EU backed draft resolution on Syria, and I suspect there will be more of this kind of thing happening.”


A geopolitical shift of this sort could perhaps benefit the region through the provision of new export markets, trading possibilities, and investment. Yet, in light of recent Chinese and Russian vetoes blocking a US- and EU-backed draft resolution condemning Syria’s crackdown on antigovernment protestors, such a shift may not bode well for the political hopes and aspirations of the citizens of those states shaken by the events of the ‘Arab Spring’.

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