JULY | 2010

EURO CRISIS:
THE IMPACT ON
EMERGING COUNTRIES

Summary
Europe has been in turmoil ever since speculations began that the EU-5 (Greece, Ireland, Italy, Portugal,
and Spain) may default on their debt. However, other developed countries, such as Germany, France,
and Sweden, witnessed a robust recovery and GDP growth in the beginning of 2010. Overall, Europe
grew 0.8% in Q1 2010.
The European Union, International Monetary Fund (IMF), and European Central Bank announced an aid
package of approximately one trillion USD, which will force the G5 countries (France, Germany, Italy, the
United Kingdom, and Spain) to undergo massive fiscal tightening.
Fiscal tightening will reduce consumer and business confidence, and thereby reduce Europe’s GDP
by 0.4% in 2010 and 0.8% in 2011. However, the depreciation of the euro by 10% in the past
12 months will likely boost Europe’s GDP by 0.7% in the next 12 months, thus offsetting the effects of
fiscal tightening.
As the euro weakens, exporters across the world will suffer, as nearly 40% of global exports
(or 15% when excluding intra-EU trade) are to Europe.
The continuous depreciation of the euro and its impact on emerging economies are discussed in detail
in this paper.

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What went wrong in Europe? Why did the IMF and Europe hesitate to bailout
Greece had a high budget Greece?
deficit of 5% and a current 4The Maastricht Treaty of Europe was designed with
account deficit of 9% per year a no bailout clause to mitigate potential problems of
on average since 2001. This moral hazard.
deficit was much above the EU
condition term of 2% and 1%, 4Greece did not meet IMF’s flexible credit line or stand-
respectively. by arrangement criteria, which are required to obtain
IMF assistance.
Greece had been estimating
low debt figures in order 4The devaluation of the euro is not possible, as 16
to maintain its European member states share the common currency.
Monetary Union membership. As a result, Greece is now Therefore, the Greece crisis led to instability and
approximately 300 billion EUR (419 billion USD) in debt, uncertainty throughout Europe.
which has reduced the world’s confidence in the European
economy.
Bond Rates Fell Globally
Stock markets worldwide lost between 8-17% in May
2010, with losses generally higher in high-income European
nations. Globally, there was a significant decline in capital
%XGJHW'HILFLW ( inflows to developing countries, although year-to-date
flows are 90% higher than in 2009.
68.6%
UK
13% Most bond rates declined, with more modest declines in
Greece
112.6 % bank lending and equity flows in developing countries.
12.5%
US withstands the Euro Crisis
54.3 %
Spain
11.25% The US was only moderately impacted by the euro
65.8% debt crisis. Its GDP grew 3.2% in Q1 2010, driven by
Irelan d
10.75% rising consumer spending, trade and investment, and a
Italy 114.6% sustainable increase in domestic demand.
5.3%

German y 74.3%
3.5 %
“US economy is on track to grow 3.5 percent this
Budget Deficit Figures as a % o f GDP Debt as a % o f GDP year as it sees only a “modest” impact from the
Source: European Commission / Economic forecast autumn 2009 euro zone debt crisis.” – Ben Bernanke,
Federal Reserve Chairman

As 16 nations share the single currency, Greece’s debt

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problems have impacted all of Europe. As a result, the 
poor debt performance of Portugal, Ireland, Italy, and
Spain were also brought to the forefront. 


Without Euro Crisis
“A serious loss of confidence in the debt of EU 5

combining high fiscal deficits and high government
debts that led to a freezing-up of credit in those 
countries could cause GDP growth to slow—pushing
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high-income countries of Europe into recession.” –

The World Bank

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 In addition, investors who started investing money in Europe after the sub-prime crisis are now reverting to dollar assets. This
trend has made the dollar appreciate
in the last couple of months. (80HUFKDQGLVH7UDGHZLWKWKH8QLWHG6WDWHVE\3URGXFW
In addition, consumer spending
increased 3.5% in June 2010. This 
increase was supported by greater 0LOOLRQV of (XURV  

consumer confidence, an increase in 

income levels, and some improvement 

in credit conditions.  



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In May 2010, oil prices fell due to 

 

the drastic depreciation of the euro,
which increased the confidence of US $JULFXOWXUDO 3URGXFWV (QHUJ\ 0DFKLQHU\ TUDQVSRUW (TXLSPHQW &KHPLFDOV TH[WLOHV DQG &ORWKLQJ

consumers and businesses. 6RXUFH (XURVWDW ,PSRUWV ([SRUWV %DODQFH

US Concerns
Currently, the USD is strong compared to the EUR, but if it appreciates, the USD might impact the price of oil and the US
economy.
For example, the appreciation of the USD could spur American tourists to visit Europe, which will boost the business of hotels
and lead to the appreciation of the EUR.

“The recent dip in the euro could prompt more US tourists to consider a trip overseas.” – Deloitte

US unemployment was 9.7% in June 2010 and continues to be a major economic threat. If the EUR continues to depreciate,
it will lead to lower domestic production in the US, as the country will import more from Europe. These factors will lead to a
rise in the US unemployment rate.
The Impact of the Euro Crisis on Emerging Countries
“Slower growth in developed economies resulting from the Euro crisis would deprive developing countries of healthy
markets for their goods and would cut into investment.” – The World Bank

,QGXVWULDO3URGXFWLRQ$SULO Low Exports

 –
Imports from developing countries constitute 27% of
 – European consumption. Therefore, the euro crisis can slow
&KDQJH<R<

 – down the export growth rate of developing nations, decrease

the profitability of exporters in emerging countries, and
 –
increase competition in sectors like agriculture, garments, and
 – automobiles in emerging countries.
² Tourism Slowdown
² The low value of the euro will reduce the number of European
&KLQD ,QGLD %UD]LO 86 tourists traveling to emerging countries, which in turn will
decrease the country’s revenue from the tourism industry.
Domestic Competition
Importers in emerging countries may have the opportunity to import from Europe at a lower price due to the low value of the
euro. An increase in imports will create price pressure and tight competition in the domestic market of emerging nations.
Capital Flows
The euro crisis forced the European Central Bank to sustain a very low interest rate. In addition, the currently low rates in
Japan and the US may lead to increased capital flow in emerging markets, which will put pressure on inflation, lead to currency
appreciation, and increase the volatility in the stock market. For example, the cost of hedging against volatility of stocks doubled
in the last two months.

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Latin America
Positive Impact
4Latin America’s exports are expected to decline less
than in other emerging countries, as only 8% of total
foreign investment is from high-tech industries, such as
aircraft assembly plants. Around 76% is from medium-
to-low and low tech industries, such as food, beverage,
or textile industries, and 16% is from medium-to-high
tech industries, such as car part factories.
“Brazil is prepared to face the crisis; reserve and
liquidity levels are higher and the economy is recovering
as a result of domestic demand.” - Henrique Meirelles,
Central Bank President, Brazil
Negative Impact
450% of Latin American foreign investments are from
Europe. Moreover, Spanish banks, which are among the
biggest foreign investors in Latin America, may cut back
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China
Positive Impact
4The exposure of the Chinese economy to Greek bonds
and financial institution shares is limited, which means a
low proportion of assets are exposed to risk.
Negative Impact
4The demand for Chinese products from the European
Union is falling, which will lead to a decline in Chinese
exports, as the EU is one of China’s major export
destinations.
4A low value EUR compared to the USD puts downward
pressure on Chinese exports, as a strong RMB affects
the competitive edge of Chinese exports in European
markets.
4China’s PMI, an indicator of factory activity that is
compiled by the China Federation of Logistics and
Purchasing, fell to 53.9 in May 2010 from 55.7 in
April 2010. This fall was caused by the depreciation
of the euro, which led to increased competition in the
Chinese export market and the domestic market and
less domestic production.
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from investing in the region if the crisis touches Spain.
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4The low value of the euro negatively impacted the

Brazilian materials sector share. The prices of key
commodities declined, which raised fears of competition
among exporters, as 20% of Latin American exports
are shipped to Europe. “European woes were probably not to blame for the
decline in China’s official purchasing managers’ index
4Inflation continued to increase in Brazil. The country’s
in May because any impact on production and exports
IBGE Statistics Institute reported that IPCA consumer
would not be felt so quickly.” – Zhou Xiaochuan,
price inflation rose 0.63% in early May 2010 from
Governor, People’s Bank of China
0.48% in April 2010. The increase in inflation pressured
Brazil’s Central Bank to raise the Selic rate by 75 basis
points in May 2010 to 9.5% annually. This hike was a
20-month high.

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India
Positive Impact
4India will be able to control its fuel subsidy bill, as the
crisis has pulled down commodity prices, including
petroleum products.
4Lower prices will also help the country contain inflation
(which was around 9% in May 2010).
4If inflation falls due to lower commodity prices, the
country will be able to achieve a growth of 8.5% for
2010.
4Despite positive earnings growth and inexpensive
valuations, Indian equity followed the same trend as
the equity markets in developed countries and was sold
off considerably. However, inward capital flows started
increasing recently because investors find the Indian
market an attractive destination.
“India is almost insulated from the euro crisis.’’ –
C Rangarajan, Chairman of Prime Minister’s Economic
Advisory Council, India
borrow large amounts from the LIBOR will witness
an increase in the cost of funds. As a result, foreign
borrowing will become less profitable for Indians, which
will lead to a rise in domestic interest rates.
4Europe accounts for 27% of India’s exports; hence, the
depreciation of the EUR will result in a downturn for
the Indian trade and services sector.
430% of foreign tourist arrivals in India are from Western
Europe. The depreciation of the euro will lead to a fall
in tourists from Europe, resulting in a drastic decrease
in India’s revenue from the tourism industry.

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Negative Impact
4The floating interest of the London Interbank Offered
Rate (LIBOR) will increase due to the negative sentiment
caused by the euro debt crisis. Indian borrowers who

Author:
Jayamurugan.P | Domain Lead at Beroe Inc

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