Does the Eurozone crisis matter to emerging markets?

27th October 2011

China

China's approach to the crisis has been paternalistic, keen to show that they are helping out in the hope of winning a more powerful place on the world stage. 

"Leading emerging economies such as China have reportedly agreed to help the European Union increase its bailout fund through the International Monetary Fund (IMF), said a reliable source close to EU decision-makers. If this happens, China and other emerging economies may obtain more influence in the global financial system ahead of G20 summit scheduled for Nov 3 to 4 in Cannes, France.

Within the IMF, an increased contribution means more voting rights. Emerging economies have long calling for a bigger say in the organization, which has been dominated by developed economies and in which the United States has a veto."

Brazil

Commentary in Brazil shows the extent to which the agenda of many emerging markets diverges from those of developed markets. It is a more naturally socialist take on the crisis. President Dilma Rousseff is quoted as saying: "Lack of financial resources is not an excuse for rich countries not to find a solution for the crisis. It is due to lack of political resources and, sometimes, straight thinking."

Russia

This affirmation of a more socialist agenda is – unsurprisingly – also seen in the Russian press. The translation is clunky, but the sentiment is clear: "Wall Street has made an enormous contribution to economic imbalances. Increased profits in the finance sector have led to the fact that revenues have risen dramatically in just the richest one percent of the population (and especially in the most affluent strata in this group – 0.1%). And politicians have only helped to strengthen the inequality.

"The recent crisis has proved all the allegations that modern finance to reduce the risk and made the system more stable to be complete nonsense. Only state aid measures have saved us from financial ruin, no less or even more dangerous than the one that caused the Great Depression."

Asia

The Asian media is more measured. But the implication is still that it is very much a problem happening to someone else. Certainly many of these countries are forging trade links away from developed markets and as a consequence, do not fear its weakness in the same way.

Mindful Money's Shaun Richards says: "We think of ourselves as ‘first world', but in South-East Asia – one of the fastest growing areas of the global economy, do they necessarily agree? They may be in a position to demote us. I suspect that we need to think about Europe a little less in the UK and start doing a little more of our business in South-East Asia. This is where the action is. Otherwise we risk becoming a backwater."

But before we suggest that the Eurozone crisis is of no consequence to the emerging markets, it is worth considering the effect on those Eurozone hopefuls in Eastern Europe. For years, the dream of the convergence trade has buoyed the economies and stock markets of these countries. In theory, the Eurozone crisis should have made membership of the Eurozone look less attractive, but – bizarrely – many of these countries are still keen to join. This suggests that, for its neighbours at least, Europe still matters.

More from Mindful Money:

Eurozone Debt Crisis: LIVE

Confidence Contagion: How Will Emerging Markets Be Effected?

What the eurozone deal means for banks, markets and Greece

New Global Titans: Stock-picking to benefit from emerging market success

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18 thoughts on “Does the Eurozone crisis matter to emerging markets?”

  1. Anonymous says:

    Hi Shaun
    The BoE should also look at the poor productivity statistics. Output per hour worked has been broadly flat for the whole economy for nearly four years. It is said by commentators that we are producing 4% below our capacity. I see often the term ‘zombie’ banks being used. I wonder if zombies can be found further afield in all advanced economies.

    1. Anonymous says:

      Hi Shire

      Do you mean perhaps zombie minds? Such zombie minds miss inflation and low productivity growth but can see rebalancing of the economy everywhere when in fact it is thin on the ground…

      They are unlikely to be worried much by weak bank lending to SMEs either.

      1. Anonymous says:

         Quite right to point to inflation as the zombie’s friend. Zombieism ( lexicon addition) leads to : earnings retained for working capital, not investment ; credit provision to non-risk activity and export of capital or public debt support ; high rates of interest for risk investment and disincentives ; anti-competitive structures…..zombeism  

  2. JW says:

    Hi Shaun
    Is the UK ‘bumping along the bottom’, or ‘hanging onto the cliff-edge by its teeth’? I think we can rule out, ‘slowly climbing the foothills’.
    If you take into account ;growth on population, creation of money, and actual inflation ( not CPI); the expediture measure of economic activity GDP is pretty appalling. The real state of affairs is better reflected in your oft quoted real wages growth ( sic), that is the only truely valid measure of the health of an economy. Perhaps the teeth are falling out!
    Interestingly the German government are finally considering raising wage levels, they need to a lot and quickly, ultimately when they run out of all the ‘jargon’, its the only thing that will save the EZ .

    1. Rob says:

      Hi JW

      If Germany do raise wage levels do you think demand will increase imports from her major European trading partners, France, Netherlands, UK and Italy or could this lead to protectionism?

      I see CMD is calling for a ‘buy British’. 
      Barry O in the past 18 months has tried to stimulate his economy  by cancelling sub contracts in the Far East and Asia bringing the work back to the US to create extra employment…..plus other conspiracy theories regarding the auto industry.

      “If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.”George Bernard Shaw.

      I always enjoy reading your comments.

      1. JW says:

         Thanks Rob. It appears that about 3/4 of the last quarter’s growth in the US came via zero interest loans for new cars. Not a lasting stimulus I fear.
        The only real hope for EZ equilibrium is for the German people to buy more ‘stuff’ from the south. And start buying all those empty cheap houses on the Costas. No, I doubt it will happen either.

    2. Spacemanc says:

      “The real state of affairs is better reflected in your oft quoted real wages growth ( sic), that is the only truely valid measure of the health of an economy. ”
      We’re very nearly the most highly paid workers on this planet.

      Considering the state of our economy and the need to increase our exports and competitiveness, our high wages are probably a sign of an unhealthy economy right now, so wage growth is probably a bit too much to expect.

      1. JW says:

         Spacemanc ( is that somewhere in Manchester?)
        I wasn’t implying we had a healthy economy. However to have one you need real wage growth so people can buy and save. The problem for western economies is since the 80s real wage growth hasn’t happened. Wages have taken a declining share of wealth in real terms. Its been replaced by growth in debt.

    3. Anonymous says:

      Hi JW

      Yes the debate in Germany has moved onto inflation and wage growth.Not exactly what you would expect in a slump but then (so far) they do not have one! I can see the Bundesbank and the ECB clashing here…

  3. Anonymous says:

    Fine article, Shaun. Came across this interview
    http://money.cnn.com/2012/05/09/pf/Europe-US-investing-Posen.moneymag/index.htm

    Hawkish? Doveish? or merely “Posenish”…. 

    1. Anonymous says:

      Hi Ray
       
      Thanks for the link. I was just reading it and thinking that the author has a weak grasp of monetary economics when I read the bits which Adam Posen had joined in on.
      “but the worst is probably over for now in the rest of Europe” “but the worst is probably over for now in the rest of Europe” .”After years of dilly-dallying, policymakers have successfully contained the Greek problem” Typical Posen and completely wrong as we stand tonight.Even better the interviewer sadly lacks the nous to enquire as to why Posen’s mum is upset because her government bonds have surged in price…. An odd complaint!
      “After years of dilly-dallying, policymakers have successfully contained the Greek problem”
       
      Typical Posen and completely wrong as we stand tonight.

      Even better the interviewer sadly lacks the nous to enquire as to why Posen’s mum is upset because her government bonds have surged in price…. An odd complaint!

  4. Pavlo says:

    Another good article. I am not surprised by the news that Clinton cards is in trouble as supermarkets now supply quite a good selection of cards. What we are seeing on the high st is a stress test of business models and those found wanting are failing. Looking back on the likes of Woolworths you have to ask yourself what it was they were doing? Nothing very well and only their pick and mix sweets appeared to be a bit different. The advent of (very competitively priced) online retailing, supermarket category expansion etc is sounding the death-knell of many ‘traditional’  high st businesses. If I were Jessops I would be worried about what the future holds. If you can’t clearly state why customers should come to you or what it is you offer that is unique or what it is you do better than others then you’re in trouble. Nothing new in that but hard times expose weaknesses.

    1. Spacemanc says:

      Clinton Cards deserves to die with the terrible business model which they’ve clung to. I’m sure they’ve lost sales to the internet and supermarkets, but in my town at least, it seems to be ‘The Card Factory’  which is really taking their business – it’s constantly packed due to their cards costing a small fraction of what Clinton’s tries to charge.
      Surely there must be a slight upside to all these High Street companies going under? They’re being undercut by cheaper rivals and the internet, which must in some way be making the economy more efficient and saving people money?

      1. Anonymous says:

        Hi Spacemanc

        I agree that the other side of the ledger is usually ignored. Someone must have the business unless card buying has dropped.

        And if people wish to send cards online or via text why shouldnt they?

  5. Ian_jones says:

    You do wonder when people will realise QE is simply redistributing wealth, it isnt a fix in itself. The gilts you suggest should be sold by the Govt would be bought by banks and pension funds. The banks will hit a crisis when rates rise and pensions will be insufficient to meet outgoings. Its nothing more than bringing forward consumption and pushing out the cost in the hope growth will replace the missing money. Shame its not going to since the cause of the crash is the rise of china.

    1. Anonymous says:

      Hi Ian

      We do sell some gilts abroad and if the Debt Management Office’s numbers are accurate we sold some £79.5 billion to overseas holders last year. We could do with selling some more to them…At the moment with rising gilt prices and just if not more importantly to them rising £ it is worth a go.

  6. Spacemanc says:

    Considering the government cuts are now in full swing and our biggest markets in Europe are in a worsening mess, the fact that there is still growth in our output and falling unemployment is pretty impressive.

    1. Anonymous says:

      I agree with you. Yesterday, Grant Thornton issued their business sentiment analysis for Q2 – it is surprisingly upbeat!

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