Wednesday, December 7, 2011

World wants Europe to get house in order - now

BRUSSELS (Dec 7): From the Indian rupee to the fledgling tourist industry in the Atlantic island chain of Cape Verde, more hangs on this week's European Union summit than the future of the euro single currency project alone.

While no one believes the 27-nation bloc can find a quick fix to a debt mountain that was years in the making and which may stunt its economies for years to come, EU leaders are under growing pressure to show they can at least stop the rot.

"We're not expecting a sudden change in sentiment or a dramatic end to the problem at the EU summit," a senior Japanese policymaker told Reuters.

"But we also don't expect zero results. There should at least be some progress in how they hope to get their house in order," said the policymaker, who for reasons of diplomacy spoke on condition of anonymity.

A spiralling debt crisis in the 17-country euro zone that started in Greece two years ago has long since cast a pall far beyond Europe's borders. A lasting solution has so far eluded EU leaders, despite holding 16 previous summits since January 2010.

In Asia, the Indian rupee has been a prime casualty as currencies are hit by a pull-out by foreign investors spooked by the euro problems. It has dropped 16 percent in four months and analysts fear a further slide could spark a balance of payments crisis as deep as that which prompted a 1991 devaluation.

Damage to Asian economies, while bad enough in itself, could have a knock-on effect on the world's no. 3 economy, Japan, whose hopes for a modest upturn are largely pinned on buoyant exports to its neighbours, officials in Tokyo fear.

While Europe's debt troubles have already had contagious effects on other financial markets, an all-out European recession would compound that by directly hitting its trade partners and, ultimately, many aid recipients across the world.

That prospect edged closer on Tuesday with figures showing the 17 euro countries recorded just 0.2 percent growth in the third quarter. Investment was flat for the second quarter in a row as business confidence evaporated.


Before this week's summit, U.S. Treasury Secretary Timothy Geithner was touring euro zone capitals with a message that it is time to act.

Speaking after talks in Berlin on Tuesday, Geithner urged reforms to "create the architecture of fiscal union", citing the "central role" to be played by the European Central Bank.

"There is concern among corporate leaders, both in the United States and Europe, about the uncertainty bred of lack of political consensus on how to move the economy forward," U.S. ambassador to the EU William Kennard said before the trip.

"And that certainly is weighing on the world economy. It's a factor both in Europe and the United States," he said, suggesting the two were "in the same boat" with over-borrowed economies and expensive welfare states.

Yet while the United States can turn to the Federal Reserve as a lender of last resort, euro zone states have no such recourse to the Frankfurt-based European Central Bank - and EU heavyweight Germany is determined to keep it that way.

Whether that position holds or not, Europe's main trading allies are letting it be known in the run-up to the summit they will have little patience with half measures.

"The recession in Europe is now expected to be more pronounced than the bank had anticipated in October," the Bank of Canada said in an interest rate statement on Tuesday.

"Additional measures will be required to contain the European crisis," it added, without spelling out what it expected.


So far, outlines of a possible deal are patchy. A Franco-German plan unveiled on Monday proposed changes to the EU basic treaty to include automatic penalties for governments that fail to keep borrowing under control, and an early launch of a permanent bailout fund for states in distress.

The need for any deal to work is especially high for Africa, tied into euro zone countries by a web of trade links dating back to the colonial era, and whose recovery from the global economic and financial crisis of 2008-2009 is now at risk.

From Ghana to Kenya, government debt yields have risen and currencies fallen as many investors who two years ago were falling over each other for a piece in new "frontier" markets are now so averse to risk that they are queuing to leave.

Some European banks are now refusing to lend to firms trading with Africa. France's Credit Agricole last week closed its 60-year-old South African unit.

Cape Verde, one of the unsung success stories of Africa in the last decade with annual economic growth rates averaging 6 percent, now fears for its tourist and real estate sectors as hard-up Europeans start deciding against a new holiday home.

"The demand for real estate in the tourism sector is stagnant, which has consequences for the employment," said Olavo Correia, a former governor of the central bank who now heads the Cape Verdean Association of Tourism Builders (PROMITUR).

Mthuli Ncube, chief economist at the Tunis-based African Development Bank, said Africa faced a triple-whammy if Europe's difficulties curtailed its exports to the zone, put much-needed foreign aid at risk and further discouraged potential investors.

Predicting a marathon summit with several rounds of talks, Ncube warned that failure by Europe to overcome the crisis could mean it lagging further behind other investors in Africa, where China now surpasses Europe as the top trading partner.

"There is a risk that Europe will be too inward-looking and forgets to look outside for opportunities," Ncube said in a telephone interview.

Benoit Anne, head of emerging market currency strategy at French bank Societe Generale in London, said the 2012 outlook for investment from the neighbours in Central Europe to further afield in Latin America now hinged on the EU's ability to plot a viable path out of its debt morass in a matter of weeks.

"We are getting close to a make-or-break situation," said Anne. "There is no room for muddling through any more."

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