The UK’s high level of economic integration with countries using the euro, together with its lack of domestic resilience to an economic slowdown, make it the most exposed nation, outside of the eurozone, to any worsening of the crisis, according to a new global index by risk analysis firm Maplecroft. Approximately 50% of its trade comes from the eurozone.
With the International Monetary Fund (IMF) predicting gross domestic product (GDP) growth of just 0.7% in 2013, the outlook for the eurozone remains precarious and any further slowdown for the region would have the most severe impact on the UK’s struggling economy, according to Maplecroft. Moreover, a potential collapse of large euro economies such as Spain or Italy would reduce the UK’s trade by approximately 7% and prompt losses around £95bn, or 7% of GDP, in Britain’s banking sector.
The UK, along with Poland, Hungary, the Czech Republic, Mozambique, Sweden, Denmark, Morocco and Côte d’Ivoire, are among 17 countries classified at ‘extreme risk’ by Maplecroft’s Eurozone Exposure Index (EEI). The UK ranks first in the EEI.
The quantitative index includes 169 countries outside of the eurozone and measures trade and foreign direct investment with the euro area; bank claims of eurozone countries; and domestic economic resilience indicators such as fiscal balance; public debt; levels of inflation; and foreign reserves.
The findings are significant as the index identifies the most economically dependent countries on the eurozone, which are most likely to falter in the face of worsening economic conditions. Impacts for these economies include lowered industrial outputs, competitiveness loss and sovereign debts that could reach unsustainable levels due to rising yields.
The drivers for the UK’s ranking also include foreign direct investment (FDI) from the euro region that accounts for 20% of the country’s GDP; while British banks are exposed to £380bn in eurozone banks and sovereign bonds, which represents 27% of UK’s GDP – an exposure that could enhance solvency problems for financial institutions.
According to Maplecroft, the situation is compounded by a large and unyielding fiscal deficit of approximately 8% of GDP and net public debt over 80% of GDP, making the UK’s capacity for a fiscal response to further economic crises in the eurozone severely limited.
Due to their high integration with the eurozone, eastern European and Scandinavian countries, including Poland (2), Hungary (3), Czech Republic (4), Sweden (8) and Denmark (11), also rank among the most at risk in the EEI. Despite Poland’s second place ranking, Maplecroft expects the country’s resilience to eurozone exposure to improve over time. Measures, including raising the retirement age to 67 for men and women and introducing a permanent fiscal rule to reduce fiscal deficit will therefore help buffer the country to any future eurozone crisis.
The emerging economies are also not immune to Europe’s economic woes. South Africa (49), Russia (50), Brazil (62) and India (85) are all classified as ‘high risk’ countries in the index, while China (112) is rated as ‘medium risk.’ The Brazil, Russia, India, China and South Africa (BRICS) economies represent a potential offset to the negative impact of the eurozone economic crisis due to their importance in global markets. Nevertheless, these economies are not fully insulated from the slowdown themselves due to trade and investment relations with Europe and an escalating eurozone crisis could further exacerbate current domestic slowdown in growth forecasts across the BRICS.
“Investors should follow closely the developments in the eurozone as the implications will continue to influence global economic behaviour,” said Maplecroft analyst Daniel Anavitarte. “Trade and investment flows may be disrupted from and to emerging economies while large developed nations could see their growth forecast offset due to their large exposure to euro area banks.”
African nations also emerge among the most at risk in Maplecroft’s study, with Mauritania (5), Mozambique (6), Mauritius (7), Morocco (12), Côte d’Ivoire (16) classified at ‘extreme risk’ due high trade dependence with the euro area and low resilience against global economic slowdown. As a result, firms operating in the region may suffer lower demand for their export products. For example, the eurozone accounts for almost 60% of Mozambique’s total fuel and mining exports and 30% of Côte d’Ivoire agricultural products.
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