Eurozone crisis brings further risks to North African economies (page 1 of 2)

As ever, the divide between the prospects of oil-producers and relative paupers in the Middle East is a pronounced one. The wealthy Gulf nations may have been unable to escape contagion during the first global economic crisis, but they remain confident that they will not be unduly harmed even should Europe shudder to a halt. However, for those less endowed with oil and gas with which to finance skyscrapers and sovereign wealth funds, the future is less clear.

Italy, Spain, France, Germany and the UK are the EU's main importers of goods from southern Mediterranean countries including Egypt, Libya, Tunisia, Algeria and Morocco. Each of the European giants are struggling in the eye of a storm which has engulfed the eurozone and threatens to drag the rest of the continent down too - a scenario which could spell disaster for those countries in the Middle East and North Africa (MENA) region which rely heavily on trade with Europe.

"It's not difficult to imagine a situation where all the banks from Holland to Hungary are bust, primarily because there's no political leadership and the European Central Bank doesn't seem capable of making the kinds of decisions on the markets that the US Federal Reserve has," says Mark McFarland, Emerging Markets Economist at Emirates NBD.

"There are very clear vulnerabilities in Eastern Europe to what's happening in Western Europe, so the transmission from west to east is quite easy to follow," he continues. "You can find yourself very quickly with not just the eurozone in deep trouble, but the whole European continent, and if you have that situation developing then it's certainly going to make life more difficult for a large swathe of emerging markets in the MENA region."

Eurozone problems escalate

Right now, the big boys of Europe are reeling. Italian Prime Minister Silvio Berlusconi has left office after a total of 17 years at the helm of a country that must now choose between unprecedented austerity measures or outright economic ruin. Spain looks set to fall short of meeting its deficit targets, and will likely lose its government too in upcoming elections.

A think-tank report warned last week that France should be "ringing eurozone alarm bells" as it is unable to make rapid adjustments to its economy. Germany is getting hammered on the bill for its neighbours' profligacy, and Britain will inevitably feel the aftershock of any seismic shift on the European mainland, as will other nations in the EU that are not a part of the eurozone group of 17 nations.

The two blocs' geographical proximity means that the MENA region is tied historically and inextricably to Europe. In 2011, this is particularly the case with regards to the flow of capital, trade and human resources - a combination which could spell trouble for the southern Mediterranean countries, some of whose peoples have endured a long, bloody 2011. These are nations whose economic woes show no sign of easing, and could even lead to further violent unrest if conditions worsen.

Of immediate concern to nations which rely on foreign capital to pay their bills, such as Egypt, is the danger that European banks' unwillingness to extend extra credit will choke the flow of funds across the Mediterranean Sea. Egypt is fighting hard to maintain stability in its currency, clearly running down its foreign exchange reserves, yet there is a danger that external debt payments will become unmanageable.

"If Egypt starts to see its currency descend, then external debt payments become more difficult and then the issue of access to capital becomes more pertinent," notes McFarland.

Europe is key trade partner

Egypt is also reliant on Europe as a destination for the majority of its exports.