The Eurozone Crisis versus the South African Economy

2011 is a year that was pock marked with financial volatility. As a Coronation genius indicated, markets had to face the repercussions of political nonsense in the Middle East and North Africa, an extremely devastating earthquake in Japan with the possibility of nuclear destruction and the on-going Eurozone crisis.

South Africans may be lulled into a false sense of security thinking that none of the above would have any effect on them. But it is a sad fact that the constant squabbling amongst policymakers to build a fix for the Euro crisis might drive the South African economy into hiding. 

Not to be an alarmist or anything but the solution so far has been for the EU and IMF to inject massive billion € bailouts into Greece and Ireland. Meaning other Eurozone countries are contributing to keep EU economies from plunging into the red, and through an arrangement with the IMF, Sweden and the United Kingdom, EU countries (like Ireland) can source funds from elsewhere. That means there is more debt to squash at the end of the day – at other EU countries’ expenses.  This is where the image of falling dominoes comes to mind.  

The countries contributing have a massive incentive to keep the crisis countries (Portugal, Ireland, Italy, Greece and Spain) afloat. The EU settled on seamless movement across borders and a common currency – the demise of one of their members is, incidentally, carried by other successful members. One domino falls and takes the next one down with it…

Picture this: the bailout debt cannot be repaid due to deficits and Ireland or Greece’s (for example) economy falls flat on its knees. That includes falling businesses and climbing unemployment rates. Seamless movement across borders means that the ranks of the unemployed will simply, seamlessly, cross borders into other EU countries - putting additional pressure on their local economies. Failing EU countries are not attractive for investors – depreciating the Euro and making it much less attractive to the kinds who like to invest. That will have an impact on all EU states. Remember those dominoes?

Another scenario to picture: the bailout debt starts to be repaid by increased taxes. A problem for countries such as Ireland whose low company taxes are the attraction for international business in the first place.

The bailer-outers (the IMF and other EU members) cannot allow member states to collapse lest they wish to be dragged down with them. On the other side of this over-spent coin, they cannot continue to simply throw money at the countries that need bailing out – this imposes huge costs on their own spending and economic policies.  Either way, that last domino will hit the deck.

And how does this all affect South Africa? It really is as simple as this: the EU is one of SA’s major export markets (valued at well over €22 billion per year). Every South African, big or small, who has anything to gain from local business (directly or indirectly), should be cheering on the success of the EU. A collapse of the EU will cause a significant collapse of business within SA. Having a devastating effect on our economy.

Are you prepared to play dominoes when the state of the country is at risk?