Eurozone crisis and emerging economies

Prince Turki al Faisal, former Saudi intelligence chief, in a speech at a business conference in Riyadh, criticised Western governments of leveraging their economies over the past sixty years and allowing their financial sectors to spiral out of control. The collapse of some European economies due to past profligacy led to unsustainable indebtedness in several Eurozone countries including Greece, Spain, Ireland and more recently Italy. The remedy has been large bailout packages coupled with an austerity drive that pinches the public sector workforce as well as social programmes for the disadvantaged leading to violent street protests in several countries grappling with the debt crisis. Democracy, reflecting a government of the people, for the people and by the people was the first casualty in terms of implementing penny pinching reforms that led to the installation of non-democratic technocratic governments in Greece and Italy. The jury is still out as to how long these technocratic governments would remain in control and be allowed to implement reforms that would undermine the standard of living of the people of affected countries. Prince Turki also argued that emerging economies like China, India and Saudi Arabia will not provide assistance to the West in its financial crisis unless given more influence in running the global economy. Requests by the beleaguered Eurozone countries for assistance from China and India have surfaced - assistance that includes support for the bailout package as well as increased purchases from the West. Beijing recently stated that, "we believe the European countries will be able to overcome the current difficulties, and China is ready to work with the international community to continue to support the efforts of Europe in fighting the sovereign debt issue." However China has not yet committed to invest in the bailout package. India was not requested to extend support for the bailout package however it remains an important market for the West. India's Finance Minister Pranab Mukherjee conceded a couple of weeks ago that the ongoing financial turmoil in the Eurozone had thrown a spanner in the works of the Congress (I)-led coalition government's long-term and short-term economic projections. However, he expressed confidence that the Indian economy would remain resilient and its growth trajectory would remain on target. In short, India would look first to ensure its own house stays in order which would leave little room for making large purchases from the West to oil the wheels of their industry. While Saudi Arabia is not considered an emerging economy as it continues to rely inordinately on one major export item namely crude oil to generate foreign exchange reserves yet its commitment to resolving the ongoing crisis in the West was reflected in the recent statement by its central bank chief promising excess oil production capacity if needed to balance oil prices - a need that may well emerge subsequent to the Western decision to ban the purchase of Iranian oil. The export market of Iranian oil was as follows: 10 percent of South Korea's oil imports come from Iran, 9 percent of India's, 6 percent of China's, 7 percent of Japan's and 30 percent of all Greek oil imports. Iran is also a major oil supplier to Spain and Italy. In short, the countries likely to be affected from the US-sponsored decision to ban Iranian oil imports would be precisely those countries that are currently embroiled in the debt crisis. This in turn increases the Saudi leverage with respect to manipulating output to control oil prices as indicated by the Saudi central banker. Enhanced influence in global finances however does not come with a set of agreements/treaties but from the exercise of power attributable to the financial health of an economy. In short until and unless Saudi Arabia leverages its oil exports and foreign exchange wealth in its dealings with the West it is unlikely to be given the influence that it covets. Copyright Business Recorder, 2012