Six months after the eurozones €110 billion bailout package for the debt-ridden Greece, the Irish government has opened its Pandoras Box of high borrowing costs. After much deliberation, Irish officials requested a bailout package worth €80-€90 billion, which will be funded by the European Union and the IMF.
Though the news of the countrys rescue mission was enough to shake investor confidence, what really pulled the carpet from under their feet was the possibility of a contagion effect on other eurozone economies - Spain and Portugal to be more precise.
With their high budget deficits, high levels of debt, and unsatisfactory growth levels, the two countries are the next in the running for a bailout package, shuddering investor confidence considerably. At the beginning of this week, Portugals benchmark PIS stock index slumped 1.5 percent and Spains IBEX was down 2.3 percent.
Effects on the overall eurozone were quite evident as the euro fell 0.4 percent against the dollar on Monday at $1.36, more than a cent off an earlier one-week high..
Being an important bloc in the global economy, fears of a eurozone debt crisis and the consequent depreciation of the euro led investors to park their monies back in the US dollar, which had lost its popularity over the past few weeks because of second round of quantitative easing by the US Fed.
Even gold, which has already gained remarkable investment luster over the past few months, witnessed a 2-week high on Tuesday as investors stuck to its safe-haven appeal.
But the fall of the euro doesn necessarily spell total disaster for the bloc since euros depreciation is good news for the regions exporters. A working paper on the eurozone debt crisis by Allianz SE - a Germany-based financial services provider - suggested, "a 10 percent real depreciation increases real exports by 1.1 percent in terms of GDP after one year."
Interestingly, a recent Reuters feedback from executives of leading global firms indicates that the confidence on the eurozone has not dwindled in general, and businessmen look at this as merely a temporary phase, "We just don see a big systemic issue coming out of Europe, given the world we see today," said Jeff Immelt, CEO, General Electric.
On the local front, a falling euro and concerns about demand in the Eurozone are likely to result in a lot of agitation amongst exporters. In 2009, goods worth around $4.6 billion were exported to the EU from Pakistan, making up about a quarter of Pakistans total exports.
"Pakistans only edge is in its currency, a depreciation of the euro will be quite disadvantageous for exports," said Khurram Mukhtar of the Pakistan Textile Exporters Association.
Because of its critical role in the global economy, the eurozone is likely to have many eyes on its economic performance over the coming few months. Hopefully, the contagion effect of the Irish bailout will not materialise on other eurozone economies to avoid fresh episodes of panic.
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