Hope in the horizon as the EU survives its worst scare
Just like the end of the world prank on Friday 21 December 2012, the gloomy, apocalyptic scenarios about the imminent collapse of the Eurozone project did not materialise in 2012. Throughout the year last year we were treated to a heavy dose of opinion articles predicting the inevitable collapse of the Euro, precipitated by the exit of Greece from the Eurozone.
From Germany's influential newspaper, Der Spiegel, (Hesse Martin, 2012, Currency's Days Feared Numbered: Investors Prepare for Euro Collapse, Der Spiegel,13 August.) to the New York Times (Krugman Paul, 2012, Apocalypse Fairly Soon, New York Times,18 May) the prognosis was the same: the Eurozone is about to unravel, with perilous consequences, not only for the Eurozone but for the global economy as a whole.
'Grexit', a new addition to the ever growing list of jargon born of the Eurozone crisis, loosely meaning the exit of Greece from the Eurozone, dominated narratives on the future prospects of the Eurozone project. Coined by Ebrahim Rahbari, an economist at Citigroup, the term first appeared in a report co-authored with Willem Buiter, the bank's chief economist. Since then, 'Grexit' has become common currency, synonymous with the gloom that was supposed to have befallen Europe.
Contrary to the doomsday scenarios that some unsuspecting publics may have sheepishly resigned themselves to, the Eurozone is pretty much intact. Yes, the Eurozone may not be out of the woods yet, but the frightening prospects of an Armageddon seem increasingly unlikely.
The currency continues its spectacular rebound against the U.S. dollar. Eurozone economic sentiment, which is a reflection of the business and consumer sentiment rebounded from a 3-year low according to an indicator released by Eurostat on 29 November 2012. Although many debt crisis related factors still weigh on growth in the region, the bounce in economic sentiment could be an early signal of the zone's recovery.
Though fed-up with austerity measures, European publics have voted with their heads, turning their backs against a populist neo-nationalist, anti-integration rhetoric. The Greek election in June, billed by many as a referendum on the Eurozone, was won by a pro-Europe party, New Democracy. This was followed by the Dutch elections, whose outcome was a ringing endorsement to pro-Europe parties, thereby establishing a strong pro-Europe sentiment.
At supranational level, European leaders are realising that a fiscal and banking union are fundamental to a durable and sustainable solution to Europe's sovereign debt crisis. Accordingly, they have taken encouraging measures to restore confidence in the Eurozone. In addition to the European financial stabilisation mechanism which gives effect to the European stabilisation fund, the EU has adopted measures for closer economic and monetary union.
These include a plan for common rules for supervising the financial sector, keeping national budgets within agreed limits and closer economic policy coordination. Although the reforms are expected to take effect in 2014, financial markets have generally responded positively with the euro rising to three-month highs against the dollar.
The package of measures taken in response to the crisis and the decision by the eurozone on 13 December to provide nearly €50bn in long-delayed aid to Greece, prompted Prime Minister Antonis Samaras to declare that talk of a Greek exit from the single currency is over. The Greek premier said the decision showed that European solidarity was working and his country would stay in the single currency. "Grexit is dead. Greece is back on its feet. The sacrifices of the Greek people have not been in vain," (NewEurope, Samaras declares 'Grexit dead', December 15, 2012).
This having been said, the Eurozone crisis has left a proverbial trail of destruction in its wake. Austerity measures and the attendant contraction of the Eurozone economy have led to record levels of unemployment, rivalling those of pre-war years. Unemployment in the eurozone has reached a record high, with 17.4 million people out of work across the single currency, according to the latest official figures.
That translates into an average unemployment rate across the euro-using countries of 10.9 per cent in March. The trend toward spiking unemployment rates was particularly strong in those countries suffering the most under the ongoing euro-zone debt crisis. Countries worst-affected by the crisis, have recorded unemployment rates that are more than double the Eurozone average: Spain (25.8%); Portugal (15.7%); Greece (25.1%).
The crisis has however not been limited to Europe. It's effects have been felt the world over. Due to its historical close financial and economic ties with Europe, South Africa has been one of the countries that has borne the brunt of the crisis. Exogenous factors stemming from the crisis have impacted negatively on South Africa's currency, the Rand, seriously undermining the competitiveness of local enterprise.
This factor was underscored by Minister Rob Davies when he stated, "Volatility has absolutely nothing to do with anything that goes on inside the South African economy, it is entirely driven by whether there is optimism or pessimism whether the European Union is going to solve its problems. "The volatility has impacted - manufacturers are not able to make long-term decisions because who knows what is going to be the situation. That has created a situation of uncertainty and a problem," Davies said. (Business Day, 2011, Euro threat to SA trade and growth,14 November).
As a single market, the EU remains the number one destination for South Africa exports. The basket of South Africa's exports to the EU is relatively diverse and includes agricultural products (fruit and vegetables), wine and beverages, motor vehicles, precious metals and stones, as well as various types of machinery and electrical equipment. At the peak of its trade with the EU, South Africa's exports to the EU market made up 44% of its total global exports in 2003.
The onset of the global financial and Eurozone crisis has since significantly reduced demand for South African exports causing the number to plummet to a low 26%. The effect of this phenomenal drop has been massive job losses at a rapid pace never seen before in South Africa's history. This fact was underscored by President Jacob Zuma who in his 2010 State of the Nation Address, candidly stated that "the crisis cost our economy about 900 000 jobs", and added that "Many of those who lost their jobs were the breadwinners in poor families".( President JG Zuma, 2010, GCIS, State of the Nation Address, 14 February).
Despite the state of decline of its economy, the EU remains the biggest source of Foreign Direct Investment (FDI) and Official Development Assistance (ODA). According to Eurostat, the European Commission's statistics arm, the main destinations for outward stocks of EU FDI in Africa were South Africa (EUR 92.2 billion), Nigeria (EUR 34.5 billion) and Egypt (EUR 24.4 billion). EU FDI stocks in South Africa grew by 19 % to the end of 2010, the country remained among the top ten partners for outward stocks of EU FDI. (Eurostat, 2012, Foreign Direct Investment Statistics, 15 June).
As a bloc, the EU is the biggest donor, accounting for more than half of global development aid, at half a trillion Euro. In the current budget cycle, 2007-2013, €980 million was allocated to South Africa. With economic austerity measures almost certainly going to extend to the terrain of development aid, it is inevitable that the overall EU development aid budget will shrink in the coming years. Other factors, such as the emergence of new powers in the South and graduation of hitherto aid-recipient countries to middle-income countries will influence EU development aid policy going forward.
In spite of all these challenges, the EU remains a strategic partner for South Africa. At the conclusion of her discussions with Baroness Catherine Ashton, Minister Maite Nkoana-Mashabane emphasised this point when she stated, "The EU remains an important and strategic partner for our country and continues to contribute to our development Agenda, as well as in SADC and Africa as a whole" (Nkoana-Mashabane, 2012, Dirco Press Statement, Remarks at the Joint Press Conference following the Ministerial Political Dialogue, 24 August 2012).
Despite its contracting economy, the EU, with a population of half a billon people remains the second largest economy in the world, accounting for 17% of the world's GDP. It has one of the world's most advanced infrastructure. It is one of the key global centres in which knowledge, cutting-edge innovation and technology is domiciled.
Over and above its significance vis vis trade, investment and development assistance, the EU is major source of tourism to South Africa. Tourist arrivals from emerging markets continued their robust, positive growth of 2011, while traditional markets recovered the lost ground of the period 2008 to 2011 and bounced back to reach positive growth in the early part of the year.
During his address to the Cape Town Press Club, Minister of Tourism, Mr Marthinus van Schalkwyk, noted that, "Although Europe registered the lowest growth compared to other overseas regions, at 9,6%, it remains the largest source of tourist arrivals from overseas markets, accounting for 55% of all overseas arrivals". (Department of Tourism, 2012, Press Statement, State of Tourism in South Africa, 1 November).
While the recovery of the Eurozone economies may lie further in the horizon, there are bright sparks that give us hope for the future. In this regard, we encourage the bloc to continue taking bold measures to restore stability and induce growth. In the meantime, work continues within the framework of the South Africa-EU strategic partnership to regain lost trade volumes, explore other frontiers of trade, and intensify cooperation in technical, scientific and social fields.
Mxolisi Nkosi, is the Ambassador of South Africa to Belgium and Luxembourg, and Head of Mission to the European Union.
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