The Euro Debt Crisis and Consequences for the Developing Nations - Essay Example

As an important trading block, there is no doubt that effects have already been spread elsewhere, with the developing nations having a share of the crisis. Accordingly, the global growth momentum is projected to slow down by more than one percent between the year 2010 and 2012 (IMF 8). Unemployment within the Euro zone is degenerating and surging upwards. In fact, the UK has registered a new level high in 17 years. Growth prospects are not any better in the United States with the Senate blocking Obama’s jobs bill.

The euro has lost substantial ground against the dollar, whereas the Chinese Yuan has been gaining ground, a fact that has prompted the US to threaten China with trade sanctions, unless they devalue their currency. Do the less developed nations have anything to worry concerning the Euro crisis? Through what transmission mechanism could the developing nations experience the Euro zone debt crisis effects? While Germany and the UK are taking the lead in steering the Euro zone towards a complete makeover with seemingly harsh austerity measures, especially to countries believed to be the architects of the crisis, developing countries are yet to feel the pinch of the crisis.

As witnessed in the degenerative effects of the global financial crisis, the less developed nations were not hit hard mostly due to their limited financial integration with the world economy. Even though the effects delayed mostly in African countries, trade ties, capital flows, tourism, remittances from abroad, and foreign aid among other channels eventually led to a significant slowdown in these economies. Just as it was with the global financial crisis, the euro debt crisis is likely to affect the less developed nation through three main transmis­sion channels: financial networks, fiscal consolidation within the European nations currently struggling to overcome the crisis, and through the exchange rate.

While the austerity measures as well the rescue package released that has seen a combined effort of the IMF to that of the EU are timely and may be effective, it is very unlikely that the measures will offset the impact of the crisis on European economies within a record time frame as may be envisioned by many economists (Mhango par 1). From the fiscal measures that are already being adopted in unison, the possibility that the Europe nations are headed for a slow growth phase is very likely. The immediate and direct impacts of such measure are set to become more pronounced in trade links (Kandiero and Ndikumana par 4).

As shown in the diagram below, it is evident that many developing nations, mostly Africans, are dependent on the European markets. The effects of European debt crisis could also reach the developing nations through sovereign risks, arising from the declines in tax revenues. This would potentially increase the costs of borrowing due to changes in risk premiums. In particular, those countries with high fiscal deficits are relatively exposed to the risk of re-pricing of risk premiums. Already the effects are being felt in certain countries that utterly depend on exports as income generating component of their economies.

The crisis is slowly cutting down demand for exports from Africa. The effect that this has will translate in difficulties of these countries in maintaining planned levels off public expenditures including infrastructural