Repercussions of EU crisis will not be limited to Eurozone. Its ripples will be felt even in the developing economies, some of which may be positive but at large most of them will be negative.
The debt crisis and reduced role in word politics of European countries could create a golden opportunity for China to bolster its position strategically. As the political influence of US and Europe diminishes; China is at the vantage point. It has already been using state controlled capitalism and multiple resource ownership strategy across the globe to spread its wings. With presence in most of Africa (which are viewed as next big markets and are resource rich), China could tighten its grips on world economy.
However economically, some of the Chinese imports may see a hit as it exports large chunk to European nations.
For other countries, multiple revenue streams may get hit. Exports for example, could be one of the first to get hit. As feared by the Chinese, further deterioration of the EU zone countries will reduce exports. It is also predicted, that the Euro may be devalued with respect to dollar, if crisis moves unprecedented. In such scenario, incentives to export to EU will reduce. Developing countries which export autos, agricultural produce (such as India, Indonesia) and textile exporting countries (such as Bangladesh) could see an immediate effect.
Tourism and travel may be hampered. This is bound to happen across the globe as the purchasing power and willingness of European tourists drop. Globally, tourism is in dire state after ’08-’09 crisis. Many companies like Thomas cook are already suffering due to lack of sustainable business.
Capital flows may be redirected for longer terms, from Europe into other markets. European markets would be seen as “risky” in short run and “sluggish” in the long run. Since in the long run, interest rates will be lower, reducing incentives for capital inflows.
This in turn is opportunity as well as threat for Emerging markets. In the short run, it will improve their inflows, providing vital capital for businesses and building rapid growth in markets, propelling economies forward. However greater risk exists in the long run, as asset bubbles and inflation could grow out of proportion.
Confidence in the banking system may further reduce in the short run as all the global banks have exposure to European sovereign debt. This retaliation is already seen in banking stocks bear rally.
To address these issues, certain policy changes may have to take place in emerging nations. They may have to rely on domestic trade as well as exports in upcoming years. Further they need to strengthen their trade relations with similarly positioned nations, creating bilateral ties for better portfolio diversification.
Better monitoring of capital inflows will be required to manage inflation and bubble situations. At the same time maintaining a greater control on banking system will be cautious approach required to avoid further implications.
Greater changes are bound to happen politically and economically on a global platform. The magnitude of these changes will be defined by the way in which crisis unfolds.
If the crisis is curtailed in its early stages; many of these implications will be halted. However, considering the lack of political will in EU nations, crisis may lead to major structural adjustments. Especially in emerging nations repercussions are greater and policy changes might be in the cards.
What is left to be seen is the way in which series of events take place. A dramatic change at political level can certainly shift the balance towards better recovery and less damage.