How will the sinking of the euro affect Arab economies?

The euro’s crossing of a psychological threshold last week, when it briefly reached parity with the US dollar for the first time in 20 years, could have economic repercussions for some of its closest trading partners.

The currency’s slide came amid growing concerns over Europe’s energy crisis and soaring inflation that could trigger a recession, as well as a bullish outlook for the US currency.

The euro has since rallied and rose briefly on Thursday after the European Central Bank raised interest rates for the first time in 11 years by 50 basis points. in an effort to combat inflation, which hit a record high of 8.6% in June.

It was trading at 1.018 to the dollar as of 6:44 p.m. UAE time on Thursday, after hitting 1.025 following the ECB announcement.

But concerns remain.

“The ECB will continue to draw a fine line between tightening monetary policy to fight inflation while ensuring that countries with high debt-to-GDP ratios [gross domestic product] the ratios are not seeing unsustainably high interest rates,” says Christopher Payne, chief economist at Dubai-based Peninsula Real Estate.

“It’s a very delicate task for the ECB, but they have no alternative. In my opinion, they would rather see inflation last a little longer and a little higher than threaten a real debt crisis. of the euro.

The EU also continues to face a looming energy crisis amid gas supply problems from Russia as it tackles an unusually hot summer and prepares for the winter months.

Unchecked inflation or a widespread energy crisis could lead to a recession, which will add pressure on the euro.

How will the euro crisis affect the Arab region?

Arab economies have traditionally had close ties with Europe, with North African countries in particular heavily dependent on the EU for trade and tourism.

The EU is the main trading partner of Tunisia (representing 57.9% of its trade in 2020), Morocco (56% in 2019), Algeria (46.7% in 2019) and Egypt (24.5% in 2020), according to European Commission data.

While exports to the EU from Tunisia and Morocco focus on textiles and agricultural products – Morocco is one of the largest European markets for tomatoes – fuels and mining products dominate exports from Tunisia. Algeria and Egypt.

Meanwhile, North African countries mainly depend on the bloc for machinery, transport equipment and chemicals.

The GCC also shares close economic and geopolitical ties with the EU, its second largest trading partner after China.

The EU accounted for 12.3% of the Gulf region’s total merchandise trade in 2020, according to European Commission data. While 17.8% of GCC imports came from the EU in 2020, 6.9% of exports from the Gulf region were destined for the Union.

For the moment, the fluctuation of the euro has limited effects on the MENA region, since certain countries, in particular those of North Africa, have their currencies pegged to a basket of major currencies dominated by the euro, which offers them a buffer against the downside at a certain level, says Wael Makarem, senior market strategist for the Mena region at forex broker Exness.

For some of these countries, the relative decline of the euro could have an impact on the competitiveness of local companies since their products would become more expensive on international markets, he said.

“For Morocco and Tunisia, agricultural and textile exports are the most exposed, although their currencies are mainly pegged to the euro, which reduces the risks. Algeria, on the other hand, is less exposed as it mainly exports oil and gas and could benefit from cheaper imports,” Makarem said.

“However, the Arab region remains exposed to the economic slowdown in the euro zone and the side effects of the war in Ukraine such as rising prices for agriculture and energy.”

Commodity prices soared around the world after Russia invaded Ukraine in late February. Both countries are major international suppliers of wheat and fertilizer, and the conflict has driven up food prices around the world.

Meanwhile, Western sanctions on Russia, the world’s second-largest crude exporter, have also led to oil prices soaring this year amid supply problems.

The impact of the current euro crisis on the Arab region will be “mixed”, says Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“A number of commodity importers in the Mena region are already negatively impacted by rising food and energy prices. The deteriorating outlook for the Eurozone and the weak Euro will likely have a greater effect on areas such as travel and tourism going forward,” she said.

The EU is a key inbound and outbound tourism market for Arab countries.

The number of tourists from Europe to the GCC is expected to reach 13.3 million by 2024, increasing at a compound annual growth rate of 17.5% from 2021, according to analytics firm GlobalData.

Meanwhile, visitors from the Gulf are also flocking to European destinations such as Switzerland, France and Italy, especially during the summer months.

Tourists take a selfie in front of the Trevi Fountain in Rome.  PA

“Obviously, for those traveling to the eurozone from the Gulf, a weaker currency is beneficial,” says Payne.

“But net-net, a weak euro caused by higher inflation is likely to mean weak demand, which will reduce demand for oil,” he says.

This, in turn, could affect energy exporters in the Arab region.

From an energy perspective, European countries are rapidly seeking to diversify their supplies away from Moscow and plan to wean themselves off Russian oil imports by the end of the year under sanctions imposed in response to the war in Ukraine.

The EU is also looking for alternative sources of gas, fearing Moscow could suddenly cut off supplies.

While Russian President Vladimir Putin confirmed on Thursday that gas flows to Europe would be restored via the Nord Stream 1 gas pipeline, after a 10-day shutdown for maintenance, he also warned that supplies would be tightly constrained until the problems with the sanctioned turbine. the pieces are resolved.

“The Mena region will be important for Europe as it seeks to diversify its energy sources – not only the GCC but also Egypt for gas,” Ms Malik said.

Last month, the EU signed an agreement with Egypt and Israel to boost gas exports to Europe.

In the first six months of this year, more than 72% of Egypt’s liquefied natural gas exports went to Europe, compared to 29% for the whole of calendar year 2021, according to data on Refinitiv LNG stream.

“It will take time for the euro zone to diversify its energy imports. We see relations with the Mena region strengthening as Europe seeks to reduce its dependence on Russian energy,” Ms. Malik said.

Many factors come into play regarding the value of the euro.

With the ECB’s adoption of a tighter monetary policy, this could narrow the gap with U.S. interest rates, thereby diminishing incentives for investors to move capital to the U.S., said said Mr. Makarem.

“The ECB’s ability to control inflation could also play an important role along with its ability to maintain stable economic growth. Ukraine remains another factor spiraling out of control,” he says.

“For the Mena region, trade compression could take place to some extent as long as the Eurozone remains under pressure.”

Significant economic uncertainties remain for the euro zone, mainly on the energy side, says Ms. Malik.

The main risk is that of a generalized energy crisis. A weaker euro will add to energy price inflation in Europe and to upward inflationary pressures, she said.

“This would lead to gas rationing and lower industrial production, which in turn would reduce eurozone exports and add to global supply chain disruptions,” she says.

According to Payne, a likely scenario is a period of stagflation in the eurozone and continued weakness in the euro.

“The consequence is a drop in domestic demand, which will affect exporting countries such as Tunisia, Morocco and Algeria. Weaker demand from Europe, combined with a weaker Euro, will likely take pressure off the oil market, driving prices lower. Although outside of a crisis scenario, we would still expect oil prices to stay above $80 a barrel, given the war in Ukraine.

Updated: July 21, 2022, 2:46 p.m.