The term paper discusses the adverse effects of the current Eurozone crisis on the economies of the developing countries. Overall, during the last few quarters of 2011-2012 the economies of the developing countries remain vulnerable to the euro zone crisis. The crisis has caused trade shocks in the lower-income economies, while the European debt crisis endangered fiscal potential of the poorest countries. Further analysis indicates that the countries under permanent risk due to the euro zone crisis are featured by the following indicators:
(1) The lion share of their exports is concentrated in the European countries that have been currently affected by the crisis;
(2) The goods they export are featured by high income elasticity;
(3) Their economies heavily depend on foreign direct investment (FDI), remittances, international bank lending, and aid received from the European countries;
(4) These countries do not hold sufficient political and economical potential to the crisis effects.
It is noteworthy that every developing country reacts to and perceives the effects of the Eurozone crisis in its own particular way. Therefore, there are considerable differences from country-to-country in terms of their vulnerability to the existing crisis. The same concerns separate groups of countries and geographic regions.
The major adverse affect, however, is put on exports since the potential of trade channels of the poor and developing countries is eliminated and therefore limited. This explains all the reductions in exports taking place over the last two quarters of 2011 and the first three quarters of 2012.
In addition to this, the portfolio flows to these countries is permanently declining while investors froze or postpone their investment plans. Meanwhile, the aid flows and remittances are falling in Mozambique, Nigeria, Kenya, Rwanda and many other countries of the region. Nonetheless, economists claim that so far the effects of the Eurozone crisis have not been that drastic so far compared to those experienced by the developing and poor countries over the last financial crisis in 2008-09.
Considering the abovementioned, lead economists suggest the governments of the developing countries taking the following steps to halt the effects of the crisis and improve their economic indicators. These steps will enable the developing economies to maintain macroeconomic stability and fiscal soundness, boost domestic demand, vary export diversification, endorse long-term economic growth, improve financial regulation, and solidify social-economic standards. In due respect, the key role will be also played by multilateral institutions and stakeholders that should coordinate adequate allocation of shock facilities and funds so that the crisis-affected countries receive timely and effective external assistance.
Starting from the last quarter of 2011, the crisis in euro zone has gradually intensified despite the numerous interventions made by the European Central Bank to recapitalise the banking system in the most crisis-affected countries of the Eurozone, namely: Greece, Spain, Italy, France, and Ireland and increase the investor confidence.
Today there are growing concerns with regard to the losses of the banking sector as well as fiscal sustainability since the sovereign spreads too many euro area countries have been recently extended. Furthermore, over the last quarter of …