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Can the Middle East survive a Eurozone meltdown?

By Kathleen Brooks of Forex.com 10 June 2012
This is a crunch month for the Eurozone, Greece heads to the polls on June 17 in what is being seen as a referendum on Eurozone membership. Either they vote yes to austerity or they may find themselves out of the currency bloc for good.
Then there is the festering crisis in Spain's banking sector. There is still no concrete action being implemented to try and protect Spain from requiring a bailout, and no sign that Germany will give more money to the bailout fund if Madrid needs one.
Hence we have experienced volatility in global stock markets, commodities and currency markets in recent months. Europe has some major problems on its hands and there are no easy solutions to solve them. So if Europe does implode how does this affect the Middle East?
Firstly through oil demand. If Europe breaks up or Greece is thrown out it could cause a global financial meltdown akin to the collapse of Lehman Brothers in 2008. Back then the global economy suffered a massive shock and demand for oil fell sharply in the major regions of the world. This weighed on economic growth in the GCC, especially for the major oil producers. Saudi Arabia's annual growth rate fell to 0.1% in 2009 after registering 4.23% in 2008. Kuwait wasn't so lucky, its economy contracted sharply in 2009, before bouncing back in 2010 and 2011.
But the economic collapse of a western sovereign nation is something we have not experienced for decades. Although corporate blow-ups like Lehman's can have devastating financial consequences there is a rule book to deal with corporate bankruptcies. There is no such rule book for the Eurozone, so its collapse could cause a more severe market reaction. Although Greece may account for a mere 0.2% of world GDP, its actions in the coming months could determine the future trajectory of growth in the GCC.
And it's not just oil demand. Although oil is the GCC's main export to Europe, the knock -on effects from the sovereign crisis dents global economic sentiment. Hence the Dubai stock exchange has fallen more than 15% since peaking in March. It could also hurt investment, for example, the problems in Europe could put off a global consortium of investors from making a big investment in the region. Investors prefer to spend their money during periods of economic harmony, where the potential future outcome (the potential for making more money) is more likely. Thus, the events in the Eurozone have affected the global investment environment, which impacts the Middle East.
Events in Europe could also cause some social friction in the GCC. In the wake of the Arab Spring economies across the region have put in place plans to boost social programmes and social spending. We already spoke about corporate investment, but social investment also requires financial timing, and if the global economy is threatened by events in Europe then we could see plans shelved or scaled back until the outlook gets clearer.
The events in Europe may be far away, but the impact of a disorderly default in Greece or a lack of action from Europe's leaders to sooth Spain's banking crisis could have repercussions on the GCC region. So the medium-term outlook for the economy of the Middle East could be determined at the polling stations of Greece.
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