Crunch time for eurozone

EU leaders will meet in Brussels to decide on the bloc’s future

THE 17 nations of the eurozone will face a defining moment on Friday, as key European Union (EU) leaders meet in Brussels, Belgium, to decide on the ultimate plan for their future. Yes, we've heard this many times before, but this time it could be different.

Over the past year or so, the eurozone union has proved to be difficult and expensive especially for Germany to maintain because of the region's escalating sovereign debt crisis. And yet a break-up of this 12-year bond could prove to be even more painful for the member states and “catastrophic” for the global economy with the extent of damage, as some economists put it, “difficult to fathom at this juncture.”

All eyes are, therefore, on the EU summit towards the weekend. And as global markets await the verdict, trading will likely exhibit an extremely cautious and highly volatile move through the week.

“The outcome of the meeting will be crucial for global market sentiment, going forward,” a research head with a local financial institution told StarBiz.

“But the good news is, there is rising optimism ahead of the meeting that the EU policymakers, led by Germany and France, will come up with a plausible solution to manage the region's debt crisis and ensure the survival of the single-currency region,” he explained.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng concurs, saying, “There appears to be a gathering of political will lately to stem the eurozone debt crisis.”

According to analysts at the Royal Bank of Scotland plc (RBS), there are already increasing signs the upcoming EU heads of states meeting would see new proposals for more serious reforms to resolve the region's structural problems. They even speculate that the region's reform initiatives could eventually lead to greater European Central Bank (ECB) backing.

The analysts further noted the ECB was expected to cut the region's key interest rates again by at least 25 basis points to 1% this month.

“In addition to a lowering of interest rates, we look for new measures by the ECB to address the current funding pressures affecting both the euro and dollar markets,” the analysts said. “This could prove to be a significant support to the banking sector at a time of acute funding pressure.”

“A further loosening of the collateral policy in euros, a move towards accepting dollar collateral and a cut in the cost of the dollar-swap line, if implemented, would go a long way to assuage some of the concerns related to funding,” they added.

The eurozone economy has been experiencing an accelerating pace of deterioration in recent months. In the third quarter of 2011, gross domestic product (GDP) grew only 0.2% quarter-on-quarter, matching the pace of growth in the preceding three months.

Recent surveys suggest further contraction is in store for the eurozone. For instance, the Markit's Composite Purchasing Managers Index (PMI), which measures changes in business activity, shows the region' private sector economy contracting for a third straight month in November.

While the PMI rose slightly to 47 from 46.5 in October, it is still far below the 50-mark that divides growth from contraction. This puts the region's economy on course for a 0.6% contraction in the fourth quarter.

In the worst-case scenario, Asia's economy will not be immune. Nevertheless, the fast-growing region can find solace in the fact that the negative impact it would likely feel will not be as severe as crisis-inflicted countries.

In its recently published quarterly report on the economic outlook, the Institute of Chartered Accountants in England and Wales (ICAEW) said South-East Asia's economies were expected to continue with their strong growth.

It said the troubles brewing in Europe should not derail the train of prosperity of the major economies of Asean, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

ICAEW said Asean's GDP was expected to grow at an annual rate of 4.8% next year and 5.4% in 2013, outperforming the global average for both years. It expected Malaysia to register an annual growth of 4.3% next year, before rebounding strongly to 5.6% in 2013.