European Sovereign Debt Crisis and its Impact on MENA Economies

The current crisis in Europe accompanied by the Arabian Spring has several implications for the overall economic outlook of the Middle East and North Africa (MENA) region. Risks surrounding the Euro area and the Arabian Spring outcomes have made the economies of MENA region face more challenges and to come under increasing pressure. The effect of the European sovereign debt crisis on MENA economies is expected to have different impacts on the region's countries depending on the unique characteristics of each economy. The most negatively affected economies are expected to be those which have high levels of relations and interactions with the European Union, mainly North African countries.

Moreover, some countries in the region are projected to suffer more due to the double effects of the crisis and the revolutions witnessed in those countries. On the other hand, countries with strong domestic demand and adequate local sources of funds accompanied by political stability are estimated to be the least affected by the crisis.

MENA oil economies are expected to be more affected by the European crisis since these economies are closely linked to Europe and negative impacts are transmitted to these economies mainly via trade, investment, and remittance channels. Reflecting geographical proximity and close historical ties, MENA oil importers' exports have mainly been oriented toward Europe, which has, according to the IMF, on average accounted for some 50-60percent of their exports since the 1970s. On the other side, the notable risk for the MENA oil exporters' of the crisis is likely to be transmitted through its impact on oil demand and prices.

In general, the crisis is expected to affect the macroeconomic environment in the region as a whole through its impact on public revenues, foreign reserves, trade balances, inflation, financial markets and credit conditions. These impacts are estimated to be measured through the effects on oil demand and prices, trade with the European Union, tourism revenues, labour remittances, interest rates and delaying planned currency unions in the region.