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Why South Africa should care about Europe

17 October 2011 Plexus Asset Management

South Africa started this week down in the dumps after Bafana Bafana’s embarrassing display in Nelspruit, and the unfortunate way the Springboks were booted out of the Rugby World Cup. “From an economic point of view, things have also been miserable,” says Paul Stewart, managing director of Plexus Asset Management.

With all the attention remaining firmly on Europe, and more specifically Greece, why should we care about them? “The quick answer is global growth,” says Stewart. “For prosperity to prevail all over the world and in South Africa, global growth needs to be increasing.

“Imports and exports need to be thriving, as employed consumers are able to buy goods from across the globe. For too long global growth has been sustained by ‘wealthy’ developed-world governments borrowing money, running deficits and artificially keeping economies thriving,” says Stewart.

 

Eventually the debt needs to be repaid. “The difficulty Greece faces is that it is struggling to repay its existing debts. Its expenditure simply exceeds its income.

“Greece has received bail-out packages from the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), yet it still owes vast amounts to banks in Germany, France, Italy and many others,” explains Stewart. “These banks will, in turn, be out of pocket and therefore become more risky if Greece is unable to service its debts or if it can only pay back a portion of what was borrowed.”

Greece does not owe South Africa any money, yet why do its struggles affect us? According to Stewart, “even though there is no direct lending between South Africa and Greece, there are strong economic connections between South Africa and the major European countries such as Germany and France.

“A slowdown in Europe has a knock-on effect on the rest of the world, including South Africa,” Stewart continues. “Europe has a large base of wealthy consumers who purchase goods from around the world, including South Africa.

“As Eurozone governments cut back on expenditure, business conditions deteriorate globally, which increases unemployment in trading partner countries. This results in less demand from historically strong countries and dampens the level of trade around the world.”

He cites an example of a South African farmer who was exporting fruit to Europe. As the farmer experiences declining prices, volumes and demand, profitability also declines. This in turn affects the farmer’s ability to employ workers and might increase the rate of unemployment in South Africa.

 

According to Stewart, there have recently been some utterances by the finance minister about the possibility of using some of our foreign reserves to provide aid to the European Union. However, this thinking was recently quashed by Reserve Bank governor Gill Marcus.

“At the very least this illustrates our government’s concern about the contagion effect for South Africa if the Eurozone enters a protracted recession,” says Stewart.

“In these times of worry, we perhaps should have shown more respect to the Dalai Lama, especially in a week when we were in need of some good karma on the sports fields,” he adds.

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