BRICS Aid Will Not Save Euro Zone: World Bank

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) September 27, 2011 --

The European debt crisis is threatening the withdrawal of investment in emerging markets, the head of the World Bank warned Monday, and Europe cannot count on cash-rich emerging nations like China and Brazil to come to the euro zone's aid. Mr Zoellick said that financial support mechanisms that had been put in place to help indebted nations, such as the European financial stability fund, had helped, but simply throwing more money at the problem was no long-term solution. He told reporters that the global recovery is “far more fragile” than it was earlier this year as concern over European solvency and cooling U.S. growth begin to disrupt bond and equity markets in emerging economies, where export demand has already begun to slow. European officials have looked to Brazil, China and other big emerging markets, which together have trillions of dollars in reserves, as places to sell large amounts of sovereign debt. Some of the big markets have played along, at least rhetorically. Brazil has publicized a meeting of the so-called BRICS nations—Brazil, Russia, India, China and South Africa—this week in Washington, which it said would discuss euro-zone problems. China also has hinted it could provide financing in exchange for trade concessions. Emerging economies such as China and Brazil had risked overheating their economies before the European debt crisis entered a dangerous new phase in recent weeks.

The euro-zone crisis is weighing increasingly on economies outside Europe. Many governments and their central banks started hitting the brakes to slow down their economies. If the European debt crisis worsens and spills over into the U.S. and global markets, the World Bank expects growth in developing countries to fall, the value of their assets to drop and the number of loan problems to increase; stocks in developing countries are already taking hits as demand from rich countries is declining. The drop in markets and confidence could prompt slippage in developing countries' investment, and a pull-back by the consumers too. In addition, events in the U.S. and Europe may be starting to filter through to emerging-market consumers and businesses in a way that hits their domestic demand. A fall in developing countries' demand would mean losing their economic engines as drivers of global recovery.

As Greece works to stave off a potential default, European policy makers are debating ways to reassure investors about the debt of nations like Spain and Italy. Zoellick largely dismissed the possibility of emerging markets coming to Europe's rescue with cash, saying that the euro zone is going to have to solve its own problems. European leaders must decide what kind of monetary union they want, by either forming a stronger fiscal union or facing the consequences when weaker members falter. The breakup of the euro-zone is also an option. While outside nations can support the euro area with measures like the central bank coordination last week to lend dollars to euro-area banks, there is not going to be one single policy which will solve the crisis.

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