The eurozone crisis could be of limited consequence on Egypt given the country's already battered economy, writes Niveen Wahish Trade, tourism and financial linkages are only three means through which any trouble in the Eurozone could be transmitted to the Egyptian economy. Other channels include remittances, foreign direct investment, financial assistance and the exchange rate. The Euro area has been tiptoeing on trouble for over a year. However, the threat of Greece dropping out of the currency union in recent weeks has been looming larger than ever, and should it happen it could augment the crisis. Theoretically any trouble on the northern side of the Mediterranean should take its toll on the Egyptian economy. The EU is Egypt's main trade partner. More than 30 per cent of Egypt's exports to the world are directed to EU's 27 member states. The EU is also a main source of tourist arrivals to Egypt, reaching around 50 per cent of total tourist arrivals in 2010. But Ahmed Ghoneim, professor of economics at Cairo University, is optimistic. He does not think the crisis will reach to Greece leaving the union, because if it leaves the union it would be losing the financial support that has so far been propping it up, and it would still need to implement harsh austerity measures. Ghoneim added that although the situation in Europe is serious, its effect on Egypt should be insignificant. "We are not in normal circumstances," he said in reference to the economic situation, saying this is a case where the crisis cannot add insult to injury. Dina Mandour, associate professor of economics at Cairo University, agrees. She said in a study presented this week to a joint workshop between Université Paris 1 and Cairo University that "the negative impact of Euro crisis on Egypt could be oversold" and that "domestic factors play a more significant role in determining the extent of the effect." She pointed out that: "It appears that the transmission channels are ineffective due to domestic policies that helped intentionally or not to partially isolate the country from that type of external shocks. In addition, the worsening domestic economic conditions are expected to have a much more negative impact relative to the Euro crisis." Along the same lines, Ahmed El-Wakil, head of the Federation of Egyptian Chambers of Commerce, believes "theoretically, we should be affected, but because there are other [domestic] factors behind our economic slowdown, we cannot distinguish where the hits are coming from." El-Wakil spoke about one of the main linkages with Europe, namely trade. He pointed out that Egyptian exports performed well in 2011 because they were still propelled by contracts signed in 2010. He said that this year things are not yet clear. However, he pointed out that the certificates of origin issued by the Chambers of Commerce for exporters are 30 per cent less compared to the same period last year. But he stressed that these certificates are not only issued for exporters to the EU. Another major linkage is tourism. Mandour said the number of tourists from the EU is expected to decline because of the negative effect of the depreciation of the Euro, leaving the European tourist with less purchasing power and thus lowering demand for tourism. In addition, she said, tourism, being a non-essential commodity, is likely to be sacrificed during downturns in sending countries. However, Mandour pointed out that, "the higher weight in explaining any deterioration during 2011 and projected to continue in 2012, is given to domestic conditions as represented in political instability and security deficiencies." Linkages also include the financial sector. But here Ghoneim said that not only are our linkages with European financial markets limited, but Egypt's financial sector has strong regulations; the same regulations that helped Egypt overcome the repercussions of the global financial crisis back in 2008. The exchange rate is a fourth linkage. And while Mandour explains that although Egypt is among a group of countries with dollar-based exports that could be harmed from an appreciation of the dollar against the Euro, to which their currencies are pegged, Egypt was not negatively hit by that due to the fact that the Central Bank of Egypt, albeit at a high cost, managed to maintain relatively stable the value of Egyptian currency during the global financial crisis and the EU crisis, and in the aftermath of the 25 January Revolution. As for remittances, Mandour said that, "remittances from the EU are relatively low when compared to those from Arab countries, and to a lesser extent the US." Accordingly, the expected impact of declining remittances inflow as a result of the Euro crisis on Egypt is likely to be mild. Notwithstanding that, she added, "remittances are relatively a robust source of foreign exchange that is not easily affected by crises." Mandour also does not see foreign investment flows affected by the Euro crisis alone, because "it could be a mixture of political uncertainty prevailing prior to the 25 January Revolution as well as a drying of financial flows from the EU." The same goes for EU development assistance. Although she said that "it is clear that there was a reduction in the amount of official development assistance directed to Egypt," given "the reverse trend that took place after the Arab Spring phenomenon and the nature of effects of foreign aid being distributed over a number of years," it is unlikely that the decline that happened would result "in serious negative impact on Egypt".
