CAIRO: The European sovereign and banking crises as well as the American fiscal stalemate will most acutely impact Egypt, given the implications on global growth, Citigroup chief economist Willem Buiter said Sunday. At an event hosted by the American Chamber of Commerce in Egypt, Buiter discussed the impact of financial turmoil in Europe and the US on Egypt and the Middle East and North Africa (MENA) region. A widely published economist, Buiter previously served as a member of the Bank of England's Monetary Policy Committee and as chief economist for the European Bank for Reconstruction and Development, in addition to teaching as professor of Political Economy at the London School of Economics. He attributed the European crisis particularly to “denial, ignorance and impotence in European economic policy making.” Of the world's growth domestic product (GDP), 40 percent resting in emerging markets is doing rather well as opposed to Europe or the US, he added. However, “emerging markets from the global perspective are more than twice the locomotive that the US consumer ever was,” he said, outlining their potential momentum in spite of the European and American markets. Buiter explained how the European sovereign and debt crisis spiraled at first from the outer periphery, Greece and Portugal, to the inner periphery, Italy and Spain, then touching on to what he called the ‘soft core‘ of the Eurozone: Austria, Belgium and France. “We're not going to have growth in Europe in the foreseeable future until the deleveraging of sovereigns, of banks — and in some countries, of households — is completed,” he said. He specifically cautioned that the sovereign default of Italy and Spain “would bring down the European banking system, or possibly the North Atlantic banking system,” causing a global financial crisis and recession on the same magnitude of, or even farther than, the Great Depression of the 1930s. When discussing Egypt, he foresaw that the crisis was going to negatively affect the country even in the optimistic case of an orderly management scenario through several channels, such as trade. Another important channel was finance, as European banks, presently significant in Egypt, could withdraw their capital. Buiter also warned of the global trend of lowered risk ratings as “risk aversion has increased massively … and of course Egypt with its own domestic component of relevant risk is more affected by this.” However, he said that low interest rates are among Egypt's defining characteristics, and he expected higher possible growth in the future as the boom that had occurred in the 1990s, pending solution of the political upheavals in the country. He predicted that the growth is “contingent on an increase in investment rate from the low 20s, to something in the mid-30s … a 10 percent of the GDP if properly allocated.” The promise however of the growth on investment will have to be postponed, not only due to the global crisis but also to the current political uncertainty. He warned of tough times, Egypt optimistically has four months of import cover left as current reserves stop. In addition he added “budget deficit, government deficit … and accelerated loss of reserves, inflation … a massively overvalued exchange rate,” all contributed to further reducing the attraction of foreign investors. “You can't have a deficit equal to 40 percent of your government spending without expecting to slash spending or raise taxes,” said Buiter as he warned of fiscal retrenchment along the lines of Greece. Buiter warned that the fiscal issues will have to be tackled, as “one of the great lessons from the Greek crisis is that without budget transparency, knowing who spends what and on what, it is not possible to have the sensible budgetary prioritization, and sensible multi-year plans which will create business confidence.” He also said that many of the things likely to be scrutinized are politically very difficult to tackle, and relate all the way from “items of spending that benefit powerful interest groups,” to subsidies that affect the average and poor Egyptians, such as water, power, and fuel. When asked about what sort of measures were required for fiscal tightening, he replied that the government was required to boost household incomes and savings, through savings instruments that people can trust.
