By: Dr. Mike Campbell

It has often been said that, in economic terms, when America sneezes, Europe catches a cold. However, in an ever more interconnected world, a crisis in any major trading block will have repercussions throughout the trading world. Fear of a sovereign debt collapse has partially paralysed the financial sector with banks reluctant to lend to other banks or business. This problem has been addressed to some extent by the initiative of the central banks to reduce the cost of buying Dollars, but until a credible Eurozone fix is agreed confidence will remain elusive. The uncertainty and weak demand go hand in glove, dampening economic activity well outside the geographical boundaries of the European Union. The EU summit on Thursday and Friday is receiving much press coverage as the “make-or-break” moment for the Euro, but failure to agree a path out of the woods will not mark the end of the Euro, just that the agony will continue for the foreseeable future.

The Bank of Korea and the Reserve Bank of New Zealand have both kept their interest rates on hold, at 2.5 and 3.25% respectively, citing fears of reduced demand because of the Eurozone crisis. Inflation within New Zealand is in check and is expected to fall within the 1 to 3% target band in December. However, South Korea does have a problem with inflation and it is likely to remain above the bank’s 4% target for some time to come. Like their counterparts at the Bank of England, governors of the Bank of Korea have decided that growth is a more pressing concern than containing inflation right now.

China’s commerce ministry has warned that its exports “face severe challenges” because of uncertainty and weak demand in Europe and the USA which account for 40% of the country’s total exports. Since domestic demand in China is relatively weak, a downturn in exports is a very serious concern. If China does eventually take a significant stake in the EFSF, it will be self-interest rather than altruism which drives the decision.