x Abu Dhabi, UAEThursday 18 January 2018

Warning signals from Europe for the GCC

Focus: A leading Gulf economist, John Sfakianakis, believes the GCC can learn important lessons from the debt crisis enveloping the eurozone, writes Frank Kane.

John Sfakianakis, the chief economist at Banque Saudi Fransi, says the EU faces a crisis on a number of levels. Fahad Shadeed / Reuters
John Sfakianakis, the chief economist at Banque Saudi Fransi, says the EU faces a crisis on a number of levels. Fahad Shadeed / Reuters

The euro-zone sovereign debt crisis, and in particular the tortured negotiations going on between Greece and international financial institutions, has been followed closely in the Middle East, for several reasons.

First, the trials in European finances coincided almost exactly with this region's very own debt crisis, sparked by the restructuring announcement by Dubai World in November 2009.

There was no cause and effect here. Dubai's problems were linked to a property bubble rather than to excessive government spending; and it was less "sovereign" in nature. (Dubai has no sovereign rating.) But for a while the financial world was thinking simultaneously about debt in Dubai as well as in Europe.

Second, the Middle East is at the start of a process the Europeans have already undertaken: the creation of a unified economic, and even political, bloc of nations.

The six-member GCC is a long way off the levels of integration achieved by the 27 countries of the EU; but, just as in Europe, there is a body of opinion that wants faster movement towards a GCC "union", and recently there have been moves to widen membership with the inclusion of Jordan and Morocco.

Will a stronger and bigger GCC bring with it the kind of economic problems the EU has faced in the past couple of years?

One Middle East expert who has followed both crises closely is John Sfakianakis, the chief economist at Banque Saudi Fransi, a French-linked bank based in Riyadh. Having worked in Dubai for many years, and being of Greek ancestry, Mr Sfakianakis has some unique insights into and strong opinions about the issues.

"The EU faces a crisis on a number of levels," he says. "There is Greece, and the problems faced there are too many to be solved in the short term. They will work out over a number of years."

But he does not think Greece will default, at least in a strict definition of the term.

"The problems will come four or five years down the line, when Greece will be the most indebted country in the world and will not be able to meet interest or principal repayments," he predicts. "There is the crisis that defines the EU itself: the fact that you have a collection of states which has proved unable to control government spending and debt levels, given their different speeds of economic development.

"This then changes into a different crisis for the EU, more serious because it's at the heart of democracy: what is necessary in economic terms is not socially acceptable or palatable. This results in a social disconnect between the states and the societies they represent."

What does he think are the lessons the GCC should learn from the European experience?

"When you open up too quickly to new member states, with different levels of fiscal and economic development, that is a real concern, and the GCC should look at what's happening in Europe as a result of this," he says. "The GCC still has not got the basic element of unity, like a customs or monetary union, in place, and yet there is talk of admitting new members. Already we have seen how member states with different rates of economic development have struggled, like Bahrain and Oman, and have required subsidy from the richer members.

"In these circumstances, the GCC should think hard before it allows new members like Jordan and Morocco. I have even heard talk of allowing Yemen, which has enormous problems of poverty and instability," he says.

Dubai has taken big steps towards resolving its own financial problems. Does Mr Sfakianakis think Europe could learn any lessons from the emirate?

"Dubai certainly became too ambitious and debt-dependent, but it had advantages that are not there for the Europeans," he says. "It is one emirate within a bigger entity, the UAE, so the regional effects were limited to the Emirates, the contagion was confined and did not spread to the rest of the GCC. Dubai was lucky to have a wealthy cousin in the shape of Abu Dhabi just down the road.

"Dubai has gone a long way to fixing the financial problem, its economy is expanding and it is a good environment for doing business with a good infrastructure and a flexible labour force."

He contrasts this with the situation in Europe, and Greece in particular: "The big cousin there, Germany, is getting very tired of being asked to bail out the peripheral economies, and Greece does not have Dubai's advantages. There are structural impediments there, a lack of competitiveness, unemployment and the threat of social violence."

Mr Sfakianakis believes there is a reckoning ahead from the European turmoil that will have a direct effect on commercial life in the Gulf.

"Given the fundamental problems the euro zone faces, the currency is much higher than it should be. It's hitting record highs against the US dollar, and this cannot be justified. The problems of the euro zone have not been fully priced in.

"I believe there will have to be a reversal of the value of the euro, and this will be a good thing for the dollar and for the regional currencies that are pegged to it. In some ways, because of the dollar peg, the GCC already has its common currency, without any of the fiscal problems that has caused in Europe."