On the face of it, the euro zone and the United Arab Emirates do not have a lot in common.
But even before Greece triggered the euro crisis by revealing a gargantuan hidden deficit, Dubai had provided an early warning of what was to come with its real-estate bust, which similarly required a bailout from a rich neighbor. But does the UAE experience hold any wider lessons for the euro zone? Morgan Stanley’s economists think so:
“Prices of goods and labor, property prices and equity prices have fallen in the periphery relative to the core countries while bond yields have gone up. The core countries are not very willing to take on a large part of the adjustment … over time the infection has spread from the periphery to the core,” they write.
“None of this is a news. What may be a surprise is the fact that we are talking not about Europe, but about the UAE.”
Both the United Arab Emirates and the euro area are currency unions with strong core countries running current account surpluses and peripheral countries running deficits. Abu Dhabi has oil, while Germany has its productivity miracle. Greece and Dubai, meanwhile, have relied on debt financing for their economies. With a single exchange rate, there is no possibility for the periphery countries to devalue.
Looking at the UAE, where Abu Dhabi came to the rescue just as the euro-area has, the imbalances are still unwinding. Wages in Dubai have fallen sharply relative to those in Abu Dhabi, and asset prices have gone the same way, Morgan Stanley notes. That means Europe still has a long way to go, even if it can seal off the crisis.
In fact, there are wider parallels to be drawn. Euro area governments effectively borrow in a foreign currency as they do not have the ability to print euros – therefore their bonds have behaved in a similar way to emerging-market hard-currency bonds in a crisis. And monetary policy constraints have been felt the same way: if an emerging-market central bank tries to raise rates to fight inflation in a crisis, doubts rise about growth and hence solvency. The ECB’s rate hikes and reversal this year reflect the emerging-market experience closely, Morgan Stanley notes. The lines between developed and emerging are becoming ever more blurred.
–Richard Barley