Euro decline is Gulf opportunity

It is official. Europe is in economic decline. From Dublin to Dresden, and from Stuttgart to Seville, euro-zone economies are suffering the fall-out from the global credit crunch. In Britain, part of the European Union but not in the euro fold, the story is just as bad, with its property and consumer-fuelled economy running out of steam and inflation looming. Being out of the euro does not seem to have brought the UK any protection from the continental downturn.

Spain has been particularly badly hit, with its high exposure to the property business leaving it vulnerable to sub-prime woes. Many projects have been cancelled, leaving anxious investors wondering if they will ever get their properties delivered, or their money back. The knock-on effect is evident in the property-fuelled consumer sector, where retail sales have been falling, and, with thousands of construction workers laid off, unemployment is rising.

In Ireland too, the property boom is well and truly over. Its economy will probably shrink by more than the European average this year, and that could just be the beginning. The country put so much store in the soaring value of real estate that the worst could still be ahead of it. Italy too is back in negative growth mode, meaning that the economy will shrink further this year.

But especially worrying is the downturn in France and Germany, both of which had appeared to have avoided the bigger excesses of the world, apart from the odd financial or corporate crisis. Now both are looking at negative rates of growth and rising inflation, which is very worrying indeed. If such economies, with long histories of prudent investment in infrastructure and sound financial management, and an apparent aversion to the Anglo-Saxon addiction to property, find themselves in such trouble, who is immune to the fall-out from the credit crisis?

Even the new euro-zone members of eastern Europe, which have been enjoying their own boom since their accession to the euro-zone, are beginning to feel the pinch.

But does it matter to the UAE? Leave aside for a moment the rather abstract economists' debate over whether this region is any more immune from the contagion than began in the US than Europe thought it was. I am beginning to think anyway that the GCC really is an "oasis" market in the current global economic turmoil.

It is in no trading bloc's interest to have their main commercial partners in a state of recession, wracked by high inflation, falling output and unemployment. Those faltering economies will certainly need less oil, the UAE's main export, which is not good for the oil price nor for the national revenues of the country. And the UAE does substantially more business with Europe than it does with the USA. In 2006 – the last set of reliable figures I can find – China was the UAE's biggest trading partner, followed by Britain and the USA, all on just under 10 per cent of total imports to the UAE. But the other European countries between them totaled another 20 per cent or so of UAE imports, making the euro-zone plus Britain the biggest source of imports for the UAE.

But this is where we see most clearly the benefits of the dollar peg. As Paul Murphy describes on the facing page, the resurgent greenback is gaining in value against the euro and the yen. Imports from the euro-zone, paid for in dollars or in dollar-denominated oil exports, will be comparatively cheaper the longer the US currency keeps appreciating – and the longer the UAE and other GCC countries retain the dollar peg.

It is not only imports from the euro-zone that will be relatively cheaper. Assets in those countries will also represent increasingly good value for investors in the Middle East. So far – though there have been some investments by UAE and other GCC states in Europe, most of the thrust of sovereign wealth fund and private equity investment has been in the USA.

The depreciation of the euro and sterling, and the corresponding rise in the value of the dollar-pegged dirham, will mean a great opportunity to diversify Gulf investment into the euro-zone and Britain.

No doubt the central banking authorities of the Gulf, which have stuck to the dollar peg when all the evidence seemed to be to the contrary, knew all along that the balance of world currencies was about to change.