Euro-contagion warning for region

Brazil's economy grew by 2.7 percent in 2011, a significant drop on the 7.5 percent registered in 2010. Among the reasons for this sudden slowdown are a series of measures imposed by the government aimed at putting the brakes on inflation fueled by massive inputs of foreign capital along with a sharp decline in industrial output provoked by the drop in exports.

Across the other side of the planet, fellow emerging nation China has just announced that its growth forecast for this year will be 7.5 percent, its lowest level since 2004.

There is now growing concern among many emerging economies that the ongoing crisis in the developed countries, and in particular, the EU's single currency economies, is slowing down growth in the rest of the world.

Guillermo de la Dehesa, head of the Center for Economic Policy Research, says that the emerging economies are still overly dependent on the developed world.

"The euro-zone countries import goods to the tune of 1.7 trillion dollars, so when trade slows down, this has a huge impact on emerging economies. Even though GDP in the developing world made up half of all global growth in 2011, they are still dependent on the developed world importing their goods and investing in their economies," he says.

Vicente Esteve, a professor of economics at the University of Valencia, says that emerging economies need to take action now, while they are still enjoying growth.

"They need to reduce the imbalances caused by external factors on their financial systems, as well as trying to stop overheating their economies," he says. "At the same time, they need to introduce financial reforms aimed at strengthening the balances of their banking systems."

Santiago Carbó, an economist at the University of Granada, says it is "only a question of time before the emerging economies are significantly affected by the crisis." He calls on countries like Brazil to take measures to prevent growth from generating unemployment, as is now happening in China.

José García Solanes also points to the huge investment by some developing countries in the economies of the West. "The fact that countries such as China and India have bought huge amounts of debt from the United States, the United Kingdom and the euro-zone countries, where economic output is still very uncertain, is an undeniable risk," he says, calling on the emerging economies to strengthen economic ties with each other to avoid the risk of contagion.

Not all the emerging economies face the same dangers, however. Santiago Fernández de Lis, a senior economist at BBVA Research, highlights the important differences between regional financial markets. "In the case of Latin America, we see affiliates with a decentralized structure that seek financing locally, in local currencies; in Eastern Europe, banks are very dependent on the euro-zone countries, which exposes them to a greater risk of contagion."

José Luis Martínez, Citigroup's Spain strategist, says that the emerging economies face grave dangers of contagion. "The best example is the housing boom in China and the decline there of medium-sized banks. The other problem these countries face is huge inflows of foreign capital. The president of Brazil was quite right to call the West irresponsible for pumping money into her country to invest in raw materials. It has put huge pressure on the currency there." He adds that one short-term response from such countries could be a return to protectionism, "which would just further slow down global growth."