Summary:
– The crisis in Europe, and more specifically in the eurozone, has had an economic impact on the African continent, even though there remains considerable heterogeneity between African countries.
– There are many economic links between Europe and Africa, and some of them have suffered from the crisis due to the decline in European public development aid, trade, financial transfers from expatriates, FDI, and, to a lesser extent, tourism.
– Africa is attracting more and more investors (particularly from China), and the African continent must continue its efforts to further diversify its partnerships and avoid suffering the consequences of Europe’s economic upheavals.
The economic development of the African continent is closely linked to Europe. The links between these two continents are long-standing, dating back to the colonial era. They are particularly evident in trade, investment, and population exchanges. Therefore, even though Africa is diverse and not a homogeneous whole, it appears that the global crisis affecting Europe is highlighting the fragility of the African continent and pushing it to orient its development strategy towards emerging countries.
Given the great diversity of African countries, the consequences for each country will be different. Some countries have currencies that are effectively pegged to the dollar or the euro, others are major exporters of hydrocarbons, others specialize in raw materials, and still others are very poor or emerging, may be highly specialized or have very diversified exports, etc. It is therefore necessary to identify several categories of transmission channels between Europe and Africa, while being aware that not every country is necessarily affected by all of them.
Official Development Assistance (ODA)
Despite the emergence of new players (China, India, Brazil) providing financial assistance to Africa, the United States and Europe remain the main financial supporters of the African continent. Annual aid stands at around $30 billion, with nearly 50% coming from Eurozone countries, making France the world’s leading historical contributor to Africa’s development.
The intensification of the debt crisis in Europe has led several countries to reduce their financial aid to Africa. In fact, in 2011, official development assistance actually decreased for the first time in 15 years. The countries that reduced their aid the most were Greece (-40%) and Spain (-33%). France also reduced its aid, causing it to fall to fourth place in terms of ODA to Africa.
If this trend continues, the African countries most dependent on international financial aid will be severely impacted. In this context, it is worth mentioning Liberia, the Democratic Republic of Congo, and Mozambique, for which ODA represents a significant share of GDP. For example, annual ODA represents about 35% of Liberia’s GDP, so even a minimal decrease would have an immediate and significant impact on the country.
International trade
The European Union (EU) is by far Africa’s largest trading partner, accounting for nearly 40% of the African continent’s exports. Africa’s commercial importance is particularly significant for North African countries (Morocco, Algeria, Tunisia, and Libya), but also for smaller economies such as Madagascar and Mozambique, with more than 60% of exports destined for Europe. The European market is even fundamental for a country such as Cape Verde, where 96% of exports go to Europe. Under these conditions, a decline in European demand can have a significant impact on employment in African countries.
Conversely, the depreciation (loss of value) of the euro may have had positive effects on a number of countries. Several African countries use the value of the euro to determine the value of their currency, including the countries of the CFA zone (African Financial Community), notably Côte d’Ivoire, Mali, Niger, Senegal, and Togo. As the value of the euro can fall, these countries benefit from this to improve their price competitiveness and thus increase their exports.
However, this effect only applies when they export outside the euro zone. Since most exports are destined for Europe, the decline in European demand is likely to outweigh the gains from improved price competitiveness. Most imports are denominated in dollars. Therefore, if the euro loses value, imports become more expensive. Ultimately, if the euro were to depreciate further, there would be a decline in exports due to reduced demand and an increase in the value of dollar-denominated imports, all of which would lead to a deterioration in these countries’ trade balances.
Tourism revenue
There are countries in Africa where the tourism sector is particularly well developed: Mauritius, Tunisia, South Africa, Morocco, Kenya, Senegal, etc. Nevertheless, Africa as a whole remains under-represented in global tourism statistics, which is confirmed by the poor development of tourism infrastructure.
The number of tourists has increased significantly over the past decade, from 27 million in 2000 to 50 million in 2010. During the same period, revenues tripled from $10 billion to $30 billion. By way of comparison, France, the world’s leading tourist destination, alone welcomes more than 70 million tourists per year, generating nearly $50 billion in revenue.
Tourism in Africa has slowed since 2010. However, it is difficult to distinguish between what is attributable to the European crisis and what is due to the Arab Spring. Nevertheless, it is becoming increasingly clear that the political events of the Arab Spring have significantly slowed tourism activity in the countries concerned, thereby automatically causing a decline in total tourism activity on the continent. It should also be noted that countries not affected by these political events have seen tourist numbers fall by more than 10%, as in Kenya. The decline in tourism in these countries, already heavily impacted by the decline in trade, can have a significant impact on local economies.
Migrant remittances
Migrant remittances are the sums of money sent by various diasporas around the world to their countries of origin. Migrant remittances amounted to $40 billion in 2010 and do not appear to have declined since then. On the contrary, the crisis has led to an increase in support from migrants to their relatives in Africa in several countries, particularly from France, Italy, and Spain. Private funds are actually less volatile than private capital in times of economic downturn.
Due to its proximity to Africa, Europe is a preferred destination for emigration and therefore the main source region. The main countries from which migrants send remittances are France, Spain, Italy, and Portugal, accounting for 42%, 16%, 15.5%, and 7% of transfers from this region, respectively.
Foreign Direct Investment (FDI)
Foreign direct investment (FDI) in Africa remains a minor component of the continent’s resources. Indeed, it mainly concerns hydrocarbon and mineral-producing countries, with a view to developing existing infrastructure or creating new infrastructure. As a result, FDI is very unevenly distributed across the continent. Nevertheless, it should be noted that it has increased significantly since 2002. However, the economic crisis, political tensions, and falling hydrocarbon prices have led to a decline in FDI in Africa, with several years of decline since 2008. For example, FDI from the Eurozone to Morocco fell by 27% in 2011 alone.
Africa must not rely solely on Europe for its development
When the crisis broke out in 2008, African countries had sufficient resources to implement policies to support economic activity. As the crisis has dragged on, their room for maneuver has become much more limited. With the decline in export revenues, the current account balances of several African countries are beginning to deteriorate seriously, as customs duties still account for a significant portion of public finances.
With economic activity less dynamic, these countries’ budget balances are also declining, further reducing their ability to cope with a prolonged economic downturn. Countries that export raw materials and hydrocarbons do not face the same problem, as these activities provide relatively stable and high financial returns. On the other hand, a country such as Egypt, for example, which is also experiencing political instability and a decline in tourism, faces great risks.
Conclusion
The current situation on the African continent highlights the importance of diversifying economic relations. Indeed, the economic difficulties encountered by the continent’s traditional partners are beginning to be felt, sometimes severely. In this context, it is worth highlighting the growing importance of China in the continent’s economy. While trade between the continent and China amounted to $10 billion in 2000, it now exceeds $120 billion.
Projections estimate that China could receive 25% of African exports by 2060, compared to only 5% currently, thus representing as much as the United States and Europe combined. India and Brazil are also seeking to increase their economic interests in the region, as evidenced, for example, by Brazil’s recent aid package, which canceled the debt of 12 African countries amounting to $900 million.
