As euro zone suffers, emerging markets thrive

No matter how Cyprus's financial drama ends, its troubles show yet again that rich countries enfeebled by the great financial crisis remain a weak link in the world economy.

By comparison, emerging markets are not only looking stronger but are also contributing more consistently to global growth.

At worst, if Cyprus has to abandon the euro, fragmentation of the single-currency bloc would chill investment and could reduce trend growth in the euro zone's four major economies by a full percentage point on average in the period 2015-2020, according to economists at Bank of America Merrill Lynch.

Under that scenario, trend growth in Germany could fall to zero, they said.

Even if a solution is found that keeps the tiny Mediterranean island afloat, the inept handling of the crisis has revived political risk. Confidence in the euro zone economy, already relapsing after a fairly bright start to the year, can only suffer.

Several banks lowered their forecasts for the bloc on the heels of grim purchasing managers' surveys, and a clutch of sentiment indicators and money supply figures this week are likely to further underscore the economy's precarious position.

While policy makers in the euro zone struggle to keep the single currency together, the leaders of Brazil, Russia, India, China and South Africa (BRICS) will meet to strengthen the foundations of emerging markets' growth.

The summit, to be held in Durban, South Africa, on Tuesday and Wednesday, is expected to give the go-ahead for a joint foreign exchange reserves pool as well as an infrastructure bank.

The initiative is being hatched partly out of frustration with international financial institutions that they judge to primarily reflect the interests of industrialised countries.

Jim O'Neill, the chairman of Goldman Sachs Asset Management, noted that, for all the havoc that Cyprus can potentially cause, its annual output of $22 billion is no more than China produces in a week.

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