Impacts of the Euro sovereign debt crisis on global trade and economic

growth: A General Equilibrium Analysis based on GTAP model

Li Na1,2, Shi Minjun1,2, Huang Wen1,2

1. University of Chinese Academy of Sciences, Beijing 100049, China
2. Research Center On Fictitious Economy & Data Science, Chinese Academy of Sciences,
Beijing 100190, China
lina@ucas.ac.cn, mjshi@ucas.ac.cn, hwcas@sina.com

Abstract: Euro sovereign debt crisis will influence international trade and global economy
through affecting factors supply, consumer and investment demand, and production efficiency in
the PIIGS region. This paper aims to examine the impacts of Euro sovereign debt crisis on global
import, export and global economic growth through trade channels by using the methods of
general equilibrium analysis and scenario simulation based on GTAP model.
As Euro sovereign debt crisis still continue, this research is carried out by two steps to
examine its impacts on global economy: 1) the impacts of Euro sovereign debt crisis on global
economy up to now (until the end of 2012); 2) the impacts of different trends of Euro sovereign
debt crisis on global economy in future (2012-2015).
The simulation results show that global economic growth has suffered a serious damage from
2010 to 2012. Affected by Euro sovereign debt crisis, the average annual growth rate of the global
economy has reduced by 0.65% and global unemployment rate has risen by 1.81%. Global trade
was in depression and the average annual trade growth was reduced by 1.14%. The import and
export trade of the United States and China suffered more serious affected by the crisis. Due to the
impact of the European sovereign debt crisis, the average annual growth of China's economy
decreased 0.37 percentage points, which is more serious than the United States and other BRIC
countries. The exports of raw materials processing and machinery and electronics manufacturing
industries of China were affected more serious.
The impacts of the European sovereign debt crisis on global economic growth will continue
in the next few years (2012-2015). The gap of the prospects for global economic growth between
in pessimistic and optimistic scenarios is larger, and boosting the global economy still needs
stronger economic stimulus policies to carry out. Trade diversion is hard to offset the impacts of
the shrinking market of EU, and the European sovereign debt crisis will continue to affect global
trade. The external demand environment of Chinese economy will continue in depression, and the
decline of investment and consumption of other countries caused by the European sovereign debt
crisis on will further led to reduce their imports from China, which requires the concern and
vigilance of the Chinese government.

Key Words：Euro sovereign debt crisis; Global Economy; GTAP; General Equilibrium Analysis

1. Introduction
Plagued by the European sovereign debt crisis, the Euro zone economy is facing a severe test. The
weak economic growth in the Euro zone will drag on world economic growth and the risk of
global double-dip recession are growing. The spread and evolution of European sovereign debt
crisis will result in a significant and far-reaching impact on the European economy and may
reshape the global economic pattern. Therefore there is a necessary to study deeply on the impacts
of the European sovereign debt crisis on the global economy and look ahead the trend of the
global economic pattern after the European sovereign debt crisis, which will provide a reference
of making decision for the timely and effective policy response.
The impact of financial crisis on the global economy mainly through affecting crisis countries'
consumption demand, investment demand and government spending, in turn affect international
trade and the global economy. Kim (2001) found that the Asian financial crisis has important
impacts on saving and consuming behaviors of directly suffered countries and other Asian
countries. Inklaar and Yang (2012) found that the financial crisis have a negative impact on
investment, especially more obvious affect on the countries with larger uncertainty and lower bear
ability by 74 countries data analysis during 1970-2005. Financial crisis will bring about
consumption and investment demand shrinking, government spending reduction, and the trade
balance change, thereby affecting the economic growth of the country and other countries. Benati
(2012) found that the US subprime mortgage crisis had led to more than 60% reduction of
potential output growth in the Euro zone, the US, the UK and Japan. UK is the hardest hit and the
growth rate of output decreased by 4.4%. As the financial crisis has led to the lack of demand, the
higher the degree of foreign trade dependence of the country, the more significant the affection by
the financial crisis(Gupta et al, 2006; of Berkmen et al, 2012). Cheng (2012) analyzed the impacts
of the US financial crisis on the world economy and China's economy. The results showed that the
economic growth of the major developed countries, the emerging market countries in Asia and
Europe were severely affected by the US financial crisis. For the impact of the US financial crisis
on China's economy, trade pathway is a main channel and the role of the virtual economy channels
such as FDI and financial channels is smaller. Larry et al. (2012) studied the impacts of European
sovereign debt crisis by simulating the world economy situation in the disorderly debt default
scenario and extreme situations of financial instability scenario. The results show that the level of
GDP in the Euro area will decrease by 4.25 % after one year lower than the basic scenario by
2.0-2.25% and Greek exiting from the Euro zone would trigger a global recession. The majority of
the research above is referring to the impact of the financial crisis happened in history on global
trade and economy, but the research on the impact of the European sovereign debt crisis on the
global economy is very little, especially the study from the view of trade chain conduction to
analyze quantitatively the impact of the European debt crisis on the global economy is rare.
Based on the above background, this paper focuses on the impact of the European sovereign debt
crisis on the global economy through the trade chain conduction. This paper use a multi-national
multi-sectoral CGE model-GTAP (Global Trade Analysis Project) model through scenario analysis
and policy simulation methods to analyze the shock of the European sovereign debt crisis on the
supply and demand side, and then simulate the impact of the European sovereign debt crisis on the
global import, export and economic growth through trade channel.
As the impact of the European sovereign debt crisis continues, the study of the impact of
European sovereign debt crisis on the global economy can be divided into two parts: 1) the impact
of European sovereign debt crisis on the current global economy since it started (due to the
European debt crisis began in late 2009, the impact of European sovereign debt crisis on the
current global economy is from 2010 to 2012); 2) the impact of the development trend of the
European sovereign debt crisis on the future global economy (2013-2015). This study is expected
to provide scientific references for China to make strategies to deal with the European sovereign
debt crisis.

2. Methods and data

In this study, GTAP model is used to study the economic impact of the European sovereign debt
crisis by comparative static simulation analysis. GTAP database 2007 is chosen as the data of the
base year for simulation. According to research needs, the regions and sectors were properly
aggregated (Table 1 and 2). In order to better simulate the impact of the European sovereign debt
crisis, we make a dynamic simulation to change 2007 aggregated database to 2009 base on
regional economic output in 2009, and then use this as a simulation database.

Table 1 Regional Aggregation

No. Code Include Countries and areas
1 PRT Portugal
2 IRL Ireland
3 ITA Italy
4 GRC Greece
5 ESP Spain
6 ROEZ Austria/Belgium/Cyprus/Estonia/Finland/France/Germany/Malta/Slovak
ia/Slovenia/Netherlands/Luxembourg
7 ROEU Rest of Europe
8 CHN China
9 US USA
10 JPN Japan
11 ROB India/Brazil/Russia/south Africa
12 ROAS Rest of Asia
13 ROAM Rest of America
14 ROAF Rest of Africa

Table 2 Sectoral aggregation

No. Code Description

Paddy rice\Wheat\Cereal grains nec\Vegetables, fruit, nuts\Oil seeds\Sugar
1 AGR cane, sugar beet\Plant-based fibers\Crops nec\Cattle,sheep,goats,horses\Animal
products nec\Raw milk\Wool, silk-worm cocoons\Forestry\Fishing
2 EXT Coal\Oil\Gas\Minerals Mining nec
Meat: cattle,sheep, goats, horse\Meat products nec\Vegetable oils and fats\Dairy
3 PRF products\Processed rice\Sugar\Food products nec\Beverages and tobacco
products
Textiles\Wearing apparel\Leather products\Wood products\Paper products,
4 TED
publishing
Petroleum, coal products\Chemical, rubber, plastic prods\Mineral products
5 RAW
nec\Ferrous metals\Metals nec
6 PMF Metal products\Motor vehicles and parts\Transport equipment nec\Electronic
 equipment\Machinery and equipment nec
7 OMF Manufactures nec
Electricity\Gas manufacture, distribution\Water\Construction\Transport nec\Sea
8 BSE
transport\Air transport
Trade\Communication\Financial services nec\Insurance\Business services
9 CSE nec\Recreation and other services\PubAdmin/Defence
/Health/Educat\Dwellings

3. Scenario Design
(1) Baseline scenario
The baseline scenario is the scenario that the European sovereign debt crisis did not happen and
the economic development is normal as before. Baseline scenario is also a reference scenario
compared with other scenarios. In the baseline scenario, the economic growth trend of each Euro
zone country since 2010 should be in accordance with its historical normal trend of economic
growth. By remove the particular economic downturn in the financial crisis from 2008 to 2009,
the average level of economic growth from 2003 to 2007 is set as the economic growth in baseline
scenario (the last volume in Table 3).
Tale 3 Economic growth of the Euro zone (%)
2003-2007
Regions 2003 2004 2005 2006 2007 2008 2009 2010 2011
Average
PRT -0.91 1.53 0.8 1.43 2.39 -0.03 -2.9 1.36 -1.71 1.54
IRL 3.86 4.36 5.9 5.43 5.45 -2.08 -5.5 -0.79 1.4 5.28
ITA -0.03 1.72 0.95 2.21 1.66 -1.12 -5.5 1.8 0.44 1.63
GRC 5.97 4.42 2.26 5.57 3.04 -0.14 -3.26 -3.51 -6.87 3.81
ESP 3.05 3.3 3.63 4.12 3.45 0.87 -3.75 -0.32 0.38 3.62
PIIGS 1.45 2.52 2.14 3.18 2.59 -0.41 -4.63 0.55 -0.14 2.61
ROEZ 0.35 2.04 1.46 3.35 3.16 0.78 -4.32 2.87 2.26 2.65

(2) Crisis scenario

The crisis scenario is an actual economic recession scenario since the European sovereign debt
crisis (2010-2012). In this scenario, the rise of unemployment rate (the decline of labor supply),
the decline of investment demand, consumption demand and production efficiency in the Euro
zone during 2010-2012, are main consideration factors of the shock of the European sovereign
debt crisis. Table 4 shows the settings of the shock extent of variables. In the short term, the
employment of the Non-Euro Zone countries will also be affected, so the labor markets of the
Non-Euro Zone countries are considered as non-full employment in macroeconomic closure.
Table 4 Settings of the shock variables in the crisis scenario- compared with the baseline scenario

(%)

Regions Unemployment rate Consumption Investment GDP

PRT 4.71 -23.81 -18.00 -7.85
IRL 7.57 -49.58 -68.96 -15.61
ITA 0.97 -5.71 -12.54 -4.78
GRC 7.77 -42.71 -58.08 -27.76
ESP 9.27 -21.26 -49.19 -12.18
PIIGS 4.65 -5.14 -22.16 -7.63
ROEZ -0.23 -1.00 -2.63 -2.41

(3) Pessimistic scenario

According to the development trend of the European sovereign debt crisis, two different scenarios
are set. One is the pessimistic scenario and the other is the optimistic scenario.
In the pessimistic scenario, it is expected that the European sovereign debt crisis will continue for
many years, fiscal austerity will accelerate shrinking demand, unemployment will continue to rise,
and the economic measures with little success. Some European leaders and scholars hold that the
European sovereign debt crisis requires more than ten years to be resolved. We assume that under
the pessimistic scenario, the Euro zone economy will have a recovery in 2016 and are fully
restored to pre-crisis level in 2020, and the European sovereign debt crisis will lead to an
economic depression in 2015. From a pessimistic point of view, the value of shock variables of the
Euro Zone in the models can be set according to the counterparts of the worst few countries in the
Great Depression (Table 5). The labor markets of the Non-Euro Zone countries are considered as
non-full employment.
Table 5 Settings of the shock variables in the pessimistic scenario- compared with the baseline

scenario (%)

Regions Unemployment rate Consumption Investment GDP

PRT 7.81 -23.81 -31.08 -15.77
IRL 13.19 -49.58 -90.60 -33.98
ITA 1.55 -5.71 -24.86 -9.77
GRC 14.40 -42.71 -82.30 -54.39
ESP 12.85 -21.26 -84.20 -25.61
PIIGS 7.69 -7.62 -60.61 -19.54
ROEZ 0.50 0.96 -5.87 -5.13

(4)Optimistic scenario
In the optimistic scenario, it is assumed that the Euro zone economy will get a gradual recovery
starting in 2013 by some European stimulus plans. The degree of recovery can be set with
reference to the degree of recovery of the US financial crisis during 2008-2009. From the actual
data, the average annual GDP growth rate of the Euro zone except PIIGS in 2010 is 2.87%,
equivalent to 90% of 3.16% of GDP growth rate in 2007. Therefore, the average annual GDP
growth rate of other Euro zone countries except PIIGS during 2013- 2015 are set to return to about
90% of the average annual GDP growth rate during 2003-2007.Because PIIGS has not yet fully
recovered from the US financial crisis before it involved into European sovereign debt crisis, there
is no relevant data can be referred. Therefore, we assume that the average annual GDP growth rate
of PIIGS during 2013- 2015can return to 80% of average annual GDP growth rate during 2003-
2007. Labor employment, investment demand, consumption demand and production efficiency are
assumed all gradually recovering during 2013- 2015. The labor markets of the Non-Euro Zone
countries are considered as non-full employment.
Table 6 Settings of the shock variables in the optimistic scenario- compared with the baseline

scenario (%)
Regions Unemployment rate Consumption Investment GDP
PRT 4.84 -13.79 -18.20 -9.13
IRL 9.09 -31.70 -73.60 -21.73
ITA 1.04 -3.52 -15.34 -6.03
GRC 8.94 -26.01 -61.66 -33.12
ESP 9.28 -13.15 -63.64 -15.85
PIIGS 6.67 -16.18 -46.49 -11.84
ROEZ 0.11 -0.10 -3.56 -3.11

4. Simulation results
4.1 The impacts of European sovereign debt crisis on the current global economy
(1) The rate of unemployment rises; the global economic growth became weaker and suffered a
serious damage.
On circumstance of the slowdown of consumption and investment, the economic growth in each
country confronts with serious challenges. Compared with the baseline scenario, the average
annual growth rate of the global economy has reduced by 0.65% from 2010 to 2012. Among the
PIIGS, Greece suffered the most damage whose average annual economic growth rate has reduced
by 10.27% from 2010 to 2012. Outside Europe, Japan suffered more than other countries.

0
0.0
PRT

ESP
IRL
ITA
GRC

PIIGS

-2
ROEU
ROEZ

CHN

ROAS

ROAF
US

ROB

Total
ROAM
JPN

-0.2
-4
-6 -0.4

-8 -0.6
-10 -0.8
-12
-1.0

Figure1 Impacts on the average annual GDP growth rate in each area from 2010 to 2012 (%)

Due to the economy recession, the decline in investment also leads to a decrease in global
employment. From 2010 to 2012, global unemployment rate has risen by 1.81%. Except that the
rate in Euro Zone countries showed a slight decrease, the unemployment rate in most countries all
suffered negative effects. Especially, the high rate in Spain is 9.27%.

Table 7 Employment rate under crisis in 2012 (%)

Baseline Crisis Baseline Crisis
Regions Change Regions Change
scenario scenario scenario scenario
PRT 8.82 13.53 4.71 CHN 4.00 6.11 2.11
IRL 4.10 11.67 7.57 US 5.80 7.11 1.31
ITA 8.90 9.87 0.97 JPN 3.90 6.84 2.94
GRC 12.30 20.07 7.77 ROB 6.00 8.04 2.04
ESP 13.06 22.33 9.27 ROAS 3.50 5.26 1.76
PIGS 11.02 16.44 5.42 ROAM 6.00 7.77 1.77
ROEZ 7.48 7.25 -0.23 ROAF 9.00 12.08 3.08
ROEU 9.00 11.76 2.76 World 5.90 7.71 1.81

Because of the unemployment, some families reduce even lost their sources of income due to the
future uncertainty. On the aspect of residents’ revenue, the most affected area is Africa outside
Europe. The decrease in global residents’ revenue results in a weak global consumption demand
and also in adverse effects on future global economic growth.

0
0.4
PRT

ESP
IRL
ITA
GRC

PIIGS

-2 0.2
0.0
-4 ROEU
ROEZ

ROAS

ROAF
CHN
US

ROB

Total
ROAM
JPN
-0.2
-6 -0.4
-8 -0.6
-0.8
-10
-1.0

Figure 2 Impacts on the average annual growth rate of residents’ revenue in each area from 2010
to 2012 (%)

(2) Global trade declined and global demand confronted with a downturn.
As a result of global demand downturn and sluggish economy, global trade was also in depression.
From 2010 to 2012, the average annual trade growth was reduced by 1.14%. The countries whose
import and export trade were most affected by the crisis are Ireland, Greece, Spain and other
countries outside Europe such as America and China.
On the aspect of export, the export volume decreased in all areas except Portugal and Spain. The
average annual growth of export volume has decreased by 0.92% in PIIGS countries. America,
China and other BRIC countries suffered more due to the European sovereign debt crisis.

4 0.0
US

ROB

Total
ROEU

ROAM
ROEZ

JPN
CHN

ROAS

ROAF

2 -0.5
0 -1.0
IRL
ITA
PRT

GRC

PIIGS
ESP

-2 -1.5
-4 -2.0
-6 -2.5
-8
-3.0
Figure 3 Impact on the average annual growth rate of exports in volume in each area from 2010 to
2012 (%)

Different from export, decline in import took place in all areas. The average annual growth of
import volume in PIIGS countries have decreased by 7.46% which is higher than the export
suffered. Outside, African countries, Japan and BRIC countries suffered more. In terms of net
exports, China is the country which suffered most except Europe countries (Table 8).

0 0.0
PRT

ESP
IRL
ITA
GRC

PIIGS

ROEU
ROEZ

CHN

ROAS

ROAF
US

ROB

Total
ROAM
JPN
-0.2
-5
-0.4
-10 -0.6

-0.8
-15
-1.0
-20 -1.2

Figure 4 Impact on the average annual growth rate of imports in volume in each area from 2010 to
2012 (%)

Table 8 Net export rate of GDP in each area (%)

Baseline Crisis Baseline Crisis
Regions Change Regions Change
scenario scenario scenario scenario
PRT -8.94 -4.20 4.73 CHN 6.89 6.46 -0.43
IRL 22.65 39.64 16.98 US -5.48 -5.84 -0.36
ITA 0.37 0.78 0.40 JPN 8.11 8.48 0.37
GRC -16.32 -7.23 9.09 ROB 1.72 1.65 -0.07
ESP -8.30 4.65 12.95 ROAS 1.71 1.78 0.07
PIGS -3.01 3.45 6.45 ROAM -0.16 -0.08 0.08
ROEZ 2.27 -0.46 -2.74 ROAF -1.74 -1.06 0.68
ROEU -1.68 -1.64 0.04 World 6.89 6.46 -0.43
 CSE, 10.55% AGR, 1.54%
EXT, 14.80%
BSE, 4.11%
OMF, 0.82%
PRF, 2.17%
TED, 4.77%

PMF, 35.98% RAW, 25.25%

Figure 5 Ratio of each industrial exports decline accounted for the total exports decline from 2010
to 2012 (%)
Due to different trade shares of different industries in global trade, the extents of trade decrease in
each sector are different. The two industries whose trade decreases are the biggest are raw material
industry (RAW) and machinery and electronics manufacturing industry (PMF). The trade decline
volumes of the two industries accounted for the total trade decline volume are 35.98% and 25.25%
respectively. The effects of mining industry (EXT) and commercial service industry (CSE) all also
big and the ratios are 14.8% and 10.55% respectively. Other industries are affected less due to the
crisis.

(3) European sovereign debt crisis brought apparently negative effects to China’s exports and
economic growth.
Since the crisis took place, the exports growth rate in China became slower. Comparing with the
statistics last year, China’s exports growth rate decrease by 7.25% and the growth rate of exports
to Europe decrease by 21.7% in 2012. Table 3 presents that the growth rate of trade to Europe is
bigger than the whole trade growth rate before the US subprime mortgage crisis, and after the US
subprime mortgage crisis, exports showed a slump from 2008 to 2009 and a rebound in 2010.
However, one more slump took place in China’s exports from 2011 to 2012 due to the factors of
European sovereign debt crisis.
Table 9 Growth rate of China’s exports for each year
2003-2007
Average 2008 2009 2010 2011 2012
Total exports 28.27% 7.30% -18.29% 30.47% 15.15% 7.90%
Exports to Europe 38.98% 21.70% -27.70% 34.20% 22.00% -2.50%
Note: the statistics of gross export from 2003 to 2011 is calculated by the relevant data of “China Statistical
Yearbook 2012”. The statistics in 2012 is derived by General Administration Customs. The statistics of trade to
Europe is derived from Commerce Department and the figures in 2012 are in the first three quarters.

Through the measurement and calculation, the average annual drop in growth rate of China’s
exports in volume is about 0.97%. In addition, worst situation is in the trade to Europe and the
average annual drop is about 4.05%.
 1
0
-1
-2
-3
-4
-5

Figure 6 Impacts on the growth rate of China’s exports in volume to each area from 2010 to 2012
(%)

From the aspect of sector, the mining industry (EXT) suffered the biggest damage whose average
annual growth rate of exports dropped by 3.59% from 2010 to 2012. Textile and paper, and other
manufacturing industries suffered less by the European sovereign debt crisis.

-1

-2

-3

-4

Figure 7 Impacts on the average growth rate of exports in volume in China’s industries from 2010
to 2012 (%)

Due to the different contribution of different industries to China’s exports, the extents of exports
decrease in each sector are different. The raw material processing industry and electronics
manufacturing industry suffered the most. Compared with the rate of 3.59% in mining industry,
though the average annual growth rate of export decline (1.34% and 1.13%) are smaller, each
decline occupied the larger parts of the whole decline in China’s exports (57.21% and 22.29%).

AGR, 1.07%
CSE, 4.18% EXT, 2.15%
BSE, 2.77% PRF, 1.69%
OMF, 0.71%
TED, 7.94%

RAW, 22.29%
PMF, 57.21%
 Figure 8 Ratio of each industrial export decline accounted for the total China’s export decline in
volume from 2010 to 2012 (%)

Caused by the European sovereign debt crisis, the average growth rate of China’s economy
dropped by 0.37%, which is bigger than the rate of America and BRIC countries and is smaller
than that of Japan.
Table 10 Economic growth rate in each area in the crisis scenario (%)
Baseline Crisis Baseline Crisis
Regions Change Regions Change
scenario scenario scenario scenario
PRT 1.54 -1.15 -2.69 CHN 8.20 7.83 -0.37
IRL 5.28 -0.22 -5.50 US 2.60 2.27 -0.33
ITA 1.63 0.01 -1.62 JPN 1.94 1.37 -0.57
GRC 3.81 -6.46 -10.27 ROB 4.80 4.44 -0.36
ESP 3.62 -0.62 -4.24 ROAS 3.60 3.33 -0.27
PIGS 2.61 -0.76 -3.37 ROAM 3.00 2.69 -0.31
ROEZ 2.65 1.84 -0.81 ROAF 3.90 3.49 -0.41
ROEU 2.54 1.98 -0.56 World 3.50 2.85 -0.65

4.2 The trend of European Sovereign Crisis and the impacts of it on global economy
(1) The impacts of the European sovereign debt crisis on global economic growth will continue.
The gap of the prospects for global economic growth between pessimistic and optimistic scenarios
is larger, and stronger economic stimulus policies which boost the global economy are needed to
carry out.
In the next few years, the consumption and investment will decrease and as well the impacts of
European sovereign debt crisis on global economic growth will continue. Under the pessimistic
scenario, the average annual growth rate of global economic will drop by 0.7%; while under
optimistic scenario, the rate will drop by 0.15% between 2013 and 2015.

Table 11 Economic growth in the pessimistic and optimistic scenarios for each area (%)
2013-2015 Change
Regions Baseline Pessimistic Optimistic pessimistic optimistic
scenario scenario scenario scenario scenario
PRT 1.54 -1.17 1.11 -2.71 -0.43
IRL 5.28 -1.26 3.20 -6.54 -2.08
ITA 1.63 -0.06 1.21 -1.69 -0.42
GRC 3.81 -6.00 1.99 -9.81 -1.82
ESP 3.62 -1.07 2.38 -4.69 -1.24
PIIGS 2.61 -0.97 1.72 -3.58 -0.89
ROEZ 2.65 1.67 2.42 -0.98 -0.23
ROEU 2.54 2.00 2.41 -0.54 -0.13
CHN 8.20 7.82 8.12 -0.38 -0.08
US 2.60 2.27 2.55 -0.33 -0.05
JPN 1.94 1.24 1.83 -0.70 -0.11
ROB 4.80 4.47 4.73 -0.33 -0.07
ROAS 3.60 3.32 3.54 -0.28 -0.06
ROAM 3.00 2.70 2.95 -0.30 -0.05
ROAF 3.90 3.54 3.82 -0.36 -0.08
World 3.50 2.80 3.35 -0.70 -0.15

The negative impacts of European sovereign debt crisis on global economy under the optimistic
scenario are less serious than those under the pessimistic scenario. Currently, the effects of global
economy recovery simulated by the economic policies carried out by European countries are still
limited. To achieve the effects of economy recovery in the optimistic scenario, European countries
need more efforts. Meanwhile, sluggish economy will continue to increase the global
unemployment rate and influence the residents’ revenue growth. Affected by European sovereign
debt crisis, the global unemployment rate will increase by 3.58% and 2.15% respectively in the
pessimistic and optimistic scenarios.

Table 12 Unemployment rate in the pessimistic and optimistic scenarios in 2015 (%)
2013-2015 Change
Regions Baseline Pessimistic Optimistic pessimistic optimistic
scenario scenario scenario scenario scenario
PRT 8.82 16.64 13.67 7.82 4.85
IRL 4.10 17.29 13.19 13.19 9.09
ITA 8.90 10.45 9.94 1.55 1.04
GRC 12.30 26.70 21.24 14.40 8.94
ESP 13.06 25.91 22.34 12.85 9.28
PIIGS 11.02 19.14 16.66 8.12 5.64
ROEZ 7.48 7.98 7.59 0.50 0.11
ROEU 9.00 14.40 12.39 5.40 3.39
CHN 4.00 8.24 6.58 4.24 2.58
US 5.80 8.41 7.30 2.61 1.50
JPN 3.90 10.41 7.38 6.51 3.48
ROB 6.00 9.92 8.42 3.92 2.42
ROAS 3.50 7.05 5.64 3.55 2.14
ROAM 6.00 9.49 8.08 3.49 2.08
ROAF 9.00 14.80 12.66 5.80 3.66
World 5.90 9.48 8.05 3.58 2.15

Under the pessimistic and optimistic scenarios, the impacts on residents’ revenue of other African
countries are the biggest except Europe. It is possible that African poverty will be aggravated and
that the realization of UN’s target on a thousand years’ development will become more difficult.
 0.00

-0.20

-0.40

-0.60

-0.80

pessimistic scenario optimistic scenario

Figure 9 Impacts on the average growth rate of residents’ revenue from 2013 to 2015 (%)

(2) European sovereign debt crisis will continue to influence global trade. The external demand of
China’s economy will keep the situation of downturn.
Under the pessimistic and optimistic scenarios, the average annual growth rate of global trade will
drop by 0.97% and 0.22% respectively. From the aspect of regions, the impacts on European
countries and countries whose trade are much related to European such as America and China are
bigger. Additional, BRIC countries also suffered some damage and other areas suffered less
affected by the European sovereign debt crisis.

0.00

-0.50

-1.00

-1.50

-2.00

pessimistic scenario optimistic scenario

Figure 10 Impacts on the average growth rate of exports in volume from 2013 to 2015 (%)

Some industries which possess comparative advantage have higher proportions of exports and
therefore, the damage is apparent by the European sovereign debt crisis. Along with the crisis
deepening, the damage will be enlarged. The service industry in Europe, machinery electronic
manufacturing industry in America and China, and agricultural industry in BRIC countries and
Asian, African and Latin American countries will be influenced a lot.

Table 13 Impacts on the average growth rate of exports in volume on each sector in each country
in the pessimistic scenario (%)
EU CHN US JPN ROB ROAS ROAM ROAF
AGR -6.34 -7.12 -5.52 -2.30 -5.22 -4.62 -4.51 -5.69
EXT -12.88 -23.64 -16.28 -22.81 -14.43 -12.14 -14.71 -10.83
PRF -4.17 -5.73 -5.79 -1.32 -3.76 -2.91 -3.73 -4.28
TED -6.87 -4.22 -8.83 -3.32 -4.36 -3.20 -3.09 -2.13
RAW -13.83 -10.04 -10.70 -5.05 -6.12 -2.91 -2.68 -1.92
PMF -10.22 -8.62 -11.79 -4.43 -5.92 -5.22 -4.88 -4.90
OMF -7.05 -2.86 -9.26 -1.31 -3.58 -0.13 -3.10 2.43
BSE -7.56 -7.47 -7.72 -6.07 -5.47 -5.71 -6.05 -2.61
CSE -10.64 -6.70 -6.33 -2.71 -4.01 -4.38 -4.37 -0.28
Table 14 Impacts on the average growth rate of exports in volume on each sector in each country
in the optimistic scenario (%)
EU CHN US JPN ROB ROAS ROAM ROAF
AGR -1.61 -5.32 -4.11 -2.53 -4.31 -3.83 -3.65 -5.34
EXT -7.24 -15.92 -11.30 -16.30 -9.75 -8.07 -9.81 -7.21
PRF -1.87 -4.00 -3.97 -1.70 -2.75 -2.18 -2.88 -3.58
TED -4.10 -2.78 -5.74 -2.72 -2.77 -2.12 -1.93 -1.50
RAW -9.23 -6.65 -7.09 -3.49 -3.99 -1.83 -1.65 -1.36
PMF -6.86 -5.46 -7.45 -2.94 -3.46 -3.15 -2.82 -3.29
OMF -4.33 -2.04 -5.98 -1.00 -2.20 0.01 -2.00 1.78
BSE -4.67 -4.86 -5.09 -3.94 -3.59 -3.71 -4.01 -1.69
CSE -6.87 -4.63 -4.14 -1.32 -2.71 -2.97 -2.98 -0.17

China will still be one of the countries whose exports are affected most by the European sovereign
debt crisis. The simulation results show that the effects on China’s net export are the most serious.
Table 15 Comparison ratio of net export accounted for GDP for each area in the pessimistic and
optimistic scenarios (%)
2013-2015 Change
Regions Baseline Pessimistic Optimistic pessimistic optimistic
scenario scenario scenario scenario scenario
PRT -8.94 0.34 -4.39 9.28 4.55
IRL 22.65 51.44 42.37 28.79 19.72
ITA 0.37 1.17 0.70 0.79 0.33
GRC -16.32 -7.94 -7.83 8.38 8.50
ESP -8.30 17.27 9.43 25.58 17.73
PIIGS -3.01 8.30 4.98 11.31 7.99
ROEZ 2.27 -1.72 -0.42 -3.99 -2.69
ROEU -1.68 -1.66 -1.82 0.03 -0.14
CHN 6.89 6.01 6.27 -0.88 -0.62
US -5.48 -6.21 -5.98 -0.73 -0.51
JPN 8.11 8.91 8.40 0.81 0.29
ROB 1.72 1.55 1.55 -0.17 -0.17
ROAS 1.71 1.80 1.69 0.09 -0.02
ROAM -0.16 -0.04 -0.16 0.12 0.00
ROAF -1.74 -0.50 -1.07 1.25 0.67
World -8.94 0.34 -4.39 9.28 4.55

Under pessimistic scenario, the average annual growth rate of China’s exports will drop by 0.98%
and the rate of the exports to Europe will drop 3.6%. While under the optimistic scenario, the two
ratios are 0.3% and 1.22% respectively.

0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0

Figure 11 Impacts on the average annual growth rate of China’s exports in volume for each area
from 3013 to 2015 (%)
On the aspect of sector, the impacts on raw material industry and machinery electronics
manufacturing industry are bigger and the impacts on some industries are smaller which have
smaller price elasticity of demand such as textile and paper industry and other manufacturing
industry. Demand downturn will make China’s economy confront with continuously serious
challenges. The average annual growth rate of China’s economy will drop by 0.38% and 0.08%
respectively under the pessimistic and optimistic scenarios.

(3) The effect of trade diversion is hard to offset the impacts of the shrinking market of EU; The
decline in investment and consumption of other countries caused by the European sovereign debt
crisis will further lead to a reduction in China’s import.
Some trade diversions to non-Euro countries in Europe, American countries and Asian countries
will take place due to the shrinking market of EU especially in textile and paper, raw material
processing, machinery electronics manufacturing, infrastructure and service industries. However,
the effects of trade diversion are limited and cannot offset the impacts of the shrinking market of
EU. As an example of textile industry, compared with the decline in trade to Euro zone, the ratio
of exports diverted to other areas is 22.57% and 26.94% respectively under the pessimistic and
optimistic scenarios.
Table 16 Trade diversion of China’s exports in volume
Ratio of trade diversion
Regions Main trade diversion regions
pessimistic optimistic
AGR 0.00% 0.00%
EXT 0.00% 0.00%
PRF 7.49% 4.80% America
Non-Euro countries in Europe, America, BRIC
TED 26.94% 22.57%
countries, Asian countries, American countries
RAW 2.78% 3.21% Non-Euro countries in Europe, America
America, BRIC countries, Asian countries,
PMF 7.95% 12.33%
American countries
 Non-Euro countries in Europe, America, Japan,
OMF 80.22% 71.26% BRIC countries, Asian countries, American
countries
BSE 7.16% 6.00% America, Asian countries, American countries
Non-Euro countries in Europe, America, BRIC
CSE 18.97% 16.62%
countries, Asian countries, American countries

Except the direct influence on China’s exports by the shrinking market of EU, the decline of
investment and consumption of other countries caused by the European sovereign debt crisis will
further lead to a reduction of their imports on products and service. This kind of indirect influence
also requires the concern and vigilance of the Chinese government especially on Japan and
African countries. Under the pessimistic and optimistic scenarios, the average annual growth rates
of China’s exports to African countries has dropped by 0.67% and 0.25% respectively and the
rates of trade to Japan has dropped by 0.92% and 0.08% respectively.

5. The implication for China and policy suggestion

(1) The goal of economic growth should not be too high
The sluggish of external demand led to decline in net export which is an important factor of
“Three drives”, developing consumption will take some time, so the situation of economic growth
depending on investment will continue. At the same time, the scale of investment is quite huge in
China, in order to promote China's economic transformation, our goal of economic growth should
not be too high. Taking the goal of “ double 2010 GDP and per capita income to 2020” proposed
by 18th CPC National Congress into account, China's economic growth targets should be about
7.0%-7.5% in next few years.
(2) Implement the strategy of exports diversification actively
Because China’s trade partners were concentrated in the developed economies in Europe and
America, European sovereign debt crisis reduced their imports from China; we should explore
other markets actively and implement the strategy of diversification. By doing this, we can avoid
negative influences brought by the European sovereign debt crisis partly in the short term and
conducive to the healthy development of China's trade in the long run.
From a regional perspective, focus on strengthening the economic and trade ties with the BRICS
and ASEAN, promote the construction of free trade zones actively will be helpful. In the
implementation of the strategy to diversify exports, we can also take measures to increase
financial and policy support. For example, to strengthen support to key development market by
Export-Import Bank and the Export Guarantee Corporation, to reduce the loan interest rate and
premium appropriately; to construct some foreign trade information consulting systems to
promote the scientific and reasonable development of foreign trade market; to establish policy
fund to help medium and small enterprises to explore overseas market.
(3) Pay attention to maintaining global strategic balance
The European sovereign debt crisis has a significant impact on international economic pattern
changes. The recession and its unknown prospects shake the economic status of Euro zone, it has
brought new challenges to the global strategic balance. In order to maintain the multi-polarization
of world economy development and the global strategic balance, China should encourage its
enterprises to invest in high quality projects in Europe, and purchase or introduce the advanced
technology. By doing so, we can enhance the competitiveness of enterprises in China, and help the
Euro zone economy to restore vitality, which can help to maintain the balance of the world
economy.
(4) "Going out" should be more focus on long-term investment and livelihood investment
Africa occupies an important position in China’s strategy of “going out”. China’s investment in
Africa was mainly in the infrastructure and energy sector in the past. Considering the great effect
on Africa by the European sovereign debt crisis, the future of China's investment should be paid
more attention on people's livelihood, in order to increase the employment opportunities and the
income of local residents, at the same time to exploit Africa market. Due to the greater impacts of
European sovereign debt crisis on Africa household income and consumption demand, we should
be more focus on long-term investment and reduce the expectation of short-term returns
appropriately.

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