Will Euro crisis lead to fresh slowdown?

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The crisis in the Euro zone is an ill wind that bodes nobody any good, as Nobel Prize-winning economist Paul Krugman recently pointed out. It started with Greece and threatens to spread to other economies like Spain and Portugal, and though the European Union as well as the International Monetary Fund has come forward with a trillion-dollar rescue package, there remains considerable skepticism on whether these three countries will be able to undertake the painful cost-cutting measures on which this aid is conditional. The Europeans dithered for months on rescuing Greece, which made the problem worse. Germany, for one, was reluctant to bail out a government, which it said, had no fiscal discipline, while people in both Greece and Spain have protested violently against the austerity measures imposed on them. The international community’s lack of faith in Greece’s ability to adopt these austerity measures is reflected in the huge interest the country has to pay on its bonds. If the Europeans had only acted earlier, as Abu Dhabi did in the case of Dubai, the Greek problem might not have got so intractable. The other factor that is hindering Greece is that it does not have its own currency, being a part of the Euro zone. If it did, it could have devalued it or taken other monetary measures to alleviate the crisis. A very good example is Britain: its fiscal deficit is almost as bad as that of Greece, but since it has its own currency and did not adopt the euro it can tweak the pound sterling and take corrective action.

The United States has a massive deficit too, but President Barack Obama has been able to trim it to manageable levels. This does not mean that the US, from where the 2008 global crisis started, is out of the woods. It might appear so on the surface, but at the core of its problems is the unresolved issue of the crisis of capitalism. It has been unable till now to resolve the key problem of unemployment, while politically conservative Republicans are going all out to derail crucial social welfare measures. America has reached a stage in capitalism, in which labor is being made almost redundant, considered dispensable and replaceable by automated machines. Despite this, the US economy still cannot compete with exports from developing countries, particularly in manufacturing. It also remains a high-cost economy, which excludes millions of Americans from healthcare and educational services. Many of the big banks and other iconic institutions which have made Wall Street what it is are now under scrutiny for malfeasance after the biggest of them all, Goldman Sachs, came under the scanner of the US Securities and Exchange Commission. So where does all this financial and social turmoil in the United States and Europe leave India and the rest of the world? All countries, including India and China, might well have to face another round of economic slowdown. For one, the stock markets are in a tailspin as foreign institutional investors, among the biggest investors in emerging markets, are seeking refuge in US treasury instruments and the dollar itself, which is appreciating against the euro — currently taking a battering. This means excessive volatility in the stock markets, which has already been witnessed in Indian stock exchanges.

Courtesy: Deccan Chronicle

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