Friday, February 24, 2012

Unabated Euro-Zone Crisis

There is negativity surrounding the euro zone nowadays; huge sovereign debt, austerity measures on the roll, further taxes for the public and lowering of credit ratings of countries like Britain, Austria, France, Italy, Malta, Portugal, Slovakia and Slovenia by Moody, Standard & Poor and Fitch clearly highlights the damaging financial scenario for the block of nations. Presently only few countries like Germany, Norway, Sweden and Denmark are holding strong and keeping away from the negative ratings, rest all the other countries left are under a close watch by these agencies.

The crisis has taken toll on countries like Greece and Portugal in such an extent that now it is difficult to find solutions for their debt-empowered economy. There are strings of bailout packages which are being utilized in such a way that it would reduce their Debt-To-GDP ratio up to some extent to kick start their economies. But the things are not working; the austerity measures have almost crippled the public spending which resulted in an extremely slow paced growth for the union. These countries have to deal with high fiscal deficits and so dropping the growth momentum too.

Huge debt on these countries have raised obligations towards more interest payment and so the government spends less for the welfare of people, levy more taxes by expanding the tax payable population base and borrow more, which has great impact on the domestic companies. The crisis may even lead to fall in exports to the European countries crippling India’s total exports. 75% of these exports are from manufacturing sector which would impact the domestic industrial production too. As slowdown will affect exports, it can lead to an increase in the already high India’s current account deficit. Further, the stock markets can witness a slowdown in funds from this region as the Foreign Institutional Investors and ECB would require funds to meet their own capital requirements and obligations back home.

So, all these factors clearly highlight the interdependency of one country over another and signifies the crippling effect too. So if the Euro Zone crisis is not solved early it would have a chain reaction which would not only engulf the European countries but also could have serious impact on the developing countries like India.

Though still a positive for India is that it is trying its best of becoming a self sufficient country in all the aspects, barring Oil & Gas, and is not primarily dependent on exports. Secondly, India has diversified its export portfolio in different geographical regions too which would definitely act as a cushion for the country in mitigating the adverse impacts borne out of this crisis.

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