EUROZONE CRISIS

1.       EUROZONE CRISIS

The sovereign debt crisis in the 17 – nation euro zone, which began in the aftermath of the 2008 global financial meltdown, continued through 2011 with prospects of its spread to bigger Euro zone countries like Italy and Spain. These fears were based on the premise that many banks holding Greek bonds will come under pressure in the event of default by Greece and create panic among other banks which may stop lending to weaker banks and which may also offload bonds of Italy and Spain to make good their losses. In fact, Italian and Spanish leaders threatened to block all other agreements of Euro zone rescue until their colleagues in the euro zone did something to take the pressure off them.

The entire euro zone was therefore keen to save Greece as early as possible to prevent the crisis from spreading to other countries in the zone. A bailout package of 110 billion Euros was given to Greece in 2010 by IMF, ECB, banks and private investors. Another bailout package of 109 billion Euros was approved for 2011. Three were also plans to leverage the 440 billion Euros Rescue Fund, known as the European financial stability facility to help struggling nations avert debt defaults.

Accordingly, in the face of pressured from the embattled Euro zone countries Italy and Spain, European leaders in June, 2012 agreed to use the continent’s bay out funds to recapitalize struggling bakes directly.  The decision would allow help to banks without adding directly to the sovereign debt of countries. As a condition, though, the leaders agreed the Euro zone’s permanent bailout fund ()agreed to at the Euro zone’s meeting in October, 2011) called the European Stability Mechanism of 500 billion Euros to be set up in July, 2012 could act only after a banking supervisory body overseen by the European central Bank had been set up, which is likely o happen by the end of the year 2012.another key measure agreed was that bailout funds would be used in a flexible and efficient manner in order to stabilize markets. Leaders also greed a package of measures worth 120 billion Euros to bolster growth in the recession – hit block. In a longer term perspective, leaders agreed on a tentative road map for the future shape of the zone that could include a banking union and a budgetary union.

The summit deal, however, leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments or would tax payers foot the whole bill?

Meanwhile, narrow election victory of Greece’s pro – bail out parties in June, 2012 signaled that Germany may be willing  to grant Greece more time to meet its fiscal targets of austerity imposed as a pre – condition to its bailout to avert a catastrophic euro (130 billion Euros) which pre – conditions strict austerity measures like (a ) deep private sector wage cuts (b) civil service layoff (c) significant reductions in health, social security and military spending, all of which together would imply nearly 430 million US dollars worth of extra saving by Greece.

Spain became the fourth country in the Euro zones to get a financial bailout in June 2012 of 100 billion Euros after Ireland, Greece and Portugal, this bailout is exclusively to shore up its teetering banks, particularly a bank named banksias whose a\shareholders were wiped out. Unlike other countries, austerity measures and economic reformed are not a precondition on Spain. The bailout is onyx for the banking sector, blot for the whole country. Spain is the 4^th largest economy in Euro zone and 13^th biggest economy in the world.

Some of the underlying weaknesses of Euro Zone are (a)  it lacks a single fiscal authority capable of strict enforcement (b) economies with deferent level of competitiveness and fiscal position have a single currency (c) these economies cannot adjust through a depreciation of the currency and (d) there is no lender of last resort i.e., fully fledged central bank.

         

INDIA AND THE GLOBAL ECONOMY 1 GLOBAL ECONOMY

INDIA AND THE GLOBAL ECONOMY

1.       GLOBAL ECONOMY

the global economy is expected to grow by 3.5 per cent in 2012 compared to 3.8 per cent in 2011 as per the international monetary fund’s (IMF) July 2012 update of the world economic Outlook (WEO). Gross domestic product (GDP) growth in advanced economies declined to 1.6 per cent in 2011 compared to 3.2 per cent in 2010 and is expected to be even lower at 1.4 percent in 2012.Growth in emerging economies slowed to 6.2 per cent in 2011 compared to 7.3 per cent in 2010 and is projected to be 5.6 per cent in 2012. The US economy seems to have revived somewhat and is projected to maintain its growth rate at 2 per cent for 2012. Even so, economic growth in the US remains sluggish despite extensive use of both fiscal and monetary policy tools. The euro zone is expected to contract by 0.3 per cent in 2012.

The predominant reason for the subdued growth in advanced economies at this juncture remains the sovereign debt crisis that started in the peripheral economies of the Euro zone, but from the latter half of 2011, started to adversely affect the major economies there, as well, . issues relating to medium – term fiscal consolidation, the exposure of European banks to public and private debt, and recurring differences in the ways to resolve the crisis have continued to weigh on the global economic outlook s the Euro zone accounts for close to one-fifths of global GDP.

Volatility in capital flows resulting from the spillover effects of monetary policy choices and other uncertainties in the advanced financial markets further impacted exchange ratites and made the task of macroeconomic management difficult in many emerging economies. Ties has brought out a new dimension of globalization in the post financial crisis world, where easy monetary policy in one set of countries may result in inflation elsewhere due to cross – border capital flows.  .

Over the last 20 years sustained; growth of a number of large emerging economies, especially the BRICS economies, has resulted in an increase in their share in the global GDP. As a consequence, the value addition in the world economy has been moving away from advanced countries towards what have been termed emerging economies. The decline in share is particularly marked in the case of the EU. The shift towards Asia has been significant hand, within Asia, away from Japan to china and Indian. The fivefold increase in share of china in the global GDP has placed it as the second largest economy in the world. The increase in share of India. Though less dramatic, is nevertheless of an order that places her as the third largest economy in PPP terms, having surged ahead of Japan.

INDIA IN THE GLOBAL ECONOMY

India has over the years become a more open economy. The total share of imports and exports accounts for close to 50 per cent of GDP. Yet economic out comes and their impact on growth and development arising from the interaction between the domestic and external economies are contingent on a large number of factors. Though economic outcomes are to some extent contingent on choosing policies appropriate to the conditions characterizing an economy, outcomes are to some extent contingent on choosing policies appropriate to the conditions characterizing an economy, the relative position of an economy vis – a – vis other countries s in a global setting could facilitate (or even constrain) policy choices.

India has moved  up the ranks but is still the poorest aiming the G-20: India has emerged as the third largest economy globally with a high growth rate and has also improved its global ranking in terms of per capital income. Yet the fact remains that its per capita income continues to be quite low (US $ 1527 in 2011). Addressing this is perhaps the most visible challenge. Nevertheless, India has a diverse set of factors, domestic as well as external that could drive growth well into the future.

India contributes positively to global growth by being a net importer of goods and services, creating demand for the rest of the world’s output and absorbing some of the excess capital scouring the world, looking for avenues fo profitable deployment. But an even more positive contribution would be for India to grow its own economy more robustly. That means focusing on investment, diverting scarce public funds away from non – merit subsidies – those on fuels and fertilizers. India has to invest massively in its physical and social infrastructure to be able to offer jobs and rising incomes to the tens of millions of young people who ion  the workfare every year. Failure to think long – term known would snow in India the seeds of the kind of crisis that Greece and the rest of the world today grapple with.

G – 20 agenda in 2012: Mexico has since taken over presidency of the G-20 after the Cannes Summit held in November 2011 and released a strategic vision of the G – 20 Agenda spelling out the following priorities.

1.       Economic stabilization and structural reforms as foundation of growth and employment.

2.       Strengthening the financial system and fostering financial inclusion to promote growth.

3.       Improving the international financial architecture in an interconnected world.

4.       Enhancing food security and addressing commodity price volatility.

5.       Promoting sustainable development and green growth in the fight against climate change.

  At the G-20 meet held to june2012 on the sidelines of Rio summit, India committed to US 10 million dollar assistance to the IMF which will not be aid but in the form of India buying IMF bonds. Other BRIC countries pledged assistance as part of G-20- members ‘commitment made in 2010 to increase IMF’s lending base.