Sunday, May 09, 2010

What the Greek tragedy can teach us?

A year-and-a-half after Lehman Brothers up-ended the world economy, a similar tragedy is unfolding in Europe. If the Americans were widely blamed for poorly regulating buccaneer capitalism and excessive risk-taking, this time it is the European Union (EU) that should take the rap for letting rogue borrowers like Greece to join the eurozone. Despite a 110 billioneuro ($140 billion) bailout package, Greece looks set to threaten the political and economic basis of the European Union. The size of the bailout — for a country with 1 per cent of India’s population and one-quarter its economic size — is larger than India’s current GDP by a wide margin.

How can a country as tiny as Greece rock the EU, which is bigger than the US economy? The answer: in an integrated world, market confidence is key. Greece had to be rescued from a debt default to prevent a domino effect. If it had gone under, the markets would have started dumping the bonds of other problem countries like Spain, Portugal, Ireland and Italy. Once panic sets in, the EU cannot survive.
This brings us to the first lesson for India, which is actually an economic union of many linguistic states, just like the eurozone: don’t let central or state debt grow to unsustainable levels. For the last few years, the UPA government has been squandering the fiscal prudence achieved in the NDA years through profligate spending. The public debt-to-GDP ratio is a high 82 per cent for centre and states — and rising.

From "What the Greek tragedy can teach us?" by R Jagannathan in DNA
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