Year 2011, Month December: FIIs are withdrawing money. The confidence in the market is less. Political instability has loomed up in India. Indian Currency Value in the world market is falling.
Indian companies are thinking to shift their bases outside India for their operations citing lack of proper policy from the government. Stock markets in India are tumbling. Not much internal jobs are getting churned in India, outsourcing strategy has a paradigm shift from USA, and projects are pipelined. USA is in a bad phase of debt, while tax reforms in the EU are trying to bail out the weaker economies. Is this due to the tumbling financial crisis in EU, or can we allot the same to the debt crisis in the USA?
A source mentions that, “The European sovereign debt crisis has been created by a combination of complex factors such as: the globalization of finance; easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow growth economic conditions 2008 and after; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.”
This is nothing but a chain of reactions in the financial world, owing to the credit lending policies. I would argue against globalization. Lending money to a debt ridden country is good, but to put the lion’s share as a multiple times of your own national GDP should be alarming. One should consider their limits. In fact, I would argue saying that controlled open economy is much more pertinent than buying treasury bonds in the open global market. It is a good time to put the credit lending system back on track by allowing a government aided organization to check the credit return ability. The banks – both private and public should be controlled by the central operating system for credit lending. The bottom line is, this is not the best time to lend money to the debtors without a thorough back ground check.
One genuine attempt is not to throw away the gauntlet at any time now. Tax Policies may be reformed to attempt to raise the coiffures, defense spending may be done to save money, and internal sustainable growth must happen in order to strengthen the economy, whether it is manufacturing or agriculture or any other performing sector.
Probably we can say, a major part of the GDP should be earned in terms of agriculture and domestic products only. In that case, the burden shifts to the advanced farming policies rather than creating infrastructure or buying bonds from the open market. Agriculture is an inherent part, and it should be an inherent part of the GDP of any country. And that is for India.
Now lets us take a look into the EU debt crisis. Now that it has happened, the EU should try to share the liabilities instead of sharing assets only. Greece, Portugal and Ireland should be helped.
Do we want to see a European economy tumbling, creating a civil strife and spreading the cancer towards its neighbor?
A source mentions, “On November 29, 2011 the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.”
It has no other way, but ECB absorbing the after-shock of the crisis. One way would be to devalue the currency while supporting the weaker economies, so that the risk of losing the currency value is not there. Special Euro Debt Bonds can be created for the EU, where the bonds made to support the weaker economies, and floated at lower interest rates. The currency surplus countries in the EU will buy those bonds from the weaker economies to allow sustaining their currency deficit, and project them towards growth.
According to Wikipedia, “Since investors would finance governments directly, banks were also no longer able to unduly benefit from intermediary rents by borrowing from the ECB at low rates and investing in government bonds at high rates. Econometric analysis suggests that a stable long-term interest rate of three percent in all Eurozone countries would lead to higher nominal GDP growth rates and substantially lower sovereign debt levels by 2015, compared to the baseline scenario with market based interest levels.”
Here is a catch now. Suppose the bail-out system does not work out. Then?
Would the currency surplus countries in the EU try to create another currency within them? That would be a boon to Uncle Sam, as the garnered surplus of such countries would be bigger than that of China, and it would actually create a drawing line between several EU countries, the link being broken between them. The question is, do we need a Europe within another Europe? Or is it better for Germany to be in a position of power after bailing out the weaker economies? I would prefer the later, given the circumstances. But, as of now, let us wait and watch.