Sunday vote in Greece, basic facts, Euro Zone crisis, implications for India

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he world may heave a sigh of relief at the election results in Greece, where parties wanting the country to remain in the Euro Zone are set to form a coalition government. But the respite might just be temporary. The Greek economy has been contracting every year since 2008, with almost a quarter of its workforce now unemployed. There is no way any economy shrinking at this rate can repay sovereign debts of some ¤270 billion, unless it starts growing all over again, or the creditors themselves agree to write-off a large chunk of loans made. As of now, the chances of both look remote. Without the release of the next instalment from the ¤130 billion International Monetary Fund and the European Union-led rescue package, the Greek government would run out of money by the middle of next month. But the conditions attached to the bailout involve austerity measures of a magnitude — a reduction in the government’s budget deficit from 9.1 per cent to below 3 per cent of GDP by 2014 — that would only further drag down growth. And having already written off ¤105 billion of debt in March, the creditors aren’t in any mood to forgive more.

Given this situation, it is no surprise that even Antonio Samaras, whose pro-bailout New Democracy party won the Sunday elections by a slender margin, is seeking a two-year extension of time till 2016 to meet the fiscal targets set under the IMF-EU package. But with Germany — which controls the purse strings of the Euro Zone — not willing to compromise on the “substance” of Greece’s austerity programme, it is difficult to see any end-game other than the latter defaulting. The prospect of that and the dangerous precedent it can create — of other highly-indebted Euro Zone members, too, following suit — has pushed up 10-year Italian and Spanish bond yields to 6-7 per cent levels, as against a mere 1.5 per cent on German bonds of same tenor. The existence of such wide differentials in borrowing costs within a single currency bloc is itself a sign of the extent of disorder, which would require quite some time to set right.

What are the implications for India? With the Euro Zone problems unlikely to resolve soon, recovery in the US faltering and China also slowing down, the external environment wouldn’t be the most conducive for either exports or attracting capital inflows. The overall effect may be to shave off a couple of percentage points from India’s trend growth to, say, 6 per cent. But it also means focusing more on domestic drivers of growth and more specifically, undertaking a host of reform measures that would unleash the full potential of a single market. This, in combination with restoring government finances to release more resources for productive infrastructure investments, would yield sizable dividends when the next global recovery gets underway.

(This article was published on June 19, 2012)
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