industries and private bondholders, assuming private debt burdens or socializing losses also adversely affected the financial position of PIIGS. In this kind of disconcerting macroeconomic setting, slow GDP growth rates in PIIGS restricted growth in tax revenues and increased safety net spending. This caused a widening of deficits and debt levels beyond manageable proportions. Fareed Zakaria stressed: “Europe’s core problem [is] a lack of growth...Italy’s economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade...The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world)” (CNN Fareed Zakaria GPS-November 10, 2011). Plainly, then, Europe has been devastated by a triad of demography, technology and globalization. Consequently, a discernible improvement in the ground realities is contingent on a vastly improved macro-economic environment, particularly lower wages and greater inflow of foreign capital investment. In any discourse on the debt crisis convulsing the 17-nation currency zone, it is commonplace to identify high debt levels as a critical factor contributing to the festering crisis. But it is not so commonly realised that the position of the EU looked “no worse and in some respects, rather better than that of the US or the UK” (The Economist Intelligence Unit). The budget deficit for the EU as a whole was 4.5% of GDP as against a whopping 10% for the US in 2010. Similarly, the EU’s government debt/GDP ratio stood at 87% in 2010 as against 100% in the US. This is not all; the situation becomes more interesting because, while there is at least a modicum of support on measures to reduce excessive deficits and debts in the EU countries, there is precious little sign of any agreement in the US. Further, private-sector indebtedness across the EU is markedly lower than in the highly leveraged Anglo-Saxon economies. Again, the opaqueness of the world of global finance is clearly manifested in the fact that the United Kingdom has an even bigger debt/deficit/and private borrowing problem than the corresponding problem faced by the Eurozone.
Share on emailShare on printMore Sharing Services SYSTEMIC RISKS AND FINANCIAL STABILITY IN INDIA India was able to withstand the direct impact of global financial crisis. But risks to financial stability have increased in India as a result of unstable global economic conditions and deteriorating domestic macroeconomic fundamentals. RBI’s Financial Stability Report isolated four key variables that posed threats to financial stability in India: the global sovereign debt problem, the domestic fiscal position, the widening current account deficit and the structural aspects of food inflation. All these are areas, where immediate, easy answers may not be available. This is because working towards sustainability is a dynamic process that must essentially be viewed in the context of long-term issues- the issue of ushering in a new approach to increase the growth rates and make the growth process sustainable over the long haul. Financial stability in India implies ensuring uninterrupted settlements of financial transactions - both internal and external, maintenance of a level of confidence in the financial system amongst all the participants and stakeholders, and absence of excess volatility that unduly and adversely affects real economic activity. All these aspects are not just a random or disconnected set of activities but constitute a ‘system’, where different constituents form parts of an organic whole. The RBI’s calibrated approach towards financial liberalization and its prudential oversight cushioned Indian economy from the direct impact of global financial crisis. Coordinated action
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