Showing posts with label GDP. Show all posts
Showing posts with label GDP. Show all posts

Saturday, October 06, 2012

EU DEBT CRISIS: WHO’S NEXT?

Ireland’s Rescue has Failed to Stem off Market Tensions from Euro Zone. B&E talks to Experts, Including the European Central Bank, to Analyse who will be the next Victim of Sovereign Debt Crisis. 

While Portugal is likely to be forced to go for a bailout, Spain still stands a fighting chance of avoiding the same fate, given that its current trends in bond yields come to an end soon. But then, things don’t look good here too. Ten-year bond yields on Spain have already jumped above 5.5% and are at the record high of 260 basis points just behind spreads of 400 basis points for Portuguese debt, 620 for Ireland, and 890 for Greece. What’s more? Spain’s gross debt will be over 60% of GDP this year (at 63.5% of GDP), which is the EU threshold under the Stability and Debt Growth Pact. In fact, with unemployment rate hovering over 20% and the budget deficit at 11.2%, possibility of Spain’s being the next epicenter can’t be undermined, particularly if Portugal asks for a bailout.

This is surely a big concern for European policymakers as it not only poses a threat of a much deeper recession than one recently experienced (when euro zone total output fell more than 5% peak to trough), but also raises questions about the survival of the single currency area. Raison d’être: The fourth largest economy in the euro zone would require more than $535 billion in bailout (way above the bailout packages of Greece, Ireland and Portugal put together) to see it through the next few years. This eats up more than half of the $1 trillion combined EU-IMF rescue fund, with only a little left over after the other three take their share. Not to say what will happen if another nation joins the beleaguered bandwagon (which has the highest probability). This certainly calls for an immediate action, both by the respective national governments as well as EU. Though both the nations have decided to cut upon their spending to bring down spiralling budget deficits (while Spain plans to cut its budget deficit to 9.3% of GDP this year from 11.2% in 2009, Portugal plans to slash it to 7.3% of GDP, from 9.4% in 2009), it will take them years before that actually happens (interestingly, EU’s threshold limit for fiscal deficits is 3%). Thus, as of now, a bailout seems to be the only possible answer to their miseries.

But then, bailouts too, in any case, are not the permanent solution since they only kick the ball down the road. The only stable remedy to Euro zone’s fiscal woes is a structural reform with national governments showing steadfast commitment to reducing budget deficits. It’s not as if the ECB doesn’t realise the magnitude of the fiscal troubles in Euro zone. In fact, Jean-Claude Trichet, President of the ECB, tells in a communiqué to B&E, “I would say that, for all countries, it is extremely important to substantiate the decisions that would allow the goals for fiscal deficit next year, i.e. 2011, to be attained, also taking into account what is going on this year, of course. But I am concentrating on next year. This is the very, very firm message that we have for all countries, including Portugal and Spain.”

No doubt, EU has proposed the swift implementation of comprehensive consolidation plans, focusing on the expenditure side and combined with structural reforms, which will strengthen public confidence in the capacity of governments to regain sustainability of public finances, reduce risk premia in interest rates and thus support sustainable growth over the medium term, but then isn’t EU a little late in proposing these measures? Well, we would say … S#!t happens, when PIGS come out in the open!


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face
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Friday, August 31, 2012

IT IS NOW FOOLISH TO COMPARE INDIA TO CHINA. RATHER, IT WOULD BE MORE SENSIBLE TO LEARN A LESSON OR TWO FROM THE CHINESE!

 Recently, in terms of Gross Domestic Product (GDP), China toppled Japan to secure the second position globally, after US. In fact, China was very close to achieving this feat the last year itself, but fell short at the last moment. As per reports, if China keeps growing at its current pace, then by 2025, it should topple the US to become the largest economy of the world. Who could have imagined that an economy, which was languishing till about three decades back, has put itself in such formidable position? What is even more amazing is the fact that at a point in time when the world economy is still recovering from the global recession, China kept on growing. The growth has been such that in 2005, it first overtook Britain and France; then in 2007, it surpassed Germany to secure the position of the third largest economy of the world. It is not that the growth did not bring in iniquitous distribution of wealth; but then, at the same time, China has managed to pull out a staggering 600 million people out of poverty – a record which no other country has achieved so far.

Going by media reports, it doesn’t seem that many experts are appreciative of the Chinese growth. In fact even now, most in the developed world still cannot fathom the fact that China can be a serious contender in the new economic order. Much of this is owing to the fact that irrespective of its number 2 position, China still remains a developing country, as its current per capita is still 10 times lesser of that of Japan. But then, what most miss out on is the fact that China is in no hurry to prove itself. China has moved step by step in terms of consolidating its position. They have never bothered about the criticisms that they faced on humanitarian issues, or the kind of global cynicism that they faced by keeping their currency purposefully undervalued. Their objective has been very clear – which gets reflected in the manner in which they have planned every step. From the very beginning, China has been extremely scientific and systematic in its approach. And more than that, the growth has come out of great sacrifice collectively made by the Chinese citizens. China has systematically moved people into manufacturing and today China manufactures almost half of the global produce. Thus today, a Walmart retains the topmost position in the Fortune list by selling goods that are being made in China. And all this has not come in a day. It has been an outcome of years of planning. China today boasts of an investment which is a mind numbing 40% of GDP! Even at its peak, the US managed around 18%. Even countries like ours are managing 18%. Additionally, the Chinese investment mobilization has been far more prudent than any other country’s efforts. They have systematically invested in infrastructure, which not only created jobs, but also helped in creating a world class environment for trade. But then, their biggest credit has been in terms of the investments that they made in education. As per reports in 1998, around 3 million students were undertaking Chinese higher education; this increased to around 8 million in a matter of just 4 years. And investments have just not been in higher education – starting from English training, to vocational training to the investments that they made in science and technology. Such has been the outcome that their investments in education alone add up to almost 6% to their growth; and this would be sustained over a period of time. Today, China produces patents, the number of which is only second to the US! Not just this, they received severe criticism from all quarters when they pro-actively went ahead with their engagement with Iran. They did so not just with Iran to but with Sudan as well, for they knew that energy security is key to their dominance in global trade.

In order to have a better understanding of what the Chinese have achieved in the last two decades, one needs to compare it with India. The Indian economy, which used to be almost 80% of that of Chinese economy as recent as two decades back, now remains a menial 25%! While the Chinese feel underachieved at a staggering $4 trillion plus economy, we celebrated our $1 trillion mark! While sometime back there, China created history by hosting the greatest sporting spectacle, Olympics, we all know what we are doing to the Commonwealth games! Increasingly, any comparison between India and China is getting banal! It is not that we do not have our own advantages, but the Chinese have gone far ahead and are increasingly going farther. If reports are to be believed, we too would reach the number 2 position economically by 2040; but that too, if we keep growing between 8 to 9% year on year, which in itself is a huge challenge.


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