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All Hellas may break loose

A few decisive reforms could ensure that the Indian economy doesn’t go the Greek way.

india Updated: May 18, 2012 00:31 IST

The euro is the only currency whose linguistic origin is in ancient Greek. More the irony then that contemporary Greece and the euro are heading for a clash that will leave one devastated. The market expectation is that Greece must leave the eurozone. The new Greek elections in June will make little difference. Athens won’t pursue austerity, the bailout tap will then shut down, Greece’s banking system will go belly up and the eurozone will start to come apart. The only issue will be whether the ‘Grexit’ will be messy or whether it will be managed. That matters: depending on estimates, the former will cost an affordable $300 billion or so, the latter will cost $1 trillion and above.

The truth is no one really knows what is going to happen in the eurozone. The Greeks could suddenly decide to vote for a government dedicated to fulfilling its European commitments. The major European governments could decide even a rabid Athenian regime deserves a bailout. The political imponderables make the future incalculable. The economic scenarios that follow are exponentially even more varied. What seems clear is that the huge debts crippling southern Europe are becoming politically impossible to clear through just budget cuts. The problem has always been who will handle the debt. Either the savings-rich northern Europeans would hand over a chunk of their wealth to the south. Or the southerners would absorb a large, sustained cut in their income levels. Until now, it looked like it would be a mix of the two. But the Greek revolt against this deal is shredding the original arrangement. And no one can see an alternative.

The rest of the world is now bracing for what increasingly looks like a medium to massive euro-blowout. The Bank of Engl-and has indicated the eurocrisis could become a Lehman Brothers-scale financial storm. India should also wonder if the ramparts of its own economy are ready for what is, at the least, a European recession but which could evolve into another global financial crisis. Going by the present budget and the finance ministry’s fumblings, the answer would seem to be ‘no’. The government has spent blindly on welfare it can’t afford. The balance of payments is wobbling as New Delhi’s investor-unfriendly policies drive away both foreign and domestic capital. The existing European slowdown’s already poked a hole in India’s trade figures. It would take only a few decisive reforms to restore confidence in the Indian economy. But such decisions seem to be increasingly unlikely. The excuses being given are “coalition politics” or “anti-corruption vigilance,” but increasingly the sense is that the government simply lacks the political capacity to make tough decisions. Which is exactly what ails the government in Greece today.