Nowhere near a solution

The Spanish bailout is a reminder that Europe has no answer for Greece.

Cometh the month, cometh the bailout. Yet another hundred billion euro package has been dispersed to a south European nation, a pattern increasingly familiar when it comes to the forever crisis that afflicts the world's wealthiest economic entity. The heart of the euro ailment continues to be the political-cum-economic crisis consuming Greece. Spain's decision to seek a bailout for its banking system, an act it had stoutly resisted for several weeks, was an acceptance by Madrid that it had to buffer itself against the ripple effects of a Greek implosion. The fear of Greece and, eventually, a fear of the weaker eurozone economies had already meant that Spain had been cut off from international capital markets and seen interest rates on its government bonds soar. The bailout was a recognition that if just the opening act of the Greek tragedy was causing Spain's economy such grief, then the climax would swamp the fifth largest economy of Europe.

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Spain's story reminds the world of three things. First, the structure of the eurozone and the increasing hollowness of its 'economic union' means that the financial crisis is manifesting itself differently in various European states. Greece is a clear-cut case of a government that overspent. Spain was fed a severe diet of austerity before being belatedly re-diagnosed as a case of an illiquid banking system. Second, Europe increasingly seems less willing to think of a solution to Greece other than expulsion. All hopes now rest on the fickle and angry Greek ballot box decision this Sunday. That inspires so little confidence that the market is already fretting about the ability of debt-laden Italy to handle a 'Grexit' from the euro.

Third, and most important, is that even as the European Union hands out policy bandaids and financial cough drops to its poorer members, governments are vaccinating against the next round of the ongoing global financial crisis - if Greece goes under. The finance ministry's chief economic adviser, Kaushik Basu, recently warned that India is ill-prepared for such an external shock. The Manmohan Singh government has ensured that the Indian economy is bereft of any surplus fat or extra ballast. There will be few instruments for India to use to handle the crisis. The government cannot afford to spend more, foreign exchange reserves and the rupee are both under pressure, and all the account ledgers are in the red. Remember, New Delhi has no place to turn to for a bailout - especially if the International Monetary Fund's resources are all tied up handling Europe.