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Friday, 11 November 2011 00:00
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Less than a fortnight after EU leaders celebrated their largely non-actionable plan to fix the crisis that’s far worse than Lehman (and at a time when the developed world hardly has any firepower left), they’re back with another solution that looks suspiciously like the end of the eurozone—the implications are so horrendous in terms of what it means for the world, markets across Asia plummeted, suggesting the Sensex may go the same way when it opens later this morning. Hardly surprising then that IMF chief Christine Lagarde spoke of the possibility of a “lost decade of low growth and high unemployment” “if we do not act, and act together”. Instead of together, French President is advocating a “two-speed Europe” while Merkel is talking of “more Europe, not less Europe” and a “breakthrough to a new Europe”. Lest anyone think that means Germany is willing to allow the ECB to guarantee bonds of all countries, Reuters quotes unnamed EU sources as saying both German and French officials had discussed plans for a radical overhaul of the EU, which would involve a more integrated and potentially smaller eurozone.


That, however, is easier said than done since there is no blueprint for exiting the euro, never mind that most commentators argue it is the euro which is behind the Greek and other crises – without a strong euro, these countries would devalue currencies and export their way out of trouble. That may have been true before the euro came into being, question is how do they get out? For one, there’s political paralysis—Berlusconi, for instance, hasn’t quit and will do so only after a while; even if he did, getting a new coalition of the willing will take some time, even assuming its ability to get reforms through will be higher. Second, how is the interim to be negotiated? If Greece leaves the euro (how many forms will need to be signed, and by how many in bureaucratic Europe, to allow a new drachma to come into being?!), this will devalue rapidly and help Greece regain its competitiveness—but who will protect Greece from the run on its banks as existing depositors run to take their euro out? In the long run, the two-speed solution is probably the one that needs to be worked at, but for now the only way to keep things orderly—remember the domino that Lehman set off?—is to backstop all crisis countries through the ECB while allowing the austerity measures to start working, and that has to include very large-scale privatisation at distress rates. Given the lower and lower chances of rational behaviour, India needs to firm up its Plan B with aggressive reforms, privatisation and lowering government states in PSU banks if it doesn’t want to get sucked back to the old Hindu rate of growth. And all this needs to be done by yesterday.

Last Updated ( Sunday, 13 November 2011 14:07 )

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