Rupee’s gain against the euro will give a lot of Indian companies which have recently contracted euro loans some advantages. Their loans will be less costly in terms of the rupee. However, in case of a spilt of the euro nations, as we have discussed later, the euro should gain substantially. But that development could be only in the long term. As of now, the euro is set to slide someway down.

On the other, India’s exports to the EU region should become costlier in the wake of a stronger rupee. When the EU economies are already facing problems, even a marginal rise in price could become a deciding factor. China is following once again a policy of creeping devaluation as the export markets are shrinking. Chinese price competition is feared to become even more sharp and therefore India will face an uphill task even maintaining its market share in the European Union.

The latest crisis in Europe is triggered by talks about Italy’s debt crisis and downgrading by credit rating agencies have created new nervousness. Italy has accumulated debt of over 1.3 trillion euros and the economy is not doing too well. The political instability in the country has further added to the crisis. Already, interest rates on Italy’s debts are rising and soon it might prove to be as intractable as the Greek debts.

The problem with Italy’s debt crisis is that Italy is the third largest economy in the Euro area and any default by Italy cannot be met by extending a bail-out package. Italy’s requirements will be too large for the European Commission or the International Monetary Fund to bankroll. Already, the EU fund for Financial Stability of 440 billion euro had to be topped up last month as talks for a roll over of Greek debt with p0rivatge sector lenders had failed. Any further topping up of the facility will be difficult to organize.

The major contributor to the European crisis fund has been Germany and the country is becoming increasingly edgy over its fresh contributions. German politicians and voters are criticizing the government for footing the bill for profligacy of countries like Greece. German politicians have pointed out that while the country is paying for the rescue funds, its advocacy of stricter fiscal practices and need for austerity has made Germany intensely disliked in countries such as Italy. The German complain is that it is being made to pay for laxity elsewhere while Germany itself is following strict rules for restricting public deficit.

But why countries like Greece, which are members of the Euro arrangements, could pass muster such huge deficits and land up with unsustainable levels of debt? Professor Mario Monti, former competition commissioner of EU and currently president of Bocconi University of Italy, said in an interview that the statistical systems of member countries should be under surveillance of the European statistical office. Had that been done countries could not have fudged their financial statements and gone on contracting fresh debts. The proposal for making the statistical practices subject to review by European statistical office was earlier rejected by the big economies of Euro system like Germany and France. Today, they are drawing the consequences of their earlier intransigence.

Faced with the new threat of Greek default, the EU is considering various options. One is that Greece is given fresh loans by European Union and IMF if the country has to avoid default. IMF has talked about its reservations on giving fresh accommodation to Greece without fresh austerity. There are other options on the table as well. Already, in the European Union meetings in Brussels there are proposals for allowing “partial default” of debt by Greece. Nevertheless, any such move will inevitably create a ve3ry serious credit market upheaval. Many of the leading European banks will get affected in the same way that the Argentinian crisis had threatened the American banks in course of the Argentina crisis. An alternative proposal is to bundle debts of Spain, Portugal, Ireland and Greece into a European debt instrument which can then be purchased at a discount. In the end all this means that Greek debt might have to be partially written off if the country has to come back to normal fiscal situation.

In the extreme case, EU is also reportedly examining a two-stage union. That is, Germany, France and other stronger European countries should be part of “Euro” currency and the peripheral countries will go back to their national currencies. This will mean the Euro will gain substantially in the global markets against competing currencies.

In case of a split-up of the Euro, the weaker countries will be able to depreciate and export their way out of the mess and follow independent nationally suitable macroeconomic policies. This appears to be the most likely culmination of the European financial crisis. Most of the peripheral countries could borrow such enormous sums of money only on the back of their membership of Euro, as if their economies were also as strong as that of Germany. Delinking with the Euro will cut off their access to the credit markets and discipline them. This will be a market-led correction of the peripheral countries dismal fiscal situation.

The alternative to this model would be to integrate the Euro countries into a single economic entity with common fiscal policy, taxes, monetary policy and other macroeconomic policies. This will be giving up virtually all of economic sovereignty. (IPA Service)