Is the European crisis turning into a global crisis?

The recession fear is looming large again. The European sovereign debt crisis has been worrying the global market since a while now.  These tremors have crossed several continents and have reached the Indian shores too. Remember, India is a developing country and has some form of aid or other with the European Union.

     To explain the European crisis in the most basic, simple form, it is just that many countries in Europe have taken way too much debt, so much that they now a stand huge risk of being unable to pay it all back.

     Although some European countries are comparatively sound and better off financially, some are very over leveraged, which when translated means to excessive debts almost to the size of their economies. The eurozone officials have been working overtime and hard to pacify these effects. The 17 nation body that uses the euro as its currency since 1999 now faces a huge, hair-raising possibility of more than one country defaulting in its debts.  This can result in a possibility of more than one country in the eurozone defaulting in payment of its debts. 

This can result in adverse effects in the financial world, which can cause investors to panic and could possibly trigger an enormous banking and financial shock. Countries like Portugal, Ireland, Italy, etc. have been grouped under the unfortunate acronym PIIGS – i.e. some of the most highly leveraged countries and it is said that if a disaster takes place, it will start with any of these countries.

     Ireland is in 109% debt of its economy, Italy’s figure is 121% and for Greece it is a staggering 165%.

      India regularly imports and export in the Eurozone. Transactions of more than a billion dollars have been taking place under several bureaucratic and diplomatic relations. Under these circumstances, it is possible that many of these nations may stop transacting and trading not just with India but several other nations, which will result in a sudden halt of foreign investments.

Although India is suitably equipped to tackle the situation, the everyday unearthing of new scandals, increase in corruption and day-to-day rise in cost of living has made things worse for India. The FII’s are slowly withdrawing their support towards Indian investments and many of these companies are facing financial crunches which are resulting in an either abrupt shut-down or debt crisis for these countries.

Because a majority of these companies are in the private sector, it is very difficult for the Indian government to bail these companies out.

      Though India is trying its best to improvise its economic reforms, the broader picture is bleak and only time will tell about the effects on Indian economy.