EUROPEAN DEBT CRISIS: IMPACT ON INDIA & LESSONS LEARNED

Abstract

Financial Crisis in any economy leads to losing of confidence of investors in the currency and financial assets of that economy leading to withdrawal of investments by the international investors. The sovereign debt crisis of Europe commenced with collapsing of banking system of Iceland resulting to collapse of many financial institutions of repute which further spread to many other European economies. Prime finding of study leading to European Debt crisis were, a) growing saving available for investment with high expectation from investors which was fulfilled by the developing nations lead to diversion of investment from US Treasury bonds to internal capital market b) EU member countries committed to restrict their debt levels & deficit spending, but number of countries failed to follow the terms & conditions of the treaty c) Inflexible Monetary Policy d) Structural Problem of Eurozone System e) Trade deficits f) Trade imbalances g) loss of confidence h) change in credit rating etc., Further the study looked into the impact of crisis where in it found that decrease in GDP, increase in interest rates, depreciation of rupees, higher import bills, fiscal deficits. The prime lessons learned from the crisis were too much leverage, too much liquidity, too much complexity & too much greed should not be there which have led to the European debt crisis, reduce public expenditure, and introduce measures to increase the efficiency in tax collection, minimizing big subsidies, steady monetary integration and international financial integration, financial market enforcement can be some of important steps that can be taken to avoid such kind of financial crisis.