In a central bankers meet in London, RBI governor Raguram Rajan warned the world about the possibility of a ‘Great Depression’ like economic problem in near future if the central banks don’t work together and in tandem to contain the problems like interest rates differences, economic instability in Europe and slowdown in world economy especially developing economies like China and India although his office issued a clarification later. But previous experiences tell that his assessment might have some indications for the future. In 2005 he had warned about the possible financial crisis in the US when everyone was very much excited about the real estate in the US. But what he had forecasted became reality in 2008 and the whole world is yet to recover from that shock.
Euro is in problem because of Greece debt crisis and the sentiments in Greece are against any restrictions and austerity. If Greece decides to abandon Euro and resurrect Drachma it will have catastrophic impact on Europe because Greece will pay in Drachma and that might not be accepted by IMF because of valuation issues. Also the existence of Euro may come under question as there is a group of economists who are against creations of Euro as they forecasted such problems.
Also the recovery of the US economy is not as expected. The developing economies are slowing down. At the same time Federal Reserve in contemplating the idea of increasing interest rates in the US. This will result in capital outflow from the developing economies leading even lower rate of growth. Also the central banks in different countries are acting as per their national interests and priorities but in an integrated financial world, it is would not be possible for the central banks to act independently without having caused other economies. The priorities in the Europe as of now are to come out of Greece debt problem and for that it require huge money so European countries may divest their stakes in developing countries. The US wants its money back to accelerate economic activities and that it may increase interest rates. At the same time developing economies needs more money from developed world to accelerate growth. These goals are not in tandem but contradictory.
Developing nations are markets for developed countries for highly technical and sophisticated products while developed world is market for less technical products from developing countries. So there is interdependence and if these countries don’t act in tandem another crisis in few years would not be a surprise.
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