Europe’s economy is on the edge. The International Monetary Fund’s mission chief to Athens, Poul Thomsen, has described the country’s ability to sustain its huge debt as being on a “knife’s edge”. A few days earlier, the European Banking Authority said eight out of 90 banks on the continent had failed a stress test and another 16 passed it narrowly.
This poses acute dilemmas in emerging markets. These have faced inflation and have been tightening monetary policy to the point of slowing growth. India, for example, is expected to witness further increases to policy rates by its central bank. Unlike 2008-09, when the Indian and Chinese economies prevented global growth from going into a shock, this time—if there’s a crisis—the situation will be different.
While this disconnect is well known, it exposes emerging countries to uncertainties they can do without.