The countries of the European Union could be stumbling into a crippling debt crisis, unable to repay bond investors and helplessly watching interest payments eat into a growing slice of government budgets. Some economists believe that the events in Greece are but the first act of a longer European debt tragedy.
Also See Public debt (Graphics)
Growing levels of government deficits and debt are a clear danger to the weak global economic recovery. The focus now is on the countries that use the euro as their common currency. Public debt has shot up by 20 percentage points of their combined economic output—and is expected to climb further. The debt of many countries in Europe is now more than their annual economic output.
India’s public debt has been relatively stable in recent years, but is still way too high for comfort and among the highest in the emerging economies group.
What is a safe level of public debt? The 13th Finance Commission recommended that the government bring its public debt ratio down to 68% of gross domestic product (GDP) by 2014-15. International Monetary Fund economists Petia Topalova and Dan Nyberg said in a January working paper that India should target a debt-to-GDP ratio of 60-65% by 2016. The Europeans themselves had agreed to keep public debt down to below 60% of GDP in an agreement before the euro was launched.
Both Europe and India are way above these safety levels, though the high-growth Indian economy should have fewer problems getting public debt down in safe territory than stagnant Europe will.
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Graphics by Ahmed Raza Khan/Mint