The European Union Summit on Sunday would try to work out a plan to solve the region's debt crisis. Warren Hogan, chief economist and head (global markets research), Australia and New Zealand Banking Group tells Parnika Sokhi this would have an impact on India. Edited excerpts:
What are your expectations from the Reserve Bank of India’s (RBI) policy review next week?
The real issue for central banks of Asian countries and RBI is how much of impact the problems in Europe would have on inflation in India. The real issue, in a policy perspective, is if you have the policy settings right, you can afford the pause. Of all Asian economies, India is heavily linked with Europe, and that's why for RBI, the outcome of the EU meeting would be important.
What do you think would be outcome of the EU meeting?
Policymakers in Europe need to demonstrate to the market that their priorities are restructuring of debt and recapitalisation of banks, and that the broad framework of financing these activities is in place. We can wait for the actual plan till the G20 meeting, but the outline is needed now.
Are the problems of the US and euro zone interlinked, and how can the US deal with its own challenges?
The Europeans are going through what the US went through in 2009. Now, US banks have good capital and reasonably healthy balance sheets, the household sector is de-leveraged, house prices have come down and household debt has fallen. But corporate America is not very confident on whether investing is the right thing to do. The final issue is its currency is highly over-valued, and the lower the currency goes, the more likely is it to secure investments from corporate America
Which Asian economies would be more vulnerable to these developments in the West?
India has the highest exposure to Europe, but the economies that are most exposed to the slowdown are economies like Singapore, Hong Kong, Taiwan and Philippines. The slowdown has not had a big impact India, China and Indonesia.