Text book economics doesn't have all the answers. And people and governments are becoming increasingly aware of that fact. However, authorities in developed countries continue to loath admitting one very simple reality - that they just don't know what to do solve the crisis anymore. All attempts so far - like the US$1 trillion European bailout package announced recently - reek of desperation. They're only part of a long list of moves by clueless governments in the US and Europe praying 'we hope this works!'
With the grave problems facing these economies and no concrete solutions in sight, it is not surprising that one of the most erudite investors thinks that recession next year is almost inevitable. George Soros expressed this view recently at a conference, saying that this is the only fate that awaits Europe with the policies that are currently being followed.
In fact, he has gone as far to condemn what looked like even the most sound solution - that of cutting fiscal deficits. He's said that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, and by wanting to have a balanced budget one would be actually setting in motion a downward spiral. Evidently, there are no easy solutions. Further, the lack of provisions for countries to leave the Euro zone in light of all this could turn out to be a fatal weakness. Many European banks also hold large amounts of the sovereign bonds of weaker euro zone countries. Losses on these bonds due to a default could also put the region's banking system in jeopardy. The destruction of the concept of the European Union could be one fallout of this crisis.
Whichever way one sees it, another deep recession seems to be fast becoming the only consequence in sight. The effect of such an eventuality on Indian business will surely be felt. Its extent and timing will depend on how much an individual company is reliant on this region for business. However, the global economy has now become more intertwined than it has ever been before. Thus the business environment in not just Europe but also the rest of the world may be adversely affected.
How stocks prices will get affected by all this in the short term is more difficult to tell. One can only surmise about this. However, it is best to avoid making investing decisions on the basis of such surmising. 'Buy when cheap, and sell when expensive' remains an ever green formula though. And stocks in general in India are anything but cheap at this point of time.