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Economic Highlights
New
Delhi, 28 October 2011
Greek Tragedy
LESSONS FOR INDIA?
By Shivaji Sarkar
The latest European Union bail-out drama to wipe off the
tears of the Greeks confirms yet again that the EU is not adept at solving a
crisis. The Greek economy has over the past two years become a bottomless pit, which
is sucking in all the EU wealth and spreading the infection beyond the Euro
zone.
India needs to view these
developments with caution and circumspect. At the same time, Europe too could
consider looking at India
for some relief. But that is not the case. In its perception, India may be an
emerging economy but it remains fragile. Therefore the EU is looking towards China and Brazil
to invest in Europe to make its economy
sustainable. New Delhi should see the writing on
the wall as it is losing an international battle to China. If Beijing
tightens its fist over Europe, India’s
dream of becoming a super power is likely to take a severe beating.
The bail out deal for Greece was struck by the European leaders,
officials of central banks and the International Monetary Fund. It provides for
writing off 50 per cent of its debt. The catch being that neither the EU nor
any of its European governments shall suffer. Instead, the losses have been
mounted on private banks and insurers, who would cut the losses of Greek debt
holdings and seek to reduce Athens’
massive debt load to sustainable levels – Euro 100 billion. This would reduce
debt to 120 per cent of the Greek GDP--something sustainable indeed!
The write-off agreement thus leaves Greece’s
repayment obligations at Euro 100 billion. EU leaders view this as a
significant achievement as they feel the Euro would now come out of the cloud. But,
the crisis is far from over, even though the bail-out brought smiles to the French
and Germans, so far the strongest economies in the EU. They were firmly against
any package at their cost and have managed to achieve it to an extent.
Though their economies would not be hit directly, the French and Swiss banks would
take the biggest brunt of the relief proposed for Greece. Both France and Switzerland are the two largest
holders of Greek bonds and they would lose clear 50 per cent of the bond
values.
Lately, it was feared that the crisis may lead to the breaking of the EU
as a common market with a single currency. Worse, it would have grave political
implications, as Euro for the EU is much more than just a currency. It’s a
political statement of being united and it is the most advanced common EU
policy. Thus, the Greek crisis underlines a major governance problem within the
EU, because Athens
cheated its European partners for years without any reaction. Thus economic
solutions are not enough. Good governance too needs attention.
Insofar as the sovereign debt default is concerned it is not restricted
to Greece.
Other member States such as Spain,
Portugal, Italy and Ireland too have their share of crises.
The Greek solution if repeated with these economies could lead to a further
fall in the Euro’s value. Worse, other
economies which still are at a workable stage, may get caught in this whirlpool.
This apart the French and Swiss economies are bearing another onslaught.
The NATO war on Libya was
largely fought with French funding and Paris
was hoping to make up its losses by capturing stakes in the Libyan oil
business. However, the Libyan crisis seems to be getting worse with lawlessness
spreading and multiple authorities mushrooming. If France loses this battle, billions
of dollars that it has sunk into NATO operations might start telling on its
economy. To stave off the crises, Paris may have
to spend heavily in the internal policing of Libya and start politicking.
All in all, what seemingly appears to be a solution to the Greek tragedy
may bring in more tears for some member States! In fact, European leaders continue
to doubt whether the “Greek solution” would stem the crisis in Spain, Italy,
Portugal and Ireland. If
their fears come true would they repeat the same solution? Nobody knows. But the
same bitter pill can not be prescribed, as it would have to be swallowed not by
the ailing economies, but the stronger among them.
For now, the EU may not exactly start tottering. It has amassed immense
wealth from its former colonies during the past over 250 years. The question is
how long will it be able to hold, as all manufacturing and industrial
activities in the Euro zone are slowing down? While it may not be exactly the
reverse of the “Industrial revolution” of the 18th century, it does certainly
send signals of a deeper crisis.
Indeed, the Greek solution does not stop here. Sooner than later, European
governments will willy-nilly have to start recapitalising the banks and
financial institutions to keep these at workable level. This would entail
drawing on the taxpayers’ money through budgetary measures. It will increase the
borrowings of European nations and acerbate inflation.
True, the Euro zone has promised to offer “credit
enhancements” or sweeteners to the private sector largely financial
institutions totalling Euro 30 billion. This would “help” Greece get a
second financial aid programme in place in 2012. In addition, EU leaders have agreed
to scale up the European Financial Stability Facility to Euro 440 billion
(about $600 billion) bail-out fund set up last year. The EFSF will be leveraged
in two ways--by offering insurance or first-loss guarantees to purchasers of
Euro zone debt in the primary market. It is also considering setting up a
special purpose vehicle (SPV) aimed at attracting Brazilian and Chinese
investment.
The EFSF has already provided Euro 150 billion relief
to Greece, Ireland and Portugal and has shrunk to Euro 290
billion. Is this a beginning of another crisis? Will Brazil
and China
bite the bait? The solution apparently does not lie here. “There is plenty of
room to doubt whether each of the key aspects of the package will deliver
within its own space”, states Malcolm Barr, an economist with JP Morgan. The big
question remains: Can EU remain a single entity with a tottering Euro for long?
While there are no answers yet, India should watch
the situation closely. Both the Indian economy and governance are under severe
strain. Inflation, job losses, fall in growth, corruption charges have become
endemic. So far it has been looking up to Europe and the US, but now it needs
to change tact. The economy can be revived only by domestic forces – by
increasing the purchasing power of its people. Exports are not bringing in much
cheers and investment from abroad is undependable. India needs to realise that it
has its inner strength and should count on it alone. --- INFA
(Copyright, India News
and Feature Alliance)
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