Europe Sneezes, India Catches a Cold
Europe Sneezes, India Catches a Cold
The on-again off-again euro summit in Brussels has bought some time for the embattled currency by writing off half the Greek debt and setting up a $1.4 trillion rescue fund. But it won't be able to fend off vultures circling over a weakened euro for long unless it can convince the markets that the fund and, more importantly, reforms promised by Greece and Italy are real. Otherwise the debt crisis will return to shake the edifice of European unity. The difficulty in reaching a definitive agreement for averting this disaster confirms a truth: when push comes to shove, local politics always trumps global cooperation. But as Europe goes through the coming ordeal – which could be long and painful – another truth will also be relearned: there is no alternative to global cooperation.
The crisis in the eurozone that began last year with the revelation of Greece's hidden debt burden has continued to buffet the 17 countries that embraced euro as their common currency. It has become increasingly clear that the common monetary policy without fiscal coordination has swept under the carpet the gaping differences between the member countries' respective economies and allowed poorer and mismanaged members like Greece to go on a borrowing binge. Those who loaned the profligate Greeks money – mostly European banks – are also to blame. This week`s move was in response to an existential threat to the eurozone, which had been further exacerbated by the danger of a government collapse in Italy, also groaning under a ballooning debt.
Under the severe austerity regimen imposed by the creditors and eurozone financiers, Greece has laid off thousands of workers, cut salaries, pension and benefits - producing nationwide protests. Meanwhile, the failure of Italy's Silvio Berlusconi-led coalition government to adopt economic reforms has brought threats of being entered into "special administration" by Brussels. Under threat of denial of support, Berlusconi managed to obtain provisional support from his hardline coalition partner Northern Alliance, which is opposed to reforms like raising retirement age from 65 to 67 years. Underlying the Greek and Italian resistance to the bitter medicine of reform is their concern about losing sovereignty to nameless, faceless Eurocrats.
It is the same concern about sovereignty that for so long spurred German parliamentarians to refuse to bankroll an open-ended eurozone bailout. Without Berlin's participation, the creation of a European financial stability facility, in essence a bailout fund for European sovereign debt, is impossible. The last-minute assent by the parliament cleared the path. Although the French president has a freer hand, Nicolas Sarkozy, with his disastrously low job rating and facing an election in six months, has been reluctant to commit large-scale state funds. The triple-A credit rating that French sovereign debt clings to by a thin thread would be cut by linking state coffers to an open-ended bailout fund – an unfortunate development for Sarkozy if it were to happen before the elections.
The temporary solution offered by the Brussels summit is unlikely to successfully ride the gathering storm. Investors are broadly unconvinced that member countries are prepared to set aside their sovereignty concerns and political autonomy. Among others, Mediterranean countries will have to trade their old habits of long summer vacations and early retirement for economic stability in a united Europe. They might even need a bigger economic shock than they have experienced so far in order to agree to part with a bit more of their sovereignty for the sake of common prosperity.
The euro was supposed to be an important step towards the creation of one Europe, ending centuries of rivalry and hostility. If the currency were to collapse it could bring an acrimonious divorce, raising both tariffs and immigration walls – a disaster not only for Europe but also for India and other countries who benefited from the rise of the European Union.
The inevitable shrinking of Europe`s banking sector and drastic fall in growth will affect India's economy in many ways. Despite the high visibility of Indo-US relations, only 10% of Indian exports this year went to the US while 18% were absorbed by the European Union. Major Indian companies that acquired assets in Europe and moved production there may also suffer. In the interconnected world, the adage that when Europe sneezes India catches a cold, could not be truer.