India needs to prepare for the likely collapse of EU
25 Nov. 2012 11:09 PM IST
India has started preparing for the new budget amid shadow of serious crisis engulfing the Euro zone as Britain mulls over an exit. The questions being asked are - “Will the Euro survive?” and “Will the EU survive?”. It is scepticism all the way.
With Greece, Spain, Italy, and other nations buckling under massive foreign debt and stumbling toward default, the European Union’s two crowning achievements - its common currency, the euro, and the free movement of people across national borders - are suddenly in jeopardy. Some European leaders even fear that the crisis could tear apart the 27-nation EU.
For the first time since the formation in 39 years Britain used veto against EU proposed fiscal reforms. It is being seen as the first sign that may lead to EU breaking down.
It is exactly not known how it would hit India but it may lead to fall in growth and severe adjustments in many of its economic decisions, budgetary provisions, austerity measures ! and so many more.
The euro is apparently no more a problem for Europe alone. It is taking gigantic proportions. Despite India not being in the severe crisis zone, it may slide into it as its banking sector with its high losses may turn as critical as in the Euro zone.
Britain’s ambivalence to the European project can be explained by a lingering conviction that the EU remains essentially a common market to facilitate trade, says Paul Whiteley, professor of politics at Essex University. “Britain became a member because there were economic advantages. It was very much focused on trade,” Whiteley said on Nov 19.
It is perhaps no coincidence then that British support for EU membership has dropped sharply in the last five years as the economic crisis has taken hold, Whiteley says.
Britain in reality is only a half member. It has not accepted Euro. It is opposing tough banking measures EU is proposing in the wake of severe crisis the sector is facing. It is neither a member of the common European Shenzhen visa nor many EU agreements.
But it remains an important part of the EU, as its currency is stronger than Euro and remains the most powerful economy of the region with Germany and France.
But Brits believe that despite the regional need and will for political union, EU has not benefited it much. It gave up free cheap import of food and farm products from across the globe for the Common Agriculture Policy of EU. It made its imports expensive as it had to pay high subsidies for the French farmer.
Initially it was a political compulsion for Britain as it did not want Germany and France to overtake it politically in an evolving region. Now it finds it tough to sustain it economically. If it accepts new EU conditions, it fears, it would be importing the Euro crisis.
Britain’s moves are also linked to coming Dec 18 EU budget summit at Brussels. Britain is unlikely to increase its budgetary contribution to the sagging economy.
So as the Indian fiscal year comes to a close, challenges increase. The EU may not collapse in December but if the efforts of Germany chancellor Angela Merkel fail in persuading Britain, it might eventually pave the path. The EU does not want to accept Britain’s conditionalities as it is not signatory to all EU agreements.
The serious question would be whether EU would be able to survive without Britain. In case EU decides to break, can it be a political unit with different currencies as each of the nations would have to revive French franc, Deutsche mark, Italian lira, Greek drachma and other as their individual currency.
Europe has before it the instance of Argentine peso. It delinked with dollar in 2002, opted to float and the currency plummeted by 30 per cent. It was a traumatic experience, concentrating contract violations, wealth redistribution, defaults, bank runs, exchange restrictions, and severe limitations on capital movements into a short period of time.
It led to a flight of capital from Argentina. Even so, it was simpler than introducing a “new drachma” would be for, say, Greece.
For a shaky Europe, peso is too stark an instance to follow. Euro defectors, by contrast, would need to promote demand for the new currency from scratch - a much messier and nastier process altogether. It may lead to a bank panic as the banks would find it difficult to deal with a new unit. It would not only be a national crisis but it may also hit the trading and business partners across the globe.
Europe remains the largest trading partner for India and most of Asia. It is only a matter of conjecture how it would hit these economies.
Even as Germany and France are battling to keep EU together, apart from Britain, the southern members of EU - Greece, Italy, Spain and Protugal - are also having a second thought on sailing together. They all say they are importing EU inflation, banking crisis and high deficit and fiscal collapse.
The only reason possibly EU would not collapse immediately is because of the US. The re-elected president Barack Obama wants EU to stay together for political reasons for keeping West Asia to Afghanistan and central Asia under check. Apart a common EU is also is its economic insurance. The US has made the largest investment in EU during the past many decades. An EU collapse could have a tottering effect on its economy.
But Britain, even now being on the fringe, if exits would create turmoil not only in Euro zone but all over the financial market. Even if does not the uncertainties would remain. The world economy is in for severe trouble.
India has to grapple with it. It has to revive its internal strengths and cash in on the largest number of people and consumers that it has. Global integration has helped it partially but has brought in major problems. It has to chart a new course where it can not only survive but also can surge ahead without looking at western economies. An easy proposition but the solution is not that easy.