Some time last year, at one of Business Standard’s regular Monday morning editorial conferences, a distinguished columnist suggested an editorial comment by the paper on Greece. There was stupefied silence in the room, followed by the sounds of suppressed amusement. Greece?! But the thought that a small European economy, with one-third of 1 per cent of the world’s GDP, should worry this paper’s readers is no longer outlandish. Nervous markets and news reports this past week have talked of the Greek crisis sparking another Lehman moment, a la 2008.
The world economy may not be teetering on the edge, as yet, since all of Europe is agreed that Greece should not be allowed to slip into a messy default that could have unpredictable repercussions. But the Greek government’s 2010 austerity-cum-revival package has unravelled, short-circuiting the international bail-out programme. No one knows whether the Greek parliament will vote in the next few days in favour of a fresh austerity plan — required if Greece is to get a second bailout package. If what is considered economically unavoidable becomes politically impossible, as seems to be the case, something is going to give.
If you want to bet on eventual outcomes, consider what the Greeks are going through: GDP is shrinking for the third year in a row, household consumption in the latest quarter is down by 7.8 per cent, and investment by 19.2 per cent. Unemployment has soared to 15.9 per cent, the budget deficit is a stratospheric 10 per cent of GDP, and public debt is so high that two-year yields have touched 30 per cent. In such a situation, an austerity-cum-fresh taxation package that raises taxes, cuts the salaries and pensions of government employees, and reduces government spending, is guaranteed to cause riots — and adds to problems instead of solving them. But then, there is no alternative available, except the unthinkable one: that Greece (and other afflicted Southern European countries) should get out of the Eurozone.
Way back in 1996, American economist Rudiger Dornbusch had forecast the present crisis while damning the project for a common European currency. Writing in Foreign Affairs, he said, “If the European Monetary Union goes forward, a common currency will eliminate the adjustments now made by nominal exchange rates, and the central bank will control money with an iron fist. Labour markets will do the adjusting, a mechanism bound to fail, given those markets’ inflexibility in Europe.” Another American economist, Martin Feldstein, wrote on similar lines last month (in a column syndicated in Business Standard), arguing that Greece should take temporary leave of the Eurozone. No one in Greece is arguing this coldly rational viewpoint, as yet. The problem is that Europe and the International Monetary Fund cannot seem to agree on anything. And that is what has markets and analysts fearing another financial quake.
This is a useful reminder to us in India that macro-economic mismanagement can have catastrophic consequences. To be sure, the Indian economy’s health readings are a world removed from what Greece has, but that does not mean no hard decisions are needed. Public debt (in relation to GDP) is about three times the average for emerging market economies. Bringing it down will mean ignoring the calls for massive new spending in areas favoured by civil society activists, cutting subsidies (read higher prices for everything from cooking gas to public transport), and introducing new taxes (perhaps along the lines Mr Chidambaram has suggested). Imagine how Anna Hazare, Prakash Karat, Medha Patkar and Nitin Gadkari will react to all that, and you get some answers about an edgy government’s room for manoeuvre.