Robert Zoellick,who successfully completed his tenure as World Bank president last month,says the euro zone has entered a very fragile period and Chancellor Angela Merkels freedom for manoeuvre is shrinking as the German constitutional court has stepped in to scrutinise the expansion of various funding mechanisms to stabilise the euro zone.
Speaking exclusively to Financial Express,Zoellick said he had serious political economy worries now as the German people were increasingly getting frustrated at the manner in which Germany is being criticised for not doing enough to stabilise the euro zone even though they feel a lot has been done. This could result in further political problems in the way Germany looks at expanding the bailout mechanisms to bigger euro nations like Italy and Spain. Zoellick was in Mumbai to give a talk at the first Oberoi-IISS Discussion Forum.
I am not sure that the political situation in Germany and the constitutional court scrutinising things very closely will help in fast decision-making, Zoellick said. In my view the big decisions taken in the last European leaders summit to take quick,coordinated action to save ailing banks,etc,are not being implemented fast enough.
Zoellick said the one silver lining that has raised the hopes of the global markets is the ECB president Mario Draghis statement last week that it has the mandate to intervene to stabilise monetary policy. Though the ECB cannot bail out individual governments,it does has the mandate to stabilise monetary policy automatically by pumping in more liquidity so that the bond spreads of some countries do not go out of whack.
Zoellick said this new interpretation of its mandate by the ECB is healthy but may need the German constitutional courts endorsement. According to Zoellick,Greece is not so much a problem as it is less than 2 per cent of Europes GDP. However,Spain and Italy are too big to fail.
Speaking about the global economic recovery,Zoellick is very clear that not much should be expected of the bulk of the OECD. Emerging markets have provided two-thirds of the global growth over the past five years. For many developing economies the export-led growth model is under severe pressure because of stagnation in OECD. Now there is a need for emerging economies to create new structural shifts to boost productivity growth.
In order to boost growth,has the time come for India and the US to sign a comprehensive free trade agreement in goods and services to realise the big knowledge partnership envisaged by US President Barack Obama and Prime Minister Manmohan Singh? Zoellick said he was always open to such agreements but there would sensitivities on both sides at present that may need ironing out. But India and the US need to deepen partnership in areas such as energy,infrastructure,water,sewage,defence. For economic and security reasons alone,India and the US will have to cooperate in agriculture,infrastructure and defence.
But the problem is that the US has vacated manufacturing spaces like that of power equipment,etc. He says it may be true that because of lower labour costs manufacturing may have shifted to China and South Korea,but held that the US is still competitive in various sophisticated services in technology,design and finance.
Speaking of India,Zoellick said the political economy is going through a very interesting transformation. The old patronage systems are under attack as reflected in the civil society campaigns against corruption. India has the opportunity to put in place more transparent institutions to replace the old ones. Zoellick said what is described as policy paralysis by some may lead to a new level of institutional maturity.
Asked whether the euro zone worsening will reduce capital flows to India on a sustained basis,Zoellick said India will get adequate capital from other parts of the world provided it sustains growth and productivity. He said India must just focus on improving its productivity by removing all manner of supply bottlenecks in the economy at present. That is the real issue,not fiscal expansion versus austerity,he said.