Opinion Between growth and austerity
Europes challenge is to balance the necessity of cuts with a message of hope for the electorate
Europes challenge is to balance the necessity of cuts with a message of hope for the electorate
When a continent finds itself in a dire financial crisis as Europe does,it can ill-afford an exhibition of political brinkmanship from its leaders. Yet that is what seems to be on offer at the moment within Europe. The failure of European Union leaders to reach an agreement on the eurozones difficulties at last months summit in Brussels only heightened market uncertainty. A Greek exit from the euro no longer appears fanciful. The prospect of contagion from Greece infecting other European economies looms large. Against this backdrop,while governments in Europe struggle to cope with the crisis,the issues at hand ought to interest policymakers elsewhere,including India.
Part of the reason behind the stalemate has to do with a growing debate that seeks to blame austerity for a continents lacklustre growth. But as beguiling as this belief may be,it is ridden with flaws. It is based on an assumption that austerity and growth are mutually exclusive. But fiscal responsibility is an essential ingredient for balanced growth. It serves to explain why reckless public expenditure in Greece has yielded its citizens a debilitating loss of self-confidence and economic harm while Germany prepares to act again as Europes banker of last resort.
The key question,though,is how this crisis can be tackled. Before a solution can be proposed,it is vital to appreciate what led to this debacle in the first place. The truth is that the eurozone crisis has exposed the contradictions within the European project. A single currency club of members with different circumstances without fiscal control was always likely to falter in the long term.
Such a model is close to a tipping point. European Council President Herman Van Rompuy noted that EU leaders wanted Greece to remain in the euro area while respecting its commitments. What was left unsaid was that if the Greek electorate delivers another fractured verdict later this month,then its exit from the eurozone will be a distinct possibility. Contingency planning for such an exit can no longer be postponed. Several aspects warrant critical attention. A disorderly Grexit is likely to trigger instability in other European markets with potentially seismic effects the current levels of volatility in the Spanish banking sector are an ominous precursor of what may lie ahead. Nor can non-European markets be sure of being insulated from a dent in global investor confidence. If Greece is fated to leave the eurozone,the best hope would be for an exit that is managed responsibly by other eurozone members,together with swift measures to protect the remaining members.
At a fundamental level though,a European response to the crisis appears to favour greater centralisation when the democratic instincts of many citizens suggest otherwise. To be fair,in order for the eurozone to emerge from this crisis,some form of fiscal union among its surviving members will be unavoidable. But for this to retain the publics faith,such a union must necessarily draw strength from a democratic franchise too. This is not to overlook the important role that the EU plays in promoting free trade among its members. It is also vital for the EU to speak in a consolidated voice at global forums. Yet,while a United States of Europe may excite bureaucrats,it is greatly removed from the wishes of most ordinary citizens. More,the challenge for governments across Europe lies in balancing the necessity of austerity with a message of optimism for the electorate. The truth about austerity is that too much of it in the short term is likely to inject fear into the public,but too little of it would inject fear in the markets and be destabilising in the long run.
From a comparative perspective,what does this eurozone crisis mean for India? Amid this economic turbulence,a spurt in oil and commodity prices and inflationary pressures are likely to be felt by consumers. Foreign direct investment is likely to slow down. The Organisation for Economic Cooperation and Developments forecast on the Indian economy notes that growth is expected to remain subdued through much of the year. In such a climate,the UPAs fiscal profligacy is an ill-suited strategy given the structural adjustments needed. It should approach reforms with boldness. Avoiding thorny choices is unlikely to bolster its credibility when seeking a third successive term in office.
Back to Europe. As its leaders focus on choices with urgency,they should avoid treating this crisis as a duel between growth and austerity. These are not conflicting values. The concerns of the here and now do matter. But for the EUs viable growth,fiscal responsibility is an essential aspect. Compromising on it may lead to a repeat of past follies. The stakes are far too high for governments in the EU and elsewhere to ignore this lesson.
The writer is a lawyer based in London
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