On 5th July, the people of Greece, in a historic referendum, spoke laude and clear against the austerity program proposed by the Euro club. The gloves are off on both sides. On one side, Greece, the quasi bankrupt nation, stands; and, the other side of the fence is being represented by the Euro club headed by Germany. On July 8th the Greek prime minister made an emotional but audacious statement: “his country has become a laboratory for austerity experiments”.
But later the Greek government,
seeing no option in hand, went on to negotiate for the third bailout plan. For
the moment, the probability of Grexit
from Euro appears to have slightly diminished but it’s still on the table. Needless
to say that if Grexit happens then its aftermath will bring a chilling
effect on the global economy, and more importantly that would shake the foundation
of belief that if globalization can really be an engine of growth and
prosperity for a longer period of time.
Greece was escorted to enter the
Euro club in 2001; and in almost one and half decades the country’s financial
mess brought it at the threshold of exiting the common currency zone. Can
Greece alone be held responsible for its economic mess or at larger canvas is
it the nature of the operation of Euro that merits more critical examination?
Greek tale of quasi
divorce from Euro
EU (European Union) was first a
political union which wanted to bind the competing European nations with a
single thread of common market. To get this project done, they conceived a
single currency, Euro, to make business easier for all.
In order to be eligible to join
the Euro club, the aspiring country had to satisfy the Maastricht criteria based
upon economic indicators; ex: interest rate, the ratio of debt vis-à-vis their
GDP rates etc. Those rules were framed to keep a comfortable balance in fiscal
and monetary policies amongst all the Euro members. In 2001, just to secure an entry
into the Euro zone, Greece manipulated the fiscal record since it was a mandatory
requirement to have the ratio of debt versus GDP as 60%.
In the early phase of its
circulation, the Euro went on swiftly with certain negligible hiccups. With
having a common currency in floating, countries like Germany, France became
natural and primary beneficiary of booming economy. Because for these already
developed countries, entire Europe had become a single market for their export
goods. Secondly, they’d a highly efficient taxation system in place which
allowed them to keep a safe balance between public expenditure and public purse.
That helped countries like Germany and France to keep their debt within a limit.
Relatively moderately developed
nations of Euro group (ex: Ireland, Portugal, Greece etc.) could not milk out
much out of common market; on the contrary, as their manufacturing industry is not as
robust as Germany and France. Thus, the latter became the natural exporter to
the former. So, the level of earning for
public exchequer didn’t get pumped up for countries like Ireland, Portugal and
Greece; on the other hand, their welfare state expenditure remained flying high
with the same vigor. To finance those welfare programs they never felt any
dearth of credit as German, French banks were ready to lend them without any
hesitation.
In 2009 with the credit crunch
crisis hitting the European continent, the entire business of fiscal and
monetary affair got measurably disturbed. European banks themselves experienced
a massive credit dearth. For countries like Greece, Ireland, Portugal, borrowing
became tougher; though their public expenditure remained high, but lending
refused to slacken. Such credit poor countries did not have any option left but
to knock at the door of ECB (European Central Bank) and IMF. The request turned
into bailout package with the imposition of tough austerity measures which
includes heavy cut in public expenditure and radical reforms in taxation policy.
We can’t deny the fact that Greeks
do not have an efficient system for taxation; nor, do have they a robust
financial system either. So, it was a pre-established fact that underperforming
Greece would not be able to pay back its debt. But still the bailout package
was offered to them from EU. People say that it was given just because it
allowed them to pay back to German and French banks. So, the first and second bailouts
were delivered not to ease the problem of poor Greeks but to re-pay the debts
to the German and French financial firms. And, ultimately the burden of that
payment falls over the Greek, German and French taxpayers.
The debt is a necessary evil of
capitalism. But letting public debt go beyond an uncontrollable limit squarely
depends upon the fiscal infrastructure of a country where Greece has lost the
game. But, let’s not feel so squeamish because if today it’s Greece, tomorrow
it’d for Ireland, Portugal and day after tomorrow Italy and Spain might be
found floating in the same troubles waters. Not even that, the economists fear
that if this trend of insurmountable debt (vis-à-vis their respective GDP) continues
then even France might fall in that lap. If all these countries will slip in the
darkness of austerity then who will
buy German goods?
The nub of the story is not that
Germany, through Euro, wants to become more powerful in compare to its eternal
competitor France or other European neighbors; but the crux of the Greek crisis
lies in asking an economically literate question which is: does the Euro itself
have a flawed structure?
Euro, an enigmatic experiment of single monetary union floating
with multiple fiscal policies:
Euro circulates in seventeen
countries. Most of these countries have got a very different culture of
economic management. Well, the fundamental mistake that the planners of Euro made
was that they could not anticipate the future. They thought that if all the seventeen
countries have democracy and free-market economics; it means they all share the
same culture which is Europeanism. Founding fathers of Euro overestimated the
power of Adam Smith’s invisible hands (the efficiency of market) and
underestimated the weakness of human nature (which is greed to have more). As
the classical liberals believe that market solves all problems itself; and the
state should not at all come in the way of market. So, the failure of Euro
exposes the limit of free-market. Today, Adam Smith’s invisible hands could not
be found to be visible in Euro zone.
It’s, seemingly, an impractical
politico-economic project that seventeen sovereign nations could surrender
themselves to a single currency which means a single monetary tool with seventeen
different fiscal policies. The fact of the matter is that the nations in Euro
zone are not homogenous in nature of development and prosperity. A few
countries from western part are highly advanced economies will continue to
prosper; their banking institutions will continue to dominate other parts of
Europe. Thus, the level playing field will never surface. And, the game of
rules will always be dictated by a few mightier ones (primarily Germany then
France).
If European leaders wish Euro to continue
as their common currency then they’d have to consider adopting a common fiscal
policy. That means it requires a complete federal structure: the idea of United States of Europe has to evolve not
merely in nomenclature but in operational terms as well. What it means is that
every Euro nation has to cede its complete sovereignty to Brussels. But, that
innovative technology of power will, technically, alter the concept of
nation-state. It’ll trigger a new
philosophical question that if any nation would ever like to be ruled by a
state whose sovereignty would not stay in its capital but far away in Brussels.
And, if this solution does not appear doable then the survival of Euro remains,
beyond doubt, questionable.
