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In an interconnected world, India cannot escape Greece crisis's fallout

By Paranjoy Guha Thakurta
Last updated on: July 07, 2015 11:55 IST
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If the impact of the Greece crisis spreads across Europe and parts of the world which are more interconnected than ever before, India cannot hope to be insulated, says Paranjoy Guha Thakurta.

There was no Night of the Long Knives. This time, it was boringly predictable. All but the most naive thought that an amicable solution would be found to prevent Greece from leaving the Eurozone. As "erratic Marxist" Yanis Varoufakis put in his papers as the finance minister of Greece, stock markets and currency exchanges didn't know how to react: with trepidation or relief, anger or gladness that the worst was over.

Only one thing was certain: uncertainty would continue in the near future, with volatility an inevitable concomitant. There was another aspect of the world's economy that became clear as crystal: the future of the euro as a currency that had been formed 16 years ago had become more uncertain than ever before.

Even if only 19 out of the 28 countries in Europe are part of the Eurozone, the battle lines that have been drawn are clear as they come. The strongest versus the weakest: Germany vs Greece. Who will blink first?

Underlying the economic turmoil, the battle is ideological as well: capitalism vs socialism.

Can India afford to be complacent? Here is what the chief economic adviser to the Government of India in the ministry of finance, Arvind Subramanian, told reporters on Monday: "This is a drama which is going to play out for some time. We are well protected in at least three ways. Our macro-economic situation is much more stable. We have (foreign currency) reserves. We are an economy which is still a very attractive investment destination. So I think we are relatively well insulated."

He then sounded circumspect and said that in such situations, there is flight of capital to safe havens which might affect the external value of the rupee. His colleague, finance secretary Rajiv Mehrishi, conceded that the crisis in Greece "might impact India indirectly", without elaborating.

Having withstood some of the worst ravages of the Great Recession of 2007-08, this country's economy has to become prepared for an uncertain phase. The Governor of the Reserve Bank of India Raghuram Rajan was right.

The truth is that economies across the globe, including the Indian economy, are going to be adversely affected by the events of the last few weeks and the events that will follow.

Almost to the week, 81 years ago, dictator of Nazi Germany Adolf Hitler carried out a purge of his detractors, both conservative and left-wing, in an operation called the Night of the Long Knives or Rohm Putsch in German. Five years later, the World War II began.

Fast-forward to the present: nothing half as dramatic happened. German Chancellor Angela Merkel (left) was merely echoing public opinion in Europe's biggest economy in arguing against further aid to Greece by the "troika" comprising the European Central Bank, the European Commission and the International Monetary Fund.

(On June 30, Greece had become the first "developed" country in recent times to default on its loan repayment obligation  to the IMF.)

Her deputy Social Democrat, German Vice Chancellor Sigmar Gabriel had stated on Sunday that Greece's 40-year-old Prime Minister Alexis Tsipras had torn down the last bridges of compromise with the Eurozone.

For the two most powerful Germans, the bigger villain was Varoufakis. He had infuriated them with his long lectures -- unsolicited, of course -- and his hectoring style. The final cut came when he described Greece's creditors as "terrorists".

That was a bit too much for Europe's non-Greek leaders. The former finance minister acknowledged as such in his resignation letter: 'I was made aware of a certain 'preference'... for my... 'absence' idea that the prime minister (Tsipras) judged to be potentially helpful to him in reaching an agreement...'

The parting shot in his blog post said Greeks had taught the rest of Europe "a lesson in democracy" and should now demand better financial rescue terms.

Those who thought the rift between Tsipras and Varoufakis was deep were probably indulging in wishful thinking. In his televised address, the Greek prime minister told his jubilant supporters: 'You made a very brave choice...The (61.3 per cent) mandate you gave me is not the mandate of a rupture with Europe, but a mandate to strengthen our negotiating position to seek a viable solution.'

Greek banks have downed shutters for a week. Its automatic teller machines are fast running out of cash. Did they vote to further attenuate their position? Probably not.

After all, in barely five years, the national income of Greece has shrunk by a fourth and real wages have collapsed by a similar proportion. Over 26 per cent of the 110 million population of Greece is unemployed and over 60 per cent of the country's youth is without jobs.

The Syrizia -- an acronym meaning "coalition of the Left" -- had come to power in January on an agenda to resist European imposition of so-called austerity measures, a euphemism for cutting public spending on health-care, pensions and education.

Tsipras's government could hardly escape the burden imposed by the profligacy of predecessor governments that had not just splurged on borrowed money but also fudged accounts.

Roughly 80 per cent of Greece's debt is owed to various public institutions in Europe and the IMF.

The issue was clear. Should Athens become a "bonded" labourer (to use an analogy from India) of its creditors or put up a spirited fight against them?

Adding fuel to the fire, were a series of scathing remarks against the German government from French economist Thomas Piketty who achieved superstar status after his book Capital in the 21st Century became an international best-seller. It is worth dwelling on what he said at some length.

In an interview (external link) to German newspaper Die Zeit, Piketty said German conservatives were about to destroy the "idea of Europe" because of "their shocking ignorance of history".

He pointed out that Britain, Germany and France were all far more indebted than Greece is at present. In 2004, the public debt of Greece was 127 per cent of the country's gross domestic product and is now up at 175 per cent of GDP. Piketty said: 'Germany is the country that has never repaid its debts. It has no standing to lecture other nations.'

He added: 'Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor after the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.'

Piketty said Germany's Wirtschaftswunder (economic miracle) after World War II was based on inflation, a special tax on private wealth and debt relief of the kind the country is denying Greece today.

He said, 'Think about the London Debt Agreement of 1953, where 60 per cent of German foreign debt was cancelled and its internal debts were restructured... We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable.'

He added that Germany is "profiting" from Greece because of high interest loans and predicted that after Greece exits the Eurozone, others could follow: countries with relatively weak economies like Portugal, Spain, Ireland and Italy.

Said Piketty: 'If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilisation on the altar of a conservative, irrational austerity policy...

'I think that Germany was greatly shaped by its reunification. It was long feared that it would lead to economic stagnation. But then reunification turned out to be a great success thanks to a functioning social safety net and an intact industrial sector. Meanwhile, Germany has become so proud of its success that it dispenses lectures to all other countries. This is a little infantile. Of course, I understand how important the successful reunification was to the personal history of Chancellor Angela Merkel. But now Germany has to rethink things. Otherwise, its position on the debt crisis will be a grave danger to Europe.'

Piketty advised Merkel find a solution to the problems of Greece. 'Those who want to chase Greece out of the Eurozone today will end up on the trash heap of history....'

The French economist is hardly the only person critical of the position adopted by Germany in the recent crisis.

In an article (external link) in Business Insider titled 'Greece Just Taught Capitalists a Lesson about What Capitalism Really Means', Jim Edwards argued that the vote in Greece is a "huge lesson" for conservatives like Merkel who think that the Tsipras government is "a dilettante government of left-wing idealists who think they can flout the law while staging some kind of Che Guevara-esque dream".

He said debt was "not a guarantee" of future payments in full. Rather, it is a "risk" that creditors take in the hope of being paid tomorrow with a premium in the form of interest.

Edwards wrote that this is "how capitalism works" and the "fact that it took a democratically elected government whose own offices are adorned with posters of Lenin, Engels and Guevara to teach this lesson to Germany is astonishing".

'More astonishing still is that Merkel et al knew Greece could not pay back this debt before these negotiations started. The IMF's own assessment of Greek debt... states: 'Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable ...'

A Great Depression may not take place the day after tomorrow, but thanks to Greece and Germany, the planet's political economy may be changing dramatically.

He argues that although Germany's own bankers knew Greece couldn't repay its loans, Merkel persisted with her position obdurately.

Edwards sought to remind the world what the Greeks know, namely that its "public debt" was originally owed to private investment banks like Goldman Sachs. 'But the IMF and the ECB made the suicidal decision to let those private banks transfer that debt to EU (European Union) institutions and the IMF to 'rescue' Greece.'

He recalled that in April, former ECB president Jean-Claude Trichet "blew up" at a meeting and shouted: 'We are an economic and monetary union, and there must be no debt restructuring!'.'

Edwards said Trichet made a "colossal, elementary mistake" by shifting the burden of the debt on "central banks who rely on taxpayer money for bailouts".

'In fact, had Trichet made the opposite decision -- and left the Greek debt with Goldman et al -- then today's vote would be a footnote rather than a headline in history. 'Goldman Sachs takes a bath on Greek debt.' Who cares? Goldman shareholders and clients, surely. But it would not have triggered a crisis at the heart of the EU.

'Now Italy, Spain and Portugal are watching Greece closely, and thinking, hey, maybe we can get out of this mess too....But the awfulness will be Greece's alone. Greece is now on its own path. It is deciding its own fate. There is something admirable about that.'

As famous economist Paul Krugman wrote in a column in New York Times, 'Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.

But the campaign of bullying - the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office - was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense?'

If the impact of the Greece crisis spreads across Europe and parts of the world which are more interconnected than ever before, as seems inexorable and inevitable at present, India cannot hope to be insulated.

Europe is India's largest trading partner. Exports came down by a fifth in May -- a trend that seems to be continuing for almost a year now -- despite the fall in the international value of the rupee.

The Engineering Export Promotion Council of India said that the economic crisis in Greece will impact engineering exports from India as the European Union is the largest destination for such shipments. The exporters' association said on Monday that it foresaw an indirect impact on exports to the United Kingdom, Italy, Turkey and France.

Exporters of computer software from India may face similar constraints as currency markets become more volatile.

Having withstood some of the worst ravages of the Great Recession of 2007-08, this country's economy has to become prepared for an uncertain phase. The Governor of the Reserve Bank of India Raghuram Rajan was right.

A Great Depression may not take place the day after tomorrow, but thanks to Greece and Germany, the planet's political economy may be changing dramatically.

Photographs: Reuters

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