Greek Tragedy: Implications For IndiaColonel Akshaya Handa@
Introduction
The Greek economic crisis is being enacted. The popular verdict has been that the crisis is essentially economic and India with its minimal exposure is unlikely to be affected. Albeit, the assumption that the implications would be essentially economic needs examination as this crisis is a tsunami wave which can unravel the WTO order and trigger a convergence of Russo-German interests, last visible just prior to WWII.
Genesis - EU Project
The problem is rooted in the European Union (EU). Having suffered centuries of wars and numbed by the industrial level killings in the two world wars, the European leaders sold a dream of a united Europe, encompassing the dreams and aspirations of the various nationalities. With its motto ‘United in Diversity’ it sought to create a peaceful zone of unhindered free movement of men, technology, capital and goods. The common currency ‘Euro’ was its logical outcome.
In a sense Europe was thus striving to be what India was – a land of many cultures and languages where men, technology, capital and goods[1] could move freely. However, the two differed in one significant way, the European Union did not have a strong centre which could step in and support/reprimand an errant state. The early summer rains and consequent farmers’ suicide is an example where, in India, the centre picked up the tab. However in Europe some nations (primarily Germany) combined the free movement of goods and capital with their more advanced technologies and efficient production systems, to enhance their own export advantage.
Greek Financial Mess
The story of excessive and inefficient expenditure by Greece being the primary cause is known. However, the flip side of the story, that of German exports, is not that well known. German exports rose from 18.7 per cent of their GDP in 1980 to 45.6 per cent in 2013[2]. Of these, close to 50 per cent are exclusively to the EU[3]. On the back of this Germany posted record current account[4] surpluses[5]. This has risen steadily since 1999, the year when Euro became effective. This is shown in the chart below[6].
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EU and German Exports
A sovereign nation normally has the following safeguards for its economy: -
a) Current account deficits[7] are curtailed by currency devaluation[8] and increased tariffs[9], which in turn helps bridge the deficit. However in EU the value of the Euro is not affected by the performance of individual regions and being a free trade zone, governments cannot raise tariffs.
b) Flight of capital is curtailed by capital controls on converting local currency into international forms. However, free movement of Euros within EU is the norm.
These restrictions combined with German surpluses affected not only Greece but all those in EU which received German merchandise. During the sovereign debt crisis of 2000s these came to be known as the PIIGS[10] (Portugal, Ireland, Italy, Greece and Spain) economies. Greece, with its liberal expenditure precipitated the crisis; however, the PIIGS are also unhealthy[11]. Hence, Greece is just a precursor. What happens in Greece would define the way sovereign debt is handled in the future within EU.
Unintentionally Germany too has become a hostage[12] to the region, if these economies manage to stop importing, Germany may witness a recession. Hence, the Free Trade Zone is a necessity for Germany and changes to it would alter its behaviour, aligning its interests to economies which can offer substitute markets.
The options for Greece are not yet fully clear. While the lenders would like to impose a Cyprus[13] like solution[14]thereby force measures necessary to insure repayment of loans. Greeks are looking at relief from austerity. However, from the PIIGS point of view, any solution should permit balancing their deficits whether within EU or a Grexit[15] like situation. Loan waivers, aid, direct investment, and/or capital controls, raised tariffs by the PIIGS economy are just tools for the same.
Implications
Increased Capital Controls and Tariffs
a) As the battle lines become sharper increased capital controls and tariffs seem likely. If Greece successfully follows this model, the PIIGS economies and slowly the rest of the world may start increasing these.
b) The WTO is based on the concept of lowering tariffs equally across the world. A contrary trend would make multilateral trade agreements archaic and replace it with bilateral or zonal free trade agreements. Another indication of this trend is the fact that China[16] and US[17] have already finalised many such agreements.
c) Alarmingly India is yet excluded from most. This would have adverse consequences for India which is a comparative new entrant to the free market economy. India thus needs to take an early view of its natural resource requirements as well as potential markets and ingrain itself in the free trade agreements of the region.
Realignment of Europe
a) All options would reduce the exports and current account surplus of Germany and increase unemployment there. Germany would thus be forced to look for other markets. Eastern Europe and Russia are the only regions in the vicinity which can offer such markets at comparable transportation costs.
b) This would force Germany to strategically get closer to Russia. Denied access to NATO, it would endear the Central Asian Republic (CAR) and Eastern Europe in the Russian camp. With China and Russia already aligning their interests in the region, it can lead to problems for India in the strategic and natural resources rich region. German success with high end technology with the resources of Russia and China can potentially change the strategic landscape.
c) The potential conflict over markets between Germany and China can be used by India to secure its own interests especially with regard to access to state of the art technology and denial of the same to potential competitors.
Credit
a) From the individual’s perspective, the lesson is to keep debt strictly under control. This has implications for the credit fuelled economies. In the regions which have suffered financial melt downs in the recent past, purchases on credit have drastically reduced. This is an additional barrier when selling high value capital goods necessitating a reorientation of what to sell, even as the ‘Make in India’ concept seeks to promote India as the world’s manufacturing hub.
b) Export orientated manufacturing would do better in products that are either sold at government levels or in direct across the counter sales.
Conclusion
The strategic implications of the Greek problem would emerge not from what is presently happening in Greece but from how they ultimately balance their economy and what lessons are drawn by other heavily indebted nations. Understanding its causation at this stage is essential to safeguard our interests in the future.
End Notes
[1] Free unhindered goods movement in India is not yet a fact but the vision of the GST bill in the parliament.
[2] All figures as per world bank see http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?page=4
[3] https://www.imf.org/external/pubs/ft/wp/2014/wp14130.pdf, https://books.google.co.in/books?id=bCoxGE338u0C&pg=PA124&lpg=PA124&dq=german+exports+to+euro+area+as+percentage+of+total+exports&source=bl&ots=OsDRXB72k0&sig=UdPG6pjqrl_83UspSlzToumZKLw&hl=en&sa=X&ei=b7qTVc-5NsSIuAT9qr2gDA&ved=0CCkQ6AEwAzgK#v=onepage&q=german%20exports%20to%20euro%20area%20as%20percentage%20of%20total%20exports&f=false
[4] The difference between net exports and imports.
[5] In 2014 it was nearly 7.4% of its GDP http://www.bloomberg.com/news/articles/2015-02-09/germany-posting-record-surplus-gives-fodder-to-economy-s-critics
[6] http://www.tradingeconomics.com/germany/current-account
[7] As the PIIGS economies have faced.
[8] Making their own exports attractive and imports expensive
[9] To protect its industry and trade.
[10] Portugal, Ireland, Italy, Greece and Spain.
[11] The sovereign debt to GDP ratios in 2014 were 177.1% for Greece, 130.2% for Portugal, 109.7% for Ireland, 132.1% for Spain and 97.7% for Italy. In comparison that of India was 67.72%. See http://www.tradingeconomics.com/ireland/government-debt-to-gdp
[12] http://www.stratfor.com/weekly/similarities-between-germany-and-china#axzz3GhLFXSka
[13] In 2012-13 the Cyproit Government agreed to confiscate private wealth to repay the lenders. See https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis
[14] Many believe that this was possible only due to pro EU leaders in the government and led to rise of anti EU leaders in countries like Greece see https://www.stratfor.com/weekly/beyond-greek-impasse?utm_source=freelist-f&utm_medium=email&utm_term=Gweekly&utm_campaign=20150630&utm_content=readmoretext&mc_cid=cb02e5b4b7&mc_eid=ea7bc0ea94
[15] Acronym being used for a possible Greek exit from the euro free trade zone; a possibility which some analysts have pegged at over 60% presently.
[16] China has finalised these with ASEAN, Pakistan, Chile, New Zealand, Singapore, Macau, Peru, Costa Rica, Switzerland, Ireland, Korea and most recently Australia see http://fta.mofcom.gov.cn/english/index.shtml
[17] US has finalised these with 20 nations already, See http://www.trade.gov/mas/ian/tradeagreements/fta/tg_ian_002401.asp
@ Colonel Akshaya Handa is a member of USI
Articles Uploaded on Jul 15, 2015
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