Bonjour mesdames et messieurs. Greetings from Paris. After a long, wet spring, we have had a peach of week here. The sun shines brightly, the temperature is “Goldilocks” right and the roses are in full bloom at the Jardins des Tuileries. The streets are clean and the Metro that links the entire city is never more than a short walk away. There are tourists everywhere. France and Paris are the world’s most visited country and city, respectively. That is nowhere more evident than in the lobby of the Musée de Louvre that is bathed in sunlight reflected from I.M. Pei’s modern glass pyramid that occupies the space between the antiquities.
Alas, this chimera of good weather from Paris and elsewhere in Europe is foolish fantasy. It was a terrible week for the economy in Europe. It became clear that two large euro zone countries—Italy and Spain—will not be able to manage their public debt unassisted from the outside. Politically, signing up for external assistance will amount to electoral suicide for ruling parties. Checkmate.
These debts, largely held by banks, have turned sour from the popping of a real estate bubble and concerns over fiscal profligacy. Weak governments are trying to prop up weaker banks. Financial Times columnist Martin Wolf aptly describes the situation as “drunks are seeking to stay upright by leaning on one another”. Spain recorded capital flight of nearly a €100 billion in the first quarter (10% of the gross domestic product). The Spanish government is under mounting pressure to open an investigation into the collapse of Bankia amid public anger at the salaries of its directors. The European Central Bank president Mario Draghi said of the rescue “this is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost”: it turns out that the European Union (EU) does not even have a banking system that functions as a union. Echoing the public anger, newly installed French President François Hollande has launched a campaign against excessive corporate pay by promising to slash the wages of chief executives of public companies in which it owns a controlling stake, including EDF, the nuclear power group (pay capped at 20 times that of the lowest paid worker). The finger pointing and the blame game has begun in right earnest. The obvious fiscal problems mask serious underlying issues such as youth unemployment—which is high and rising particularly in the European periphery.
The non-cohesive structure of EU has reached breaking point. It could take weeks, months or years, but it is difficult to imagine Europe moving from crisis to stability in this manner. So far, Germany has remained steadfast about its insistence on fiscal austerity and its prescription against a common banking system, quantitative easing and euro zone bonds. The ghosts of a hyperinflationary Weimar Republic continue to haunt Germany. Unless the German establishment is willing to shake off its inflationary geists and the German people believe it is in their interest to stabilize Europe using carrot as well as stick, Europe will inexorably move towards break up. Germany holds the cash (and the key) to solving this problem.
India can learn many lessons from Europe’s difficult hour. The most important of these is to maintain the momentum and urgency for change. Once an economy hits stall speed, fighting against the negative spiral, particularly for a country with little fiscal room, is very complicated. Of course, India’s problems are different. We are in a (near) stagflationary quagmire. Luckily we are not dealing with a real estate or other secondary bubble. Our banking system is not broken. We suffer mostly from supply bottlenecks not demand busts. But there is a commonality with today’s Europe: about how poorly we are responding to adversity. Our political will is being lost to federal cacophony. The blame game is on. In the states and at the centre, we tinker with the idea of austerity but are not able to tackle our big subsidies (did you know you are burning cooking gas at one-third of market price?). And we are thinking of piling on even more subsidies such as with the Food Security Bill. With our timid incrementalism, we are stretching out the pain with no promise of gain in the future. If a government is likely to go then why not do the right thing and go rather than a series of small, wrong things? The government is engaged in a dangerous game of chicken, banking on a crisis for the political cover to take action. As with Europe, it may be too late.
The broad sweep of history preserved in Paris suggests that centuries of war and pestilence are punctuated by brief moments of peace and prosperity. Those periods have to be guarded with great zeal and come from good governance and a balance in society.
Until better times. Au revoir. À bientôt.
PS: “Some day, following the example of the United States of America, there will be a United States of Europe” said George Washington. “We are asking the nations of Europe between whom rivers of blood have flowed to forget the feuds of a thousand years,” said Winston Churchill, ever the sceptic.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at firstname.lastname@example.org
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