Views | Lessons from the EU’s fiscal crisis

Views | Lessons from the EU’s fiscal crisis

As European governments navigate through economic uncertainty, the revelation that 25 member states of the European Union have recently signed a fiscal treaty committing themselves to greater budget discipline has brought temporary relief to the markets. Yet much work lies ahead before signs of a long term recovery start to acquire credibility. With European governments striving to fully come to terms with the crisis, fundamental assumptions about the role of the State and its capacity for reform are open for examination. It is a debate with a resonance that extends beyond European shores.

The irony is that a European response to the crisis appears to be headed towards greater centralization at a juncture when the desire for preserving member state autonomy has never been clearer among its citizens. Championed by Germany, the EU ‘fiscal compact’ covers eurozone and non-eurozone member states. Yet there were dissenting voices too. Britain and the Czech Republic refused to sign the treaty on the basis that it would further erode the sovereignty of member states. None of this is to dispute the vital role that the EU plays in several strategic areas. It is a crucial actor in promoting free trade within a single market of 27 members. It is also important for the EU to speak in a consolidated voice at global platforms, particularly when dealing with a rising power such as China. Nonetheless, the technocratic dream of an ‘ever closer union’ remains far removed from the wishes of the majority of EU citizens.

Looking ahead, the real challenge before governments across Europe lies in facing up to a climate of austerity. Governance in an era of easy credit and unbridled public spending had its thorny moments but those melt into insignificance compared with current challenges. The alchemy of squeezing more from less has become critical. The easy option for governments may be to ignore difficult decisions and carry on as they were before. Yet that would no longer be a sustainable course of action. In particular, continuing with a bloated welfare state approach supported by borrowing runs the risks of harbouring financial instability. Such a model would be ill-poised to compete effectively in the future with rising Asian powers. It will also weigh successive generations down with a colossal tax burden. A restructuring of public finances is urgently needed to safeguard long term prosperity. Despite this, the lure of political expediency may mean that governments seek to avoid taking painful decisions. Yet contrary to conventional wisdom, governments that are prepared to tackle sensitive issues with boldness and honesty will find that voters are prepared to give them a patient hearing.

In Britain, the David Cameron led Tory-Liberal Democrat coalition provides a neat illustration of this strategy. Since the coalition’s inception, a commitment to fiscal consolidation has been the central narrative around which policies have revolved. With an eye on reducing wastage and bureaucracy, the coalition has also embarked on ambitious reforms to education, health and welfare services. The upshot of this is that even in an adverse economic environment, the coalition continues to be ahead of Labour in the opinion polls. Britain’s sovereign credit rating remains intact too. Britain is not out of the woods by any means just yet. But it has a government with a credible rescue plan which gives it hope.

From a comparative Indian perspective, there are challenges looming for the UPA government too. For the fiscal year ending in March, the central government has already borrowed an additional 40,000 crores. There are structural adjustments to be confronted due to a slowing economy, fiscal profligacy engendered by well-intentioned but unfunded welfare schemes and a spurt in global commodity and oil prices. Avoiding politically awkward decisions will be convenient. But the UPA ought to forge on with a reformist resolve. Otherwise, seeking a third successive mandate without a coherent narrative may prove a bridge too arduous to cross.

Turning back to the crisis in Europe, as the affected governments contemplate difficult choices, they should resist the urge to prevaricate. As Meryl Streep’s Oscar winning Thatcher reminds audiences in the recent biopic, ‘The Iron Lady’: ‘Yes the medicine is harsh. But the patient requires it’. It is a prescription for long term health that governments in Europe and elsewhere would do to well to heed.

Rishabh Bhandari is a lawyer based in London.