I was travelling through Europe for the last 12 days. As part of natural curiosity, I looked for signs of the economic crisis on the streets, but found none. Life is as smooth as probably it was earlier and living standards and infrastructure are far superior than that in India. Perhaps the only sign is the daily media coverage of Greece, Spain and survival of the euro.

Government is a large part of the gross domestic product (GDP) across most of Europe. Unlike India, no large industrial complex is visible. Barring tourism, finance and services, other parts of the economy are not visible. Government contributes about 37% of the euro zone’s GDP, which is a little less than twice that of India. Adjusted for a parallel economy in India, that number could be above 2.25 times. In Europe, the government has become a large part of the economy probably by providing a welfare state and building low yielding surplus infrastructure. In the early stages, perhaps it was funded through tax revenue, but later it must have been funded from internal as well as external borrowing.

What’s bailing out Europe?

Paras Jain/Mint

Most of the countries in EU have a large fiscal deficit, high debt-to-GDP ratio and enjoy a better rating than India (see graph). Most of them had a much higher rating than India before the crisis. Their deficit will multiply if they have to pay interest rates without ECB’s support.

Therefore, they need to tighten their belts and bring down deficit and debt and consequently interest rates. Some of the EU nations probably would have defaulted on their debt (though it would have been called voluntary write down by creditors) if they had to pay interest rates like India does on their local debt.

Austerity measures may be an answer. However, the local population does not support austerity measures as was evident in election results of Greece and France.

Media, too, unsupportive: Surprisingly, there is little support for austerity measures among media stories, too. In fact, many of them talk about increasing government and public spending in current times to replace falling private spending (though they are silent on how to finance it).

They also talk about excessive government regulations restricting entrepreneurship and job creation (easy to blame the government for anything). There are reports of how the country is different from a family that has borrowed heavily. In an economy, one person’s expense is another’s income and vice versa. If everyone starts to cut back on spending and begin saving, overall income will come down, the economy will contract and things will become worse. Hence, people should continue to spend rather than save.

There is little analysis about why the deficits and debt levels are high in the first place. There is hardly any mention of how the welfare state policy pursued over the last many years have reached the point of no return and are required to be curtailed for future recovery. There is hardly any mention about how Asian countries in 1997 and India in 1991 have survived economic crisis by raising interest rates, depreciating currency, cutting deficit, relaxing government regulations and suffering the pain of slower growth and unemployment to become competitive. The Austrian school of economics does not exist for Europe. It is meant for Asians and Africans.

Learning from the subcontinent

It is ironical to find opinion makers preaching fiscal consolidation to India at 5.9% deficit, while preaching the exact opposite—of increasing government spending—to the US, the UK, Spain and France, whose deficit as well as debt is far higher than India.

I am still unable to convince my young daughter that higher credit ratings are not given to countries with higher debt-to-GDP and higher deficit-to-GDP ratio. She is innocently going through data to arrive at her conclusion rather than using a complex logic to differentiate between developed and developing nations.

Unfortunately, the rule of economics doesn’t look at the colour of the skin on a long-term basis. Sooner than later, European countries have to learn from Asian tigers and India to recover from the hole they have dug for themselves. Asia in 1997-98 and India in 1991-92 recovered by taking on pain. By cutting deficit, by cutting debt, by freeing the economy from excessive regulations, by depreciating currency, by allowing foreign capital to come in and by becoming competitive through hard work. Asia and India recovered as they took the right path. Europe cannot hope for sustainable recovery till such time they walk the same path.

You cannot recover when your pharmacy store closes at 6pm. You can only recover when your pharmacy store home delivers one tablet at midnight.

Nilesh Shah is director, Axis Direct.

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