COVER STORY
Don’t save Greece
West has to fall for the Rest to rise
By Dr Bharat Jhunjhunwala
Brazil, Russia, India and China are commonly referred to as BRIC nations. Their clout in the world economy is growing. Their Finance Ministers have said that they are willing to provide assistance to Greece and Europe to overcome the present economic crisis. Economies of Greece, Ireland, Italy, Portugal and Spain are in various stages of crisis. Greece leads to pack. Income of the Government is less and expenditures are more. Greece is meeting the deficit by continually borrowing more money.
European countries led by Germany and the International Monetary Fund (IMF) have provided loan of about 110 billion dollars in the last year but deficit of the Greek Government does not show any signs of receding. Now the developed countries are seeking assistance from BRIC nations as their own ability to bail out Greece is coming under stress.
The European Union had imposed condition that the Greek Government will impose new taxes, cut the number of government employees and reduce the salaries of the remaining to reduce its budget deficit. However, the people of Greece have balked. Strikes by government employees as well as private groups like taxi drivers have made it impossible for the Government to meet its commitments of deficit reduction.
Roots of the problem lie in the very structure of the European Union. Member countries of the Union have accepted a common currency. This means that individual countries have lost their ability to print notes, which is known as monetary policy. Member countries are in only control of their tax and expenditure policies, known as fiscal policy. But it is difficult to impose new taxes and cut expenditures hence the Greek Government is helpless.
Budget deficit can be bridged both by monetary and fiscal policy. Say, a government’s income is Rs 100 and expenditure is Rs 110. Monetary policy can be used to bridge this deficit. The Government can print notes of Rs 10. Goods available in the market were previously being sold for Rs 100. Now the same goods will be sold for Rs 110. This will lead to an all-round increase in price of 10 percent. This price rise will affect people of the entire country. Just as the sun lifts water from the pond, so also the government will quietly transfer income from the people to itself. There will be no need to impose taxes on any particular group or to dismiss any particular group of government employees. It is this quietness of monetary policy that makes it an effective tool when people are restive. We in India had seen this happen when the rupee was devalued in 1991 due to the balance of payments crisis. The economy attained and stabilised at a new equilibrium without much discontent because the impact was gradual and diffused.
The impact of fiscal measures is direct and harsh. The government will have to impose new taxes or cut expenditures to the extent of Rs 10 in order to balance its budget. Taxes will be imposed on some particular group of people. A tax on petrol, for example, will affect the taxi drivers directly and they may go on strike as has happened in Greece recently. Dismissal of government employees or a cut in their salaries will again hit a particular group of people directly and they may go on strike and bring the economy to a standstill. Thus Greece is on boil. The Government cannot bridge the deficit in a quiet manner through printing of notes because that power has been taken away by the European Union. The only weapon in hands of the Government is that of fiscal policies. This directly hits some people and they indulge in strikes or cripple the economy and government in other ways. This can be understood by an analogy. People bear the heat quietly if the sun is strong and the temperature rises. But the same people will shout and make a ruckus if the ceiling fan is switched off. Similarly, people bear the impact of monetary policy but they balk at fiscal measures.
The solution is to break up the European Monetary Union and the common currency-euro. Member countries can still maintain a common market as if they had a free trade agreement, they can have common standards of health and weights and measures, they can allow citizens to migrate from one country to another but their governments need the freedom to play with the monetary policy. Greece can then print notes and bridge the budget deficit. There will be inflation and the currency will be devalued but there is likely to be much less civil unrest because the impact will be slow and diffused and not be targeted at any particular group.
Finance Minister Pranab Mukherjee and Finance Ministers of other BRIC countries must reconsider their offer to help Greece and other European countries in this backdrop. The developed countries are saying that the BRIC nations must bail out Europe so that their conventional markets remain intact, their exports are not affected and their economies continue to grow. This is like the King telling the poor villagers to help out the Zamindar so that the latter continues to buy the milk and vegetables produced by them. The King forgets to tell the villagers that they will be ever mired in poverty in this process.
Many diseases cannot be treated by administering medicines. Surgery is required at times. So is the situation of the world economy today. A surgery is required to shift the global purchasing power from the developed- to developed countries so that there is balance in global consumption. Presently, 25 per cent of people living in the developed countries are consuming 75 per cent of the world resources. The need is not to maintain this ugly imbalance in consumption but to allow the economies of the developed countries to collapse. The bush growing under a big tree will be protected from the harsh sun and storm but will ever remain a bush. The only way it will grow is to cut the tree and bear the harsh sun. Similarly, the BRIC countries must bear the problems arising out of the collapse of Europe. Then only they will grow in stature in tune with their real role in the world economy.
Finance Minister Mukherjee has expressed dissatisfaction with the slow pace of reform of the global financial institutions like the IMF and the slow pace of fund flows to the developing countries. Mukherjee must understand that reform of the IMF, World Bank and the United Nations Security Council will not happen by sweet talk. Only weakening of the economic clout of the developed countries will force them to cede place to the developing countries and lay foundations of a new world economic order that is just and equitous.
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