Prof. R Vaidyanathan
Professor of Finance – IIM Bangalore
For all those who came late –Grexit is shorthand for Greece exiting Euro Zone of 19 members to make it 18. See my earlier article Grexit-1 on this.
Summary of prev. article…
As mentioned earlier, the Greek Government has to repay an amount of $1.9 billion by end June to IMF and $8.5 billion to European commercial bank by August and it has total debt of $352 billion with a national income of $242 billion last year. Some estimates suggest that the debt could be 200% of its income in the coming year if it is not sorted out now.
Greece wants longer payment schedules which has been rejected by the lenders. Lenders want Greece to increase its Primary Budget surplus to 3% in 2015 and slowly to 4.5% next year. Greece says that is not possible since it argues increasing VAT from 23% –a major tax –will make people to evade and not comply. It claims that by regularly increasing taxes the amount that is getting collected is lesser. Cutting pension is not feasible since it will hit old age and poor segments. Already pensions plus wages take away 75% of Greek Government spending. Also the unemployment rate among the younger population (age group 16 – 24) is nearly 50% with an overall unemployment rate of 25%.
Alexis Tsipras, the Greek Prime Minister is caught between his electoral rhetoric and reality. So Tsipros went in for a referendum about accepting/ rejecting stringent austerity condition imposed by the troika of IMF/ECB/EU. Obviously his voters did not accept it and gave a resounding No- They are used to a welfare state. But Greeks also wants to be part of EU and Euro.
A good section of German conservatives and other European right wing wants to kick Greece out from Euro worrying that some others may follow Greek example. Also they are in no mood to humour Greece. To quote Thomas Piketty:
“Germany has never paid its debts in the past century. Neither after the First nor the Second World War. However, it (Germany) has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.”
– Thomas Piketty
Another interesting issue is that post 2008 crisis, US and other global institutions rushed to save major banks with huge amount of support running to $615 billion which facilitated these institutions to recover later.
So the natural question is if sovereign countries are less important for bail out by European giants compared to corporates?
One of the reasons for this is that Euro tried to achieve only monetary union and each state was having its own fiscal deficit not adhering to suggested “norms”. This included Germany! But Germany was able to raise its productivity levels (remember the unification of Germany was not too long ago) and meet the Euro requirements. Others have not been able to do it. Each Government (such as Greece, Spain etc.) has created a huge welfare state and that requires massive amount of funds to sustain it in the context of increasing longevity and declining birth rates. The former makes pension funds get depleted faster and latter imply no growth in taxable labor population.
Now the question is not if Greece getting out of Euro but when? The longer it takes to get out the messier it will be both for Greece and for Euro.
Greece can have its own currency which will be significantly depreciated and from that angle help its tourism industry and other exports. But that would be short term since it will pay heavily for its imports. Even if Germany and ECB arranges one more bail out for Greece – it will only postpone the problem and not solve anything. Greece has significant structural problems of Govt. playing the role of father and mother. The same problem exists in a large number of European countries. In most of Europe families have been nationalized and this model may not work in the long run with longer life expectancy and single parent [single mother] families on the rise.
The more important issue is the damage done to “Project Europe” by Greece. To start with there is nothing “uniting” Europe since all conflicts in human history emanated from Europe – be it the 100 years war / Crusades/ Franco – Prussian wars / World War I or World War II – which later spread all over world. Project Europe is more a dream to bring together warring tribes of Europe on a common platform.
Given the level of unemployment [in Greece it is 50% for youth in age group 16 to 24] one can expect increase in violence in the country which could spread.
Another major area of concern is the increasing resentment against immigrants in many countries and since most of the immigrants are Muslims it is becoming an anti-Muslim sentiment. Le Pen is waiting in France with her idea of anti-migration and anti-EU combined with anti Muslims. So are the right-wing parties in Denmark/Holland etc. Incidentally Greece is the only country in Europe having a socialist Government and that itself is a negative point in the midst of right wing Governments all around.
Declining Europe due to demography: During First World War Europe had 25% of world population. Every fourth human being was a European. Now it is around 10% and expected to become 2 to 3% in another 30 years. [See chart below] Reproductive rate in many European countries is less than 2 and in some less than 1. [Equilibrium rate is 2.1 including for some wastage]
Source: United Nations Dept of Economic and Social Affairs – Population Division: Quoted in “Key Issues in Insurance,” –David M. Holland, F.S.A, President & CEO, Munich American Reassurance Company. – World Risk and Insurance Economics Congress, August 8, 2005,Salt Lake City, Utah, USA
Demographically Europe is declining and it has a huge problem with Radical Islam in its southern flank. It has lost the will to live and fight. It is believed that the average age of a soldier from Belgium is above 40. Will Europe survive another conflict within its borders? The conflict that may arise due to Economic misery and Radical Islam fighting “modern” or secular Europe? Observe that Radical Islam is more against “modernity” – contraception/ pre-marital sex/ homosexuality etc. And the cocktail brewing in Europe is very volatile. Will US get dragged into the fight and will India be “persuaded” or bullied to send its soldiers? Herein come the need for strategy of India — not to get involved in European wars unlike 1st and 2nd world wars. We wait and watch with bated breath. Since most wars are now a days outsourced we can encourage private companies to recruit and participate. In one way or the other Indians will get recruited as freelance fighters – for cooking/ cleaning/ driving etc.
India must evolve its own strategy which protects its interest. In the long run funds—particularly nearly 18 trillion USD pension funds have to come to India and it should be on our terms.
Author is a Professor of Finance at IIM Bangalore – views are personal…