In the face of the Greece crisis, the fundamental problem that needs to addressed is whether the European Union was sustainable, as very soon Spain would also be faced with a financial crisis similar to Greece. A total re-writing of the books and balance sheet of the European economy is required as it was done in 1945, according to Dr. S. Narayan.
A talk on the "Implications of Greek economic crisis for India" was jointly organised by the Observer Research Foundation, Chennai, and the Madras Management Association. The guest speaker S. Narayan, former Economic Advisor to the Prime Minister A. B. Vajpayee, traced the roots of the crisis to the 1970s. Until 1974, Greece was ruled by a right-wing military junta that functioned under the capitalist ideology. In December 1974, the junta was replaced by a left-wing government. The new government invested heavily to improve the public service sector. The 70s and 80s were a prosperous period for Greece as well as for Europe as a whole.
The 1990s was a very significant decade for Europe as the Cold War came to an end, East and West Germany merged, and the economies of northern, Scandinavian countries like Sweden and Denmark as well as Britain and France became prosperous. North European countries saw an opportunity to invest in the comparatively less developed southern countries, especially Greece, and thus, Narayan said, significant amounts of money started flowing from northern European countries to Greece from 1999 onward. European countries started encouraging Greece to increase its defence spending, and Greece started procuring large amounts of defence equipment without any fundamental need.
Borrowing to buy weapons
Between 1999 and 2004, the speaker pointed out, Greece became the second largest spender among the NATO countries after Germany in the procurement of arms from countries like the US, France and Germany. Payment for these arms was made through external investors in the form of debt. During the period 2004 to 2008 Greece started to run out of money because of its expanded public sector spending and huge defence expenditure that resulted in fiscal deficit. As a result, the European financial agencies started lending money to help Greece reduce its fiscal deficit.
Exploiting the opportunity, investment firms like Goldman Sachs made millions of dollars by advising Greece on how to borrow and how to hide its debt by borrowing in euros and immediately translating that debt into dollars at artificial exchange rates. By 2009 Greece was no longer able to hide its debt due to the 2007-08 global financial crisis, triggered by the collapse of Lehman Brothers. By 2014, Greece’s debt was valued at 320 billion euros. Ironically, today, no nation or financial institution is addressing whether Greece will ever be able to repay such a massive debt. The focus, instead, is on temporary solutions like providing short-term financial assistance worth billions of dollars. If anything, waiving the same amount in the principal debt of $320 billion alone would help, if at all, Narayan argued.
Protecting monetary policy
S. Narayan illustrated with examples of some other countries that had successfully overcome a fiscal crisis of the kind Greece is experiencing. He referred to Iceland, a very small economy largely funded by British banks. When the financial markets collapsed in 2008, Iceland found that it could not repay the British banks and the country’s economy came close to bankruptcy. But unlike Greece, Iceland immediately devalued its currency, following which the value of its debts reduced.
Iceland also stated clearly that it would not repay the British debts. Iceland was taken to 20 different courts in Europe and in all courts, a judgment was given in favour of Iceland on the basis that a sovereign nation has the right to deny payment. Therefore, a lot of lenders were forced to reduce their debt claims substantially. Iceland’s economy has since recovered and is today a thriving economy. The Iceland experience, the speaker said, showed that during such a financial crisis a nation should isolate itself and protect its monetary policy.
Increasing productivity
Ireland's economy also collapsed after the 2008 financial crisis. The unemployment rate went up to 30 percent and trade deficit to 68 percent in the country. But Ireland guaranteed repayment of its debt. The Irish population is extremely determined and hardworking, because of which the country increased its productivity and reduced its wages. In turn, Irish exports nearly doubled over the period of five years. By 2013 the country had started to repay its debts and today, Ireland’s economy is doing well.
Narayan also narrated the example of the UK, which also faced a similar economic crisis. When Prime Minster David Cameron came to power he imposed serious austerity measures by cutting down the budget and public expenditure. Though public services and public employment fell, overall employment increased following the privatisation of public service jobs. Today, the UK is the healthiest economy in Europe.
But the success story of Ireland and UK may not work with Greece as its population is more laid-back and easygoing. This attitude is mainly because of the extensive government subsidies that the Greek population has enjoyed since 1974. The subsidies in turn have undermined incentive of hard work in the public mindset. Even if Greece exits the European Union and devalues its currency, the country’s economy would collapse due to severe inflation. So Greece has no other option at present other than to relent to the lenders’ demands, which was reflected in the agreement of 13 July.
Caution for India
The fundamental question that needs to addressed, Narayan said, is whether the European Union is sustainable, as very soon Spain will also face a financial crisis similar to Greece. A total rewriting of the books and balance sheet of the European economy is required, as was done in 1945 at the end of the Second World War.
In this context, the speaker said that India is not facing similar problems like Greece as far as current monetary policy and possible problems are concerned. However, the Indian economy would be faced with other problems of its own in the times to come, he cautioned.
Report prepared by R. Vignesh.
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