Cry for Europe, but don’t weep

Cry for Europe, but don’t weep

By Dhiraj Nayyar | 4 July, 2015
The collapse of European integration, a role model, is a blow to the world, but it is mostly self-inflicted.

The integration of Europe was probably the most audacious political project of the 20th century when you consider that the continent, twice, tore itself (and the world) apart in the World Wars. For those who say the conflict-ridden South Asia can never integrate more closely, Europe is a lesson. Later today, "is" may become "was" if the people of Greece — a relatively small country — vote to reject the terms of economic rescue set by their powerful counterparts in Northern Europe.

And that won't be because Greece wants to leave either the single currency or the common market. It will be because the continent's major powers led by Germany will consciously expel Greece from membership. Sadly, it will bring to an abrupt end a project that has ensured peace and prosperity for hundreds of millions of Europeans including those who came out of the Cold War in the early 1990s.

Why did things end up at the brink? Because, at some point, the ambitious politics of European integration chose to ignore complex economic reality. The reason Europe's integration succeeded was because it delivered greater economic prosperity to its members (breaking down barriers to trade, by encouraging the movement of people — essentially by creating a large free market). It will collapse because it is no longer seen to be delivering economic prosperity for all — Greece has lost 25% of its GDP in five years while trying to comply with policies to keep its membership.

The seeds of destruction lay when the common currency, the euro, was introduced in 1999. A common currency restricts policy freedom in individual countries much more than a single market does — it robs a country of an independent monetary policy and a flexible exchange rate. Fortunately, not all the countries of the EU chose to sign up. In fact, not all should have been allowed to sign up. Greece was one of those never fit for membership — its economic productivity was light years behind Germany and Northern Europe, its fiscal situation was always precarious and its government notoriously inefficient and corrupt. It was only desperate aspiration on the part of Greece's people (to belong to an elite club), woolly-headed idealism on the part of Germany and some clever statistical jugglery (to meet entry criteria) by Greece's government that forced membership of the common currency. It took only a few years for it all to unravel as Greece's economy was rendered totally uncompetitive, its debt unsustainable.

Of course, there was a way out — if only political idealism continued to soar and the rich countries of Europe effectively subsidised the poorer ones via fiscal transfers. The currency union between India's 29 states works because Gujarat and Maharashtra subsidise Bihar and Orissa via the Central government. It works between America's 50 odd states because wealthy California and New York subsidise less well off states in the Midwest. However, the 2008 global financial crisis, which caused much misery across all advanced countries, ended the appetite for such generosity in Europe, which lacked a single central fiscal authority. There would come a time when Germany's voters would have only limited tolerance for their government subsidising Greece. It had arrived by 2014.

That is the crux of why Europe is in crisis. The economics of the currency union was always flawed. The politics of keeping it running was unsustainable. Now, even if some last minute developments stave off a Greek exit, it is only likely to be temporary balm. Greece's economy requires a miracle to turn around. That isn't going to happen unless Germany allows massive debt write-offs, which its voters scoff at. Remember also, there are other countries like Portugal, Spain and Italy, who also have serious problems remaining competitive in the eurozone. Sooner or later, they will demand concessions as well.

In the long run, there are only two solutions for Europe. One, a complete political union, which is highly unlikely, given the strong nationalism in member countries. Two, an end to the common currency, the more likely outcome. In the interests of the rest of the world (inter-connected as we all are economically), an orderly breakdown of the eurozone would be far better than a messy exit for Greece, which could happen as early as the coming week.

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