To Leave Or Not To Leave?

Consequences of a Greek Exit from the Euro-Zone

In the midst of renewed calls for Greece to step out of the Euro-Zone over the past few days, several vantage situations have been contemplated and cited. Analysts have argued that a Greek Exit is a matter of ‘When’, rather than ‘Whether’. But while these arguments are legitimate and reasoned, they exhibit only one side of the coin.

The consequences of a Greek exit from the Euro-Zone can be catastrophic not just for Europe, but the entire global economy. It can, and probably will lead to a break-up of the Euro-Zone, and its consequences will be grave.

Setting the Clock a couple of Decades back

The Thumbs Down to the Euro-Zone!

When we do consider a disintegration of the Euro-Zone, one needs to go back in history and look at the reasons as to why it was established in the first place. A congregation of a number of countries, and economic integration without political integration, it’s a concept which has been questioned time and again. Deemed flawed by more than a few analysts, it seems more and more likely that they were right. The vision of an empowered block of countries, rejuvenated by common market policies, brought all the major economies together to  institute a shared currency in 2000. The dream was shared and lived for almost a decade, until it turned into a nightmare. Analysing the concept itself, the idea of economic integration and common market dynamics, coupled with political incoherence and policy diversion, is a recipe for disaster.

Together We Rise, Together We Fall

But this concept, even though flawed, was realised for more than a decade.  And the Euro-Zone is, and shall remain to be, the largest economy in terms of GDP, if we were to consider it as an economic block as a whole. 

A Greek exit will lead to many more countries contemplating the same, and countries like Ireland, Spain, Portugal and Italy may follow suit. A Euro-Zone Break-Up will taken a region a couple of decades back, as far as international geo-politics is concerned. And Europe’s might, in an increasingly multi-polar world, will be considerably diluted, something which no country or leader wants.

The Economic Fall-Out

Whatever the geo-political consequences might be, the economic aftermath is bound to be a Pandora ’s Box. As and when Greece leaves the Euro-Zone, it is expected to revert back to its domestic currency, The Drachma, which would be relatively devalued. Now the good part is that reverting back to your domestic economy will help wipe off the enormous public debt. The bad part is that it will cause erosion in the bank deposits and savings of millions of people in Europe. That then will lead to a credit crunch, and lack of liquidity in the markets. The anticipation and the speculation around such a situation is another nightmare. All this will affect the global economy adversely, and contagion to other major economies would be inevitable.

So, while Greece goes to elections on June 17, and while Euro-Bonds are seriously considered, and while the ECB and the IMF firefight this sovereign debt crisis in the best way possible, it would be wise to excogitate a worst-case scenario for a Greek exit, rather than a best case scenario, which is projected by the proponents of a Greek exit.

For a Euro-Zone Exit is a path traversed never before, and no one is sure what lays ahead, not even those who are at the helm in Europe. 

Budget 2012 - The Wait for Economic Reforms Continues!

"I must be cruel only to be kind." – Pranab Mukherjee

So, Pranab Mukherjee has spoken. And spoken rather well. Hamlet was quoted, philosophy was preached. And another non-reformist/status quo budget presented before the Parliament. All this after the soap opera, which the Railway Budget turned out to be.

To be pragmatic, this budget, 7th by Pranab Mukherjee, turned out to be yet another damp squib, a disappointment, for all those who were hoping to see the sun rise over the

horizon, the sun of economic reforms.

Instead, all we got was some light at the end of the tunnel!

Some light because there seems to be a subtle effort to move towards a uniform tax regime, the GST. The gradual shift can be considered a positive sign, but its clearly not enough. Income Tax slabs, as always, have been adroitly shuffled around. Quite astutely, Pranab da has given some from one hand, while taken a bit more from the other. The expansion of the Service Tax base, and the consequent increase of 2% is just an example.

We can talk at length about the positives and negatives, for both the common man and India Inc. But there is one underlying statement in this budget - The fact that no big ticket reforms have been introduced. And that it will have to wait till 2014 now.

Economic Implications

The second wave of Economic reforms, popularly termed as Reforms 2.0, is not something which we desperately need right now in 2012-13. In an ideal world, where good economics meant good politics, we desperately need it at least 5 years ago!

A fiscal deficit of 5.6%, and a GDP growth of less than 7%, is not the kind

of numbers any government would be proud of. And those numbers are what they tell you. Look at the books closely, and its worse.

A consolidated fiscal deficit of 8%, as against an average of 2% in the rest of the emerging economies,

and a Debt to GDP ratio of 70%.

That ain't sound very sweet, right?

The fact is that you can fool the people by comparing yourself with the world economy. 7% against 3% . But cannot fool the science, the science called economics!..

This country need a >8% GDP growth rate to sustain the shameless policy of populist schemes and the never ending saga of subsidies. The moment you slip below 8% over a considerable period of time, you end up disturbing the fiscal equilibrium of the economy. That is precisely what has happened over the last 4 years.

And to achieve a >8% GDP growth, the economy needs some big-ticket reforms. And since its unlikely that we'll have that before 2014 now, as the 2013 budget will be the last one for this dysfunctional government, the wait seems to be perpetual.

Political Implications

This May will mark 8 years of the UPA rule. 8 years of a stable and contiguous coalition government. 8 years for a person in office who was known as the architect of the 1991 economic reforms. The script could not have been better for Manmohan Singh. And the deviation from that script could not have been worse either. For these 8 years has been a massive opportunity lost, a disappointment of gigantic proportions.

Manmohan Singh, in 2004, had a great opportunity to continue what he left off in 1995-96. The tars had aligned, almost mercurially, to hand him the post which matter

s the most. He was the cynosure of all eyes. The Left was vilified, for more than 4 years, for being regressive and acting like a virtual opposition. The nation went to polls in 2009, and the people empathized with Dr.Singh.

2009 was probably THE most decisive and definitive mandate for an incumbent government in more than two and a half decades.

What has followed since then has been even more historic! .. A facade in the name of politics, a farce in the name of governance, a travesty in the name of government.

"Power Corrupts. And Absolute Power corrupts Absolutely."

The policy paralysis at all levels over the past 3 years has been remarkable, considering the caliber of the people in office. As far as Manmohan Singh is concerned, the last 8 years might just have transformed his legacy, from one of that of a reformist to one of that of a dormant and passive leader.

He, most probably, will continue in office till 2014, much in the same vein. But when he leaves office in 2014, he might just realize that he has left the Indian Economy exactly where he took it in 1991. Therein lies the Rub!

Even after two terms as Prime Minister, the economic reforms of 1991 might just turn out to be Manmohan Singh's most prolific achievement.

And that will be his biggest failure.

Mohit Dayal