Lessons for India

Exit of Greece from the eurozone would have led to the collapse of the domestic banking sector and steep inflation.The eurozone seems to have survived, at least for now. After keeping the world on tenterhooks for weeks, the Greeks ended up voting for pro-bailout political parties to assume power and gave the besieged nation some semblance of stability.

The conservative New Democracy party came first in a critical election and pro-bailout parties won enough seats to form a joint government. This was Greece’s second national election in six weeks after an inconclusive ballot on May 6. Antonis Samaras has been sworn in as Greece’s prime minister at the head of a coalition government with the rival Panhellenic Socialist Movement, or Pasok, and the smaller Democratic Left. His government will now have to reconcile the demands of the country’s international lenders with the growing frustration of its recession-wracked citizens.

The European leaders had warned that if a new Greek government rejected the bailout, the country could be forced to abandon the single currency. And there were indeed a range of views on euro across the political spectrum in Greece. The parties had starkly different views about what to do about the $300 billion in bailout loans that Greece has been given by international lenders, and the harsh austerity measures that previous Greek governments had to accept to get the funds.

While the radical-left Syriza and other smaller parties have opposed the bailout, New Democracy and Pasok said they would keep it in a renegotiated form. The elections results have finally provided some certainty to the global economy even as the central banks across the world stood ready to intervene in case of financial turmoil post elections. In more ways than one the fate of Europe -- and the global economy -- was in the balance as Greece went to polls. Exit of Greece from the eurozone would have been accompanied by a collapse of the domestic banking sector and steep inflation. Perhaps more significant, a Greek exit could have accelerated bank runs in other troubled euro countries, such as Spain and Italy, as investors and depositors got nervous that those countries were next. A total collapse of the currency union would have looked like a real possibility.

Now a measure of certainty would return to the eurozone. Germany’s finance minister, Wolfgang Schaeuble, said he viewed the election result as a decision by the Greek people “to forge ahead with the implementation of far-reaching economic and fiscal reforms in the country.” But Greece’s election results will provide some respite only on one front. Other problems remain especially as major European economies like Spain and Italy continue to suffer. The dilemma of how to give a push to economic growth in the eurozone at a time when all economies on an austerity drive remains unresolved.

Banking union

The new Greek prime minister has already asked to slow the pace of budget cuts required under the bailout plan, which currently demands another $11 billion in spending reductions over the next two years. To reconcile some of these problems the focus of eurozone leaders is now on some of the larger questions, such as creating a banking union that puts the full weight of the 17-nation currency zone behind an integrated financial system, rather than leaving each nation to stand or fall alongside its own banks.

These problems that eurozone is facing underline the precarious nature of the European project itself. The achievement of Europe at regional integration and its interesting trajectory has raised theoretical issues and important practical conundrums as to whether the experience of the EU holds important lessons for other regions of the world. When the economic integration in Europe was in its nascent stages in the 1960s, neo-functionalists had argued that regional economic integration would create its own momentum leading to the devolution of authority to a central institution. Transnational elites and interest groups would lead the way and external actors then would start treating the unit as a single entity.

Realists responded that people might get linked with economic integration. States would find it difficult to carry through their promises because of domestic politics constraints. Integration would then move at the pace of the slower countries. This largely theoretical debate continues till date. There are practical issues that still spark interesting parallels with other attempts at regional integration in the world.
Despite its achievements in maintaining peace and prosperity in Europe, the problems in the EU have been clear for a while now as it started becoming a two-tier zone of highly performing economies and the laggards on the periphery. The basic problem is simple. The institutional arrangement of the EU had been formed in different circumstances: that model needs to be brought up to date. But no one seems interested in that broader reform.

The European project is in crisis and unlike in the past when the response to crises usually used to be an attempt towards greater integration, this time few will be buying this suggestion. Instead, a backlash might emerge leading many to question the very utility of the EU. India and South Asia would do well to learn from this crisis the dangers of regional economic integration in the face of massive economic differentials among member states.
Until such time as other regional economies in South Asia have emerged from their economic sloth, New Delhi should not push for greater economic integration in South Asia. Otherwise, India will be left to manage the eurozone-like crises in the region, should they emerge and that won’t be a very comfortable place to be in as Germany is finding out these days.

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