Implications, far and near

Europe has recently become the main action area on the world stage. Three recent developments with far reaching consequences  are: the massacre following the publication of some cartoons in Charlie Hebdo magazine in France, the proposed  injection of massive amount of money in the Eurozone (with the technical name of ‘Quantitative Easing’ or QE) and the troubled economy of Greece  electing a government with the agenda of ending the austerity regime and pressing for substantial debt relief.

Let us consider the possible implications of these developments. The French media, government officials and the general public are putting up a brave face and are vowing to maintain their centuries old tradition of absolute freedom of expression. But the reality is that the writers and cartoonists are human beings with families. So, most of them would be much more careful  (fearful?) before publishing anything which may hurt the ‘sentiments’ of  groups which have the muscle power to kill people. It is not possible to provide adequate security cover to all ‘offending’ writers against people with AK-47 as the Charlie Hebdo episode clearly shows.

Even the public opinion in the Western world – whose demographic composition has become much more diversified in terms of religions and ethnicities compared to what it was, say, at the time of the French Revolution or the American Declaration of Independence – is likely to change in favour of exercising more restraint on the part of writers in expressing opinions which have the potential to create law and order problems. 

For example, a very recent post-Charlie poll in the US shows that about 60 per cent of people are currently against publishing cartoons depicting Muhammad, compared to about 40 per cent in an earlier poll. The other fallout would be the rise of more militant political and social groups who would be against immigrants and in favour of greater integration of ethnic and religious minorities with the norms of the majority community. This tendency is already showing in countries like Germany and France which have a large number of  non-white and/or non-Christian immigrants.    
      
In other words, whether one likes it or not, in the area of freedom of expression, the Western model would see the emergence of similar kinds of tendencies that we are used to having in India. The recently announced massive injection of 60 billion euro each month, at least till the middle of 2016 in the Eurozone – suffering from both recession and falling prices or ‘deflation’ – is hoped to keep interest rates low, raise the inflation rate towards the targeted 2 per cent over  time and push up expenditures and the growth rate of GDP.  
To what extent this would succeed in achieving the objectives, only time  would tell.

At the same time, one can expect that part of this excess liquidity (along with QE being pursued in Japan) would spill over into the rest of the world, including the bond and the stock markets of emerging economies like India.  Apart from pushing up the Sensex, this  would cause greater volatility in the stock markets and the exchange rate of Rupee against Euro and the US dollar in the coming months.

Finally, the developments in Greece.  Suffering from a fall in GDP by 25 per cent, an unemployment rate of 25 per cent and a debt-GDP ratio of 175 per cent – despite a severe austerity programme imposed on it by the troika of IMF, ECB and EC for the last few years – Greeks have recently elected a left-wing political party Syriza into power which promised to end austerity and negotiate a debt forgiveness with its creditors.

If these are not accepted by the other EU members  – Germany in particular –  the party even threatened to go out of Euro. After being elected, the government has clarified that it has no intention of abandoning Euro as that would also cause big economic problems (like sharp hike in interest rates, rise of the Euro debt burden in terms of the hugely devalued domestic currency Drachma) for Greece.

‘Grexit’ averted

So, at least for the time being, the fear of the imminent exit of Greece (‘Grexit’) has been averted. If that had happened, it would have strengthened the political pressures in other troubled Eurozone economies like Spain, Portugal or Italy to leave Euro, sounding the death knell  of the much-heralded European integration experiment.

As part of the ongoing hard bargaining, it is likely that a large portion of the outstanding foreign debt would be rescheduled which means the creditors would have to suffer substantial losses. But once that is allowed, similar pressures on creditors would develop from other indebted countries which may have big unsettling effects on the global financial flows.

Moreover, it is difficult to see how Greece would be able to come out of the mess without unpopular structural reforms to create international competitiveness in some sectors. At present tourism remains the only significant foreign exchange earner for Greece.

According to most analysts, without reduction in wages (which the new leftist government  can not allow) or devaluation of its currency relative to other European countries (which is not possible with Euro remaining its currency) or efficiency improvement (lack of which is a long-standing problem for Greece), only the day of reckoning (going off Euro or debt default) is being postponed.

Some consider debt default to be the least cost-realistic solution for Greece. In such a case, Greece would be deprived of new loans in future but it would also get rid of the very substantial debt servicing cost, leaving a significant part of government revenue for developmental purposes and essential public services.  

In other words, no clear solution is in sight, which implies a lot of uncertainty for the global economy ahead. India, despite showing promise to step up its growth rate, cannot expect to be immune from the resulting volatility.

(The writer is former Professor of Economics, IIM-Calcutta)