India needs to be on the caution. It should be preparing for a futuristic change in the economic, trade and diplomatic policy. Brexit, though appears to be far-fetched thinking, may mark the beginning of fall of European Union and collapse of Euro.
It may also be the reprocessing, if not undoing, of globalization that former UK prime minister Margaret Thatcher had projected as the TINA ( there is no alternative) factor, as the Soviet Union started collapsing in 1980s.
It has important lessons. India should desist from becoming a bureaucracy-oriented democracy. Europe today is revolting against the Brussels bureaucracy, which is imposing rules and laws, on the democratically elected governments. Brexit is the first major onslaught on that process.
India needs to rethink about a Goods and Services Tax (GST). (Instead it should have a uniform tax rate). It empowers the central tax bureaucracy, weakens the states and is likely to create a convulsive situation. The central system is likely to overwhelmingly create a situation, where tax oppression is bound to increase. Despite prime minister Narendra Modi and finance minister Arun Jailey repeatedly calling upon the tax bureaucracy to behave in a civil manner, it is sending notices to virtual non-earners (or very low earners). Resentment is building up.
With GST, the bureaucratic net widens. Many in the state governments are likely to lose jobs. So would discontent. The political leaders in the states would have to take the brunt and that may lead to an implosive situation – almost similar to what is happening in Euro-zone. The bureaucracy rarely listens to sane advice. It thrives on stringent impractical rules. It helps them in rent seeking. India must be wary of it before allowing the central taxman rule the states.
Europe is the laboratory for studying the failures of a stringent monolithic system as opposed to diversity that signifies India.
As nearly everyone now acknowledges, the euro has been a disaster. This economic catastrophe was imposed on the people of Europe in order to achieve the central objective of the EU – and to pander to the French establishment’s view of what was in France’s national interest.
A Pew research survey in February-March found that a plurality of voters in France, Itraly, Germany and Netherlands want the EU to return some of its powers to national governments. Hungary is planning to hold a referendum.
The key question to arise from this episode is about what might happen in the future. The euro is not an isolated occurrence. It followed upon other crazy decisions, including the common agricultural policy and the Schengen passport-free travel zone. Given free rein, who knows what monstrosities the Brussels elites will yet unleash upon the people of Europe? It wants a common pension policy and tax harmonization, not to the liking of most.
Not only has it impoverished the countries of southern Europe, with huge numbers of people made unemployed, but it has also allowed Germany to run an enormous current account surplus, now amounting to over 8 percent of GDP, obliging other countries to run corresponding deficits. The unemployment rate in Greece and Spain now hovers around 25 percent, with youth unemployment over 50 percent, and all the EU members subjected to heavy doses of austerity have witnessed a steep rise in the number of people living below the poverty line. The recent European Central Bank (ECB) announcement of “quantitative easing” — a monetary sleight-of-hand to pump money into the Eurozone — is too little, too late.
The major principle of European integration is on the reversal. Instead of Eastern and Central Europe catching up to the rest of the EU, pockets of the “west” have begun to fall behind the “east.” The GDP per capita of Greece, for example, has slipped below that of Slovenia and, when measured in terms of purchasing power, even Slovakia, both former Communist countries.
“In many countries the perception is that national governments are powerless and that there is nothing at the European level to address problems,” says Paul De Grauwe, a former Belgian member of parliament now at the London School of Economics. “Both Europe and national governments lose legitimacy.”
It is a terse statement. India needs to listen.
The European project is teetering. Growth is anaemic at best and socio-economic inequality is on the rise. The countries of Eastern and Central Europe, even relatively successful Poland, have failed to bridge the income gap with the richer half of the continent. And the highly indebted periphery is in revolt.
Politically, the centre may not hold and things seem to be falling apart. From the left, parties like Syriza in Greece are challenging the EU’s prescriptions of austerity. From the right, Euroskeptic parties are taking aim at the entire quasi-federal model. Racism and xenophobia are gaining ever more adherents, even in previously placid regions like Scandinavia.
The standard of living in Hungary, 25 years after the fall of Communism, remains approximately half that of neighboring Austria. Similarly, it took Romania 14 years to regain the GDP it had in 1989 and it remains stuck at the bottom of the EU. Poland, Slovakia, and Hungary all remain economically far behind Austria.
It is a continent of severe disparity. Many others Sweden, Denmark and Ireland are unhappy.
The EU sanctions on Russia have a boomerang effect on itself. The EU took too much for granted. Brussels autocratic functioning has led to the resentment, now may be even revolt, among the unwilling, who do not want to have free movement of people or labour and an unmanageable currency festered by ECB.
India is on the threshold of building a new economy. The EU remains one of its biggest export destinations. A fall or splintering of Europe or weakening of Brussels would lead India to rethink its strategies. Its cost on diplomacy may increase. It is too early to predict but India has to start the process of building up bridges with individual countries in Europe. Modi has partially started that process with his visits.
European countries or the US with Donald Trump want to build walls. India has to learn to penetrate it. One hopes European dream does not become a nightmare. But India must be ready to accept the impending changes in robust way to take the advantage of emerging situations.