For a first-hand view of what has produced the current crisis in Europe and its likely denouement, Dr. Frank-Jürgen Richter, a former director of the World Economic Forum and chairman of Horasis, is the right person to speak to. Excerpts from an interview with Sanjay Kumar Singh:
Has the possibility of the European currency union splintering increased in recent times?
If you had asked me this question three or four months earlier, I would have said that the euro is here to stay forever. Now I am much less certain. There is a real danger of the euro breaking up. I shall call it a danger, but maybe it is an opportunity because countries like Greece and Portugal can't sustainably remain within the euro zone. The competitiveness of, say, the Greek economy is not at all at par with that of the German or French economy.
How should this breakup take place? We can't have a chaotic separation. We need to go about it in an orderly manner. Greece needs to be supported, say, through a haircut. But it has to go back to the drachma. Today Greece and many other countries within Europe have too much of social welfare. People retire at the age of 50-55 and get all the benefits. Even when people work, they work for only about 35 hours in a week in some European countries. How then can you compete with countries like China, India and others?
Some countries like Germany are strong in high-end manufacturing. But Europe can't compete anymore in mass production. It should leave mass production to the BRIC countries.
We should just retain a core region within Europe that uses the euro comprising Germany, France, and the Benelux countries. We should not give up on the European Union. But what we need to do is streamline the bureaucracy in Brussels. Far too many people work for the European Commission, which makes it an expensive affair. We need a smaller and more efficient leadership in Brussels that should focus on regaining Europe's competitiveness.
Why have the south European countries not abandoned the currency union yet? What is in it for them?
It is human nature not to want to give up something that you got as a gift earlier. Being under the umbrella of the euro and the European Union is comfortable. But what also happens is that once you are in, you reduce your commitments. These countries have all reduced their reform-related endeavours.
What would be the collateral damage if the euro zone splits?
China could be impacted if European demand declines. India would be less impacted because India is not so much an export-oriented nation. India does export IT services, but it is not so much into the export of manufactured goods. For the moment this is a blessing in disguise.
Over the long run, India needs to increase its exports because it has a trade deficit vis-a-vis several nations. It needs to create companies that can survive on a global scale. There is a need to build global brands of Indian origin. There aren't too many at present except, maybe, the Tatas. The Tatas are famous in India, but in the US and Europe they are still not very well known. After their recent acquisitions, maybe they are better known. But even today a lot of customers who are buying a Jaguar or a Land Rover don't know that the company behind these brands is Tata. Indian companies need to increase brand awareness about themselves and thus enhance their export potential.
Will individual nations agree to give up their sovereign powers to allow for tighter fiscal integration, one of the solutions being advocated?
There is talk of having a euro bond, or one bond for the whole of Europe. This would be to the disadvantage of Germany and other strong economies. Angela Merkel doesn't like the idea. I agree with Merkel that we can't introduce euro bonds now. At first the European Union needs to balance the differences between the stronger and weaker economies. There needs to be greater fiscal harmonisation. Only when the differences between nations are small can we have a uniform fiscal policy. We need first a joint Finance Ministry for Europe. Only then can we have a common euro bond.
Another solution that is suggested is that the European Central Bank (ECB) should act as the lender of last resort. Do you see it playing this role?
It is already acting as the lender of last resort. It was not part of the ECB's mandate to bail out weak economies. But it is doing that right now. But this can only be a short-term solution. If it becomes a long-term solution, then you can't educate the weaker economies. The latter will think that there will always be somebody to bail them out, so they will not make the effort to reform.
How strong is the political resolve among European leaders to prevent a splintering of the euro zone?
Angela Merkel has been saying that we will preserve the euro zone and the European Union. But many incumbent governments have been replaced. In Greece, Spain and Italy there has been a change of leadership. Sarkozy will be challenged next year and Merkel the year after. Will Merkel survive politically in her own country? She has a strong hold on the economy and on Europe and is doing the right thing. But what will happen if she goes out of power and a new leader comes in? That leader may not share Merkel's commitment towards preserving Europe.