Lessons for India

India needs to be cautious. Whereby, it needs to prepare for a futuristic change in economic, trade and diplomatic policy. True, this might appear far-fetched, but Brexit could mark the beginning of the fall of the European Union and collapse of the Euro.

Notably, it might also be the reprocessing, if not undoing, of globalization which the late UK Prime Minister Margaret Thatcher had projected as the TINA ( there is no alternative) factor, when the Soviet Union started collapsing in 1980s.

Undoubtedly, this holds important lessons for India whereby it should desist from becoming a bureaucracy-oriented democracy. See how Europe today is revolting against the Brussels bureaucracy, which is imposing rules and laws, on democratically elected Governments. Britain’s exit is the first major onslaught on that process.

Consequently, New Delhi needs to rethink about the Goods and Services Tax (GST). Instead it should have a uniform tax rate. The GST empowers the Central tax bureaucracy, weakens the States and is likely to create a convulsive situation. Whereby, the Central system is likely to overwhelmingly create a situation, leading to an increase in tax oppression.

Despite Prime Minister Modi and his Finance Minister Jaitley repeatedly calling on the tax bureaucracy to behave in a civil manner, taxmen are sending notices to even virtual non-earners (or very low earners) thereby building up resentment.

Moreover, with GST, the bureaucratic net widens wherein many babus in State Governments are likely to lose their jobs, leading to discontent. Resulting in political leaders in States having to take the brunt which might lead to an implosive situation – almost similar to what is happening in Euro-zone.

As it stands, the bureaucracy rarely listens to sane advice. Instead, it thrives on stringent impractical rules, which helps them in rent seeking. India needs to be wary of this before allowing the Central taxman to rule the States.

Especially against the backdrop of Europe being the laboratory for studying failures of a stringent monolithic system as opposed to diversity signified by India. As everyone now acknowledges, the Euro has been a disaster. Remember, 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.

Interestingly, a Pew research survey in February-March found that a plurality of voters in France, Italy, Germany and Netherlands want the EU to return some of its powers to national Governments. Hungary is planning to hold a referendum.

Importantly, 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 other crazy decisions, including the Common Agricultural Policy and the Schengen passport-free travel zone.

Undeniably, by giving 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, which is not to the liking of most EU countries.

In fact, not only has it impoverished the countries of southern Europe, with huge numbers of people unemployed but it has also allowed Germany to run an enormous current account surplus, amounting to over 8 per cent of GDP and obliging other countries to run corresponding deficits.

Pertinently, the unemployment rate in Greece and Spain now hovers around 25 per cent, with youth unemployment over 50 per cent. Add to this, all EU members are subjected to heavy austerity doses witnessing a steep rise in the number of people living below the poverty line.

Clearly, the recent European Central Bank (ECB) announcement of “quantitative easing” — a monetary sleight-of-hand to pump money into the Euro zone — is too little, too late.

Alas, the major principle of European integration is on the reversal. Instead of Eastern and Central Europe catching up with the rest of the EU, pockets of the “West” have begun to fall behind the “East.” For example, the GDP per capita of Greece has slipped below that of Slovenia and, when measured in terms of purchasing power, even Slovakia, both former Communist countries.

Asserted a former Belgian member of Parliament now at the London School of Economics Paul De Grauwe, “In many countries the perception is that national Governments are powerless and that there is nothing at the European level to address problems. Both Europe and national Governments lose legitimacy.”

It is a terse statement. India needs to listen.
Unfortunately, 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 might not hold and things seem to be falling apart. From the left, Parties like Syria in Greece are challenging the EU’s prescriptions of austerity. From the right, Euro skeptic 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.

Besides, 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 yet it remains stuck at the bottom of the EU. Poland, Slovakia and Hungary all remain economically far behind Austria.

Thus, it is a Continent of severe disparity. Many others, Sweden, Denmark and Ireland too are unhappy.

Additionally, the EU sanctions on Russia had a boomerang effect on itself whereby it took too much for granted. As things stand Brussels autocratic functioning has led to the resentment, which now might turn to even a revolt, among the unwilling, who do not want to have free movement of people or labour and an unmanageable currency festered by ECB.

In sum, 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 New Delhi to rethink its strategies. Its cost on diplomacy might increase.

True, it is too early to predict but India has to start the process of building bridges with individual countries in Europe. Happily Prime Minister Modi has partially started this process with his foreign visits.

But there is no gainsaying, European countries or the US with Presidential candidate Donald Trump want to build walls. India has to learn to penetrate this. . One hopes the European dream does not become a nightmare. However, India must be ready to accept the impending changes in a robust way to take the advantage of emerging situations.

By: Shivaji Sarkar
(India News and Feature Alliance)