The Greek crisis and an imperfect European Union

Sanjaya Baru

The European Union (EU) was never a union. Greece has called the bluff. At the heart of the economic crisis in the EU is a political failure. The inability, indeed the unwillingness, of the member nations of the “Union” to move beyond a single market and a monetary union to create a political entity. The economic crisis in Greece is a manifestation of that political failure across the EU. National politics have worsted regional economics.

Imagine an India in which a less developed State was on the verge of default and neither New Delhi nor any of the more developed States were willing to step in and help. The success of the Indian Union rests on the fact that the developed regions of the country, and the Union government, have taken upon themselves the responsibility of offering a safety net to the less developed regions. All federal systems and continental nations are built on this foundation of regional interdependence and mutual support facilitated by federal political systems.

 

A commentary on EU
The failure of the EU’s more developed nations, especially Germany, to provide such a safety net to a less developed one like Greece has brought the EU to the brink of unravelling. This situation has been long in making.

The distance between Brussels, Berlin and Athens was brought home to me 20 summers ago when I opted for Athens as a destination for my travels as a guest of the European Union Visitors Programme (EUVP). The head of the Delegation of the EU in Delhi at the time, a French diplomat, suggested politely that I drop Athens and opt for Paris instead. The EUVP invitee was allowed to visit two European capitals of choice apart from the visit to Brussels. Berlin and Paris are the heart of Europe, she told me. Why waste time visiting Athens?

Since I had been to Paris many times and never to Greece, I insisted on Athens. When the ambassador of Greece to India found out that I was under pressure to visit Paris rather than Athens, he threw a mighty fit causing a diplomatic brouhaha in Brussels. Two decades later, the relationship between Europe’s major powers and its peripheral nations has not changed much.

Germany has behaved much in the same way that developed States in India like to when it comes to the question of transferring funds to less developed States. The former usually sermonise the latter on the virtues of industriousness and hard work and blame them for their backwardness. The latter demand all manner of special assistance. The Indian union has the political instruments to deal with such issues. The EU doesn’t.

Through the 1990s and well into the 2000s, EU enthusiasts from various European, especially German, think tanks would often lecture Indians about the virtues of regional cooperation and hold up the EU as an example for South Asia to emulate. The fact is that long before the EU tried its experiment with unification, India did. The reason why India stuck together and the EU is now facing the prospect of “Grexit” and “Brexit” (the exit of Greece and Britain) is because the Indian Union became not just an economic and political union but adopted the principle of federal financing administered by a democratically elected Union government.

The absence of such a principle of internal safety net for an imploding economy, and the weakness of the EU’s political institutions, has brought the EU to this brink. How the citizens of Greece would view their future and how much importance they attach to their membership of the EU to safeguard their future will be determined this weekend when Greece conducts a referendum.

 

Future of Europe
Two exogenous factors have come to shape the Western response to an unfolding Greek tragedy. First, the rise of Germany as a geoeconomic power and, second, the return of Russia as a geopolitical player. Over the years, a more economically successful and prosperous Germany has asserted itself, projecting its post-war “geoeconomic’” power to acquire political influence. The eastward expansion of the EU has further facilitated this.

Germany’s ascendance within Europe was shaped by two additional factors. First, the relative decline of other European economies, especially the economies of southern Europe.

Second, the induction into the EU of several east and north European economies worried about the resurgence of Russia as a geopolitical player. Russian President Vladimir Putin’s aggressive leadership has sent a shiver down Europe’s spine and many of East Europe’s smaller nations.

 

Germany and multipolar world
While southern Europe, including Italy, worries more about growing German assertiveness within Europe, northern and eastern Europe worry about a re-assertive Russia. It is against this background that Greece’s nationalist and Leftwing leadership reached out to Russia for help and Mr. Putin was quite happy to step into Europe’s troubled waters. Indeed, the fact that Greek voters opted for a Leftwing leadership has added a new dimension to the resolution of the crisis, given concerns in Germany and the United States about rising left-wing and right-wing forces in Europe and the decline in the influence of centrist political parties. Therefore, the stakes are high. The crisis in Greece is not just about sovereign default. It is about the future of Europe.

There is an interesting parallel between the Asian financial crisis of the late 1990s and the European crisis today. In 1997-98, when Indonesia, South Korea and Thailand faced a payments and debt crisis, it was the political fallout of that crisis, and the failure of the International Monetary Fund (IMF) to help the economies in trouble, that altered Asian geopolitics. While the IMF sermonised Korea and dictated to Indonesia, China stepped in and bailed out Thailand. The IMF has not been able to return to Asia since, while China has set up its own regional financial institutions.

Russia does not have the deep pockets to be a China to beleaguered Greece, but the IMF and Germany’s myopic policy response to Greece’s social crisis has set in motion political responses that could have similar long lasting impact on big power equations within Europe and beyond. In Greece it is not just the IMF but also Europe’s own regional financial institutions that have been found wanting.

Germany, it would appear, would not mind the exit of Greece, and maybe even Italy, because it has acquired a more loyal hinterland to its east. This could well mark the beginning of a new “Pax Germanica”. The crisis in Europe is also a test for the U.S. Having fathered the post-war trans-Atlantic order, the U.S. is unable or unwilling to step in and preserve the EU in its present form.

When the dust settles in Europe the emerging multipolar world will come to stay. If the Asian financial crisis consolidated Chinese power in Asia, the European financial crisis will consolidate German, and perhaps Russian, power in Europe. Economic crises do have geopolitical consequences.

 

Developed economy risk
The crisis in Greece does not in itself pose an economic risk for Indian investors and traders, but a Europe-wide crisis would. Even as the Indian economy begins to recover from the consequences of India’s own bad policies it may face the risk of dealing with those of Europe. There may be some business opportunities for Indian investors arising out of the decline in asset valuations in Europe, but caution would be the better part of valour.

Over the past five years, there has been a flight of capital from India to Europe. Many Indian companies have found investing in Europe a better proposition than investing at home. What the Greek crisis shows is that even in developed market economies there can be government failure, if not market failure. Indian businesses that seek foreign markets and external investment opportunities must invest more in understanding the nature of political risk around the world. Far too many analysts have worried about “emerging market risk” to have bothered about “developed economies’ risk”. This now deserves attention.

What the Greek crisis also brings home to Indian policymakers is the importance of responsible economic management at home and the need for creating multiple interdependencies externally. Greece’s weakness is that few in the world worry about its economy capsizing. India was in that spot in 1990-91 and, mercifully, is no longer in that worrisome place. But the debate on the extent of global interdependency that India should create and maintain continues. The lesson from Greece is not that a country should isolate itself from the global economy but that it should carefully manage its relations with the regional and world economy.

(Sanjaya Baru is Director for Geo-economics and Strategy, International Institute of Strategic Studies, and Honorary Senior Fellow, Centre for Policy Research, New Delhi.)