Should the BRICS indeed pitch in to save the Eurozone?

When you hear about $10 billion greenbacks (Rs.563.34 billion) being committed by India to the rescue of the Eurozone, it is bound to make you cringe at first. The figure that came to mind, most prominently, was our fiscal deficit figure for FY 2011-2012, which was 5.9% of GDP. Then you think about all the things we want to do with greater fiscal room in our own economy to be able to revive GDP growth, which receded from the 7% mark in the previous fiscal; and more importantly, to bring down those insane poverty numbers.

The fact is that we need to really first distinguish between reality and sentiment. In the early years of this century, especially from 2003-2007, when the Indian economy was growing at a brisk pace, India Inc. was going all out to acquire global companies, sectors like aviation, insurance, retail and BPOs were all established as our 'sunrise sectors', our IT companies were showing us how we could beat the world at what they did; and India was, in general, fancying an exalted global status for itself, $10 billion would have seemed a pittance. Today, even committing that much seems sacrilegious to those against the idea. Those for it (which I doubt, would be the majority) are talking about the greater role that India needs to play in global affairs, and how saving the Eurozone is also in India's interest since it is our greatest export market. In 2011, India exported Euro 39.3 billion worth of goods to EU-27 (Eurostat) and Euro 10.7 billion worth of services. In all, the BRICS have pledged $75 billion, and they have a consensus on the rationale as well.

Ethically, it's hard to digest that we are committing this money to save countries that have borrowed and devalued their way to such unimaginable distress the world's poor, most of which are our fellow citizens, struggle for basic necessities of life. But the economic argument is strong, nevertheless. Or is it? Well, it all depends on where you think all the coordinated efforts to revive the distressed Eurozone economies are headed.

If you ask businesses in the Eurozone, the answer is 'Downhill'. The latest Markit's Eurozone Composite Purchasing Managers' Index that is a combination of manufacturing and services, stayed below the 50% mark at 46; which is the lowest level since the crisis commenced and signifies continued contraction. Chris Williamson, Chief Economist at Markit, comments, “The flash PMI for June (2012) rounded off the weakest quarter for three years, indicating Eurozone GDP is likely to have fallen by 0.6%. The downturn is gathering pace and spreading across the region, with Germany on course for a marginal fall in GDP in the second quarter, though far steeper declines are likely elsewhere – including a 0.6% drop in France.” Germany's Ifo business climate index fell for the second consecutive month in June to 104.3, the lowest since May 2010; which shows that the crisis is already having some broad repercussions. Concerns are imminent that more vulnerable nations (in terms of indebtedness), particularly Spain and Italy, could come under the “Save our sovereigns' list. When you are thinking whether to make Greece go, or stay and follow the guidelines of the EU powers, just imagine how far we are from a solution when the combined debt of Spain and Italy alone is Euro 2.5 trilion. The Eurozone's emergency funds themselves - European Financial Stability Facility and the European Stability Mechanism – have a cash pile of just Euro 500 billion, out of which Euro 100 billion is already committed to Spain!


The ongoing political and economic uncertainty is expected to make matters worse in the coming months. Two bailouts have already been committed, adding up to Euro 240 billion, along with significant write offs of Greek debt. The elections in Greece have resulted in a positive outcome for the pro-bailout brigade. However, the new PM Antonis Samaras has already vowed to renegotiate the terms of the bailout with IMF, which imposes tough austerity measures on Greece. The question on the degree of softening could mean another impasse.


Furthermore, the challenge, far beyond repayment of debts and taking the Greeks to austerity school, is of reviving growth. The imbalances in terms of fiscal situation and export competitiveness in these weak Eurozone nations have been built over a decade and are huge enough to last much longer. As a Carnegie report states, “Even in the best of circumstances — where the adjustment is politically feasible and financing is stable — reestablishing competitiveness, fiscal sustainability, and a more balanced growth model will take several years. As a rough guide, countries have to engineer a fiscal adjustment of 5-12% of GDP (talking about the GIIPS or the troubled economies of Greece, Italy, Ireland, Portugal and Spain), and claw back a unit labour cost disadvantage of between 15-30%, though the precise figures vary by country.” Meanwhile, all that the emergency funds are able to do is douse fires here and there. The movement towards a political union as well as a banking union of Eurozone countries is still far off too.

Considering this situation, one wonders if it makes sense for India, and even the BRICs to commit this kind of funding to a journey whose end is not in sight. The good part, of course, is that this will only be given if the rest of the resources in the IMF war chest dry up. The BRICS have also used the opportunity to demand greater clout in the IMF itself as per the reforms that were decided in 2010. Eventually, that is perhaps the only objective that really validates this funding commitment to countries that lost track of their spending years ago. A better contribution could have been to do an 'Incredible India' blitzkrieg in these Eurozone countries and promote 'austerity tourism' as a version of slum tourism. I can already imagine a possible punchline, “Visit India. And feel richer than ever!”.