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Friday 18 November 2011

DON’T PLAY WITH FIRE - Is India alert to the message that is being beamed from Greece?
- Is India alert to the message that is being beamed from Greece?
Cutting Corners
Ashok Mitra
A spectre is haunting Europe and the rest of the Western world, the spectre of what till yesterday they considered a tiny speck of a country too insignificant to waste a thought on, Greece.
The sovereign debt crisis that engulfed Greece early this year was in no way the fault of its people, not certainly of the struggling middle and working classes. A bunch of fly-by-night industrial pretenders, who included some foreign adventurers as well, inveigled the country’s government to advance funds for their high-sounding projects. A credulous regime did so by raising money from the market. Partly because of the ongoing global recession, a large number of these projects flopped; the loans advanced to them by the government became unredeemable. Speculators, among them again quite a few foreign institutional investors, chose this moment to organize a run against Greek government bonds. As Greece is now integrated with the 17-member euro system of the European Union, it has no longer a currency of its own. It wields no independent monetary policy, no power either to control the banks or discipline capital movements in and out of the country. The uninterrupted run against State bonds meant a rapid draining of the public exchequer. This soon escalated into a breathtaking capital flight too. On the verge of sovereign debt default, the Greek government turned with the begging bowl to the godfather, the EU, and the European Central Bank the latter lords over. A despicable round of fun and games started. The EU and the ECB agreed last May on a bailout package of 110 billion euros for Greece, but would release it in instalments and on the most stringent conditions, which breathed the dictum that the poor must pay for the sins of rich industrial adventurers and unscrupulous speculators: the State’s budget must be cut back through ruthless slashing of public spending, there would have to be lay-offs, reduction in wages, lowering of social security benefits, severe curtailment in health and educational services and no coddling of public enterprises. A couple of such instalments have been released, each resulting in a further worsening of economic distress among the poor and fixed income groups, more of worklessness, loss of wages for those retaining their jobs and a steeper fall in the general standard of living. Even so, these instalments have been of no help towards addressing the structural problem afflicting the Greek economy. With all crucial monetary and economic decisions under the purview of the EU and the ECB, the country’s government is unable to deploy interest rate adjustments to encourage or discourage particular types of investments, it cannot regulate external capital movements and thereby quash the mischief-making potential of predatory speculators. Its fiscal powers are equally constrained. Given the relatively underdeveloped nature of the Greek economy, the scope of raising resources from direct taxes, such as through imposts on the corporate sector, is rather limited. The government has traditionally collected the bulk of its revenue from indirect taxes. The death knell of independent initiative in this area has been sounded with the dismantling of tariff barriers between constituents of the EU and the compulsory enforcement of a uniform value added tax for all commodities and services. Formally, Greece is a sovereign nation and a member of the United Nations. It is the nation which, millennia ago, introduced the human race to mathematics, philosophy, literature, art and architecture. It is now a bonded country with no suzerainty in monetary and fiscal spheres, no power to move against vandals who are ruining its economy, and has to cringe before external parties for funds to survive. Since nothing has been done to curb speculative runs and engineered capital flights, and the overall global prospects continue to be gloomy, the package deal has failed to stem the Greek crisis. On the other hand, the heartless austerities the EU is insisting on are having an altogether disastrous effect. As wages decline, unemployment grows and living standards fall, ordinary men and women are finding it beyond their endurance; they seethe in anger, march in protest, organize riots, stone banks and government offices.
Forced to take cognizance of the gravity of the situation, the heavyweights in the EU met in Brussels last month and did a stock-taking. They chose to announce a much larger package of 130 billion euros which included remission of one-half of certain accumulated past debts. Instalments of this package again would be returned only if the Greek government imposed further privations on the people.
This supposedly generous decision embodied in the new deal was trumpeted with much fanfare alongside a confident assertion that all the kinks were now sorted out, bringing to an end the predicaments Greece had been facing. Stock exchanges around the globe dutifully took the cue, the bulls were out in force, important newspapers wrote ponderous editorial articles extolling the sedate, orderly way the capitalist system negotiates the hurdles it faces every now and then; television pundits were back with their clichéd predictions concerning major economic indicators, national as well as international.
They took for granted the people of Greece. The country’s prime minister could not afford to do so. The nation, he perceived, had reached the end of its tether. Before capitulating to the fresh roster of austerities the Brussels package had ordained, he thought it proper to order a national referendum on the issue. The Washington-Bonn-Paris axis, consisting of the great votaries of freedom and democracy, was scandalized beyond measure: how did that fool of a prime minister dare to consult the people, who were sure to scornfully reject the terms of the deal?
For a negative verdict, in case a referendum took place, would have ominous implications for the Western countries. Rejection of the package by Greece would mean stoppage of further assistance to the country and it would hence fail to meet sovereign debt obligations. That, in turn, would result in Greece’s exit from the Eurozone, which though would also render irrecoverable all the money sunk in that country by Western interests. Yet, the United States of America, Germany and France would have to think a hundred times before marching troops to Greece to bring that nation to its heels. Much the greater concern would be the peril of a domino effect of the Greek drama. Italy and Spain have been experiencing the same strains on the sovereign debt front as Greece has been; their growing fiscal deficit was feeding the hopes of scheming stock operators. The collapse of the Brussels deal and the inevitable chaos that would follow in Greece might encourage the unscrupulous elements to target Italy and Spain too. Once the spreading crisis reached epidemic form, the euro empire could crumble. The dream of an economically tightly integrated Europe, where capitalism enjoyed unbridled sway, would then disappear into thin air.
Pressure from the EU made the prime minister of Greece drop the proposal for a referendum. Instead, he sought and won a vote of confidence in Parliament. He did not have the nerve to stay in office and enforce the vastly unpopular harsh terms the new package contains. He resigned. A veteran banker has since formed a new government and has pledged to implement the terms of the deal. Even if the country’s main political parties back the new incumbent, the situation will however continue to be dicey since the people are in an intensely rebellious mood. Stock exchanges around the globe have taken the hint. Share prices have kept tumbling. To deepen the worries of the Western powers, Italy has now succumbed to the Greek malady. The third-largest enemy in the EU is about to slip up on payments against sovereign debt, its prime minister too has resigned, a new one has taken over, but few know what tomorrow will usher in.
Are we in India alert enough to read correctly the warning signals beamed from Greece? India carries the burden of a host of heterogeneities, linguistic, cultural, ethnic and other. These call for sympathetic individual attention, including in matters concerning administrative, monetary and fiscal dispensations. The country’s monetary system is, however, rigidly centralized. The picture in the fiscal sphere is not much different. The major tax heads, including the entire spectrum of direct taxes, are the domain of the Centre. The states have no independent authority to borrow from the market. The Constitution provides for a finance commission to ensure devolution to the states a significant proportion of tax revenue raised from Centre’s sources, but the commission has been converted into a bonded labourer of New Delhi and taught to betray its assigned tasks. Another agency, the Planning Commission, originally intended to chart the integrated development of the country, is also reduced to a device to impose the Centre’s will on the states. A so-called fiscal responsibility and budgetary management statute is inhibiting the states from making outlays in accordance with their own priorities. Shortage of resources available with them has come to such a pass that many states are unable even to cope with demands on the revenue account and seek loans from the Centre on extremely stiff terms. The upshot is steadily accumulating indebtedness. Development is getting increasingly centralized. While this process continues, New Delhi has humoured the states into abandoning their hitherto most important source of revenue raising, the sales tax, and substituting it with a uniform system of value added tax for most commodities in the pattern of the EU. It is now aiming at an even more ambitious goods and services tax which would reduce the states to total financial servitude.
The turmoil in Greece, currently swallowing Europe and threatening to spread across the continents, has a message to convey to the power-hungry pack scheming to transform the diversity-rich Union of India into a unitary hegemony. The message is very curt: desist from playing with fire.

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