Here is the ultimate block buster in Economics. Isme action hain, drama hain, austerity hain, reforms hain, growth hain, depression hain, there are scams galore and bro-mance to boot! How could Bollywood not move in to create a movie?
IMF ruled out further funding for Greece until old arrears are cleared.
Greece defaulted on a loan repayment of €1.55 billion due to the IMF on June 30.
According to the IMF economist, reforms were needed in tax administration, collective bargaining, the judicial system, pensions and reducing barriers to entry for professions, and these were not undertaken to a sufficient degree.
Since his successful book, Capital in the Twenty-First Century, the Frenchman Thomas Piketty has been considered one of the most influential economists in the world.
Germany Has Never Repaid its Debts. It Has No Right to Lecture Greece.
So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?
Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece.
The Greeks have voted resoundingly against the economic policies that its creditors in the European Union want it to pursue.
But what next?
Other weak European countries such as Spain could be tempted to follow the Greek strategy.
The impact of a Spanish or Italian default will be far more severe because of the size of their outstanding public debt.
There is one principal economic lesson from the Greek crisis: a monetary union cannot work well unless there is a fiscal union as well.
The Grand European Project : Genesis
At the end of World War II, visionaries such as Jean Monnet convinced Adenauer of Germany and Robert Schuman of France—that deeper economic engagement between European countries would be the best way to prevent a repeat of the mistakes that led to so much bloodshed in Europe between 1914 and 1945.
Brief Timeline –
1951 – Setting up a common system for coal & steel
1957 – European Economic Community was set up
1992 – The Maastricht Treaty led to the creation of the European Union
1999 – Euro made its debut
A few Trivia questions –
What is the difference between the European Union and Euro Zone?
The Greek episode has exposed fundamental assumptions about the role of the state and its capacity for reform to a searing examination.
Two key takeaways:
The idea that nations in different stages of development could be yoked harmoniously under a common currency without sufficient fiscal oversight might never truly be a sustainable one.
From a comparative Indian perspective, there are long term challenges looming for the NDA government too.
In this year’s budget, the government pushed back by a year, to 2017-18, a deadline for cutting the fiscal deficit to 3% of the gross domestic product. For now, the government has largely chosen to focus on disinvestment as a means of deficit reduction but ultimately it will need to tackle the revenue deficit and unfunded welfare subsidies.
Greece’s creditors suggested for the first time that a deal to avert bankruptcy is in sight after a proposal by Athens made significant concession on pension cuts. They will be coming to the table for discussions on tax cuts & EU + IMF might just unlock an aid.
But first things first, Greece makes up just 2% of the euro zone economy, so should you even care about what finally happens?
Above and beyond the economics of the Greek crisis, however, what is clear is that the political implications of a default and possible euro exit would be huge and largely negative.
Athens is facing another deadline to repay its debts, putting Greece again in spotlight.
Greek default does not imply Greek exit from the EU or euro.
But the political implications would be huge and largely negative.
Governments in the other countries on the receiving end of EU-mandated austerity having been closely following events there. Debt relief offered to Athens might inflame their own opponents of austerity. Should Greece exit the euro and perform relatively well, such pressures would increase!
A referendum – a vote in which everyone of voting age can take part was held to decide whether the UK should leave or remain in the European Union and Leave won. <what is the difference b/s referendum and plebiscite?>
What is this UK, Britain, Ireland, Republic? What’s going on? Is Scotland a separate country?
Without going into the history-
Full name is United Kingdom of Great Britain and Northern Ireland i.e Great Britain plus N.I.
Great Britain – It contains 3 somewhat autonomous regions – England, Wales and Scotland
Republic of Ireland separated from northern Ireland and UK in 1920s and is a separate country now <Belfast is capital of which Ireland and what is the capital of Wales and Scotland?>
But why this referendum
Conservative govt led by David Cameron had promised this referendum if they won the general election and as they won this referendum was held
What is European Union?
It is an economic and political partnership involving 28 European countries <latest country to join EU?>
It is a single market (common market) allowing goods and people to move around, basically as if the member states were one country. So basically any French citizen can travel to Germany and work there without visa.
You can visit whole of EU with a single visa <no internal borders>
I had to take a separate visa to travel to London. How about that?
So this common visa thing is applicable only to countries that are party to Schengen area <where is Schengen btw?>
There are 26 Schengen countries (22 EU + 4 Non EU)
4 Non EU – Iceland, Norway, Switzerland, Liechtenstein <btw Liechtenstein is a double land locked country. Look in the map and find out which other country is doubly landlocked, There’s only one other>
6 EU not party – Bulgaria, Croatia, Cyprus, Ireland, Romania and the UK.
So as UK is not party to Schengen, you had to take Visa.
What about euro? I had to use pound in UK. Isn’t the Euro currency of EU?
Euro currency is used by Eurozone countries. Eurozone is subset of EU. Only 19 EU countries are part of it. Obviously UK is not party to it.
Euro is also used by 4 other European countries – Vatican, Andorra, San Marino, Monaco
Any history ? How did EU begin?
It grew out of a desire for peace in a war-torn and divided continent. It started in 1951 with European Coal and steel community of 6 countries by treaty of Paris <France, Germany, Italy, the Netherlands, Belgium and Luxembourg>
1957 – European Economic Community (EEC) or common market was formed by treaty of Rome,
1973 – Britain, Denmark and Ireland joins the EEC <total 9 countries now>
1992 – Maastricht treaty was signed and comes into force in 1993. Formal beginning of EU
2002 – Euro replaces national currency in eurozone
What does EU do?
Eu oversees co-operation among its members in diverse areas, including trade, the environment, transport and employment
Common security and foreign policy
coordinates policy on asylum, immigration, drugs and terrorism <that’s why so much concern over migration fro middles east and north Africa>
EU policies on workers’ rights and other social issues <UK not part of this social chapter either>
Promotes human rights, give aid to agriculture, fisheries etc
Okay, sounds great but how does it all work?
EU works through 4 main institutions
European Commission – All powerful bureaucracy of member states <each country, one representative>, propose laws, implement laws, job is to promote European interest, not the interest of member countries, HQ in Brussels<where is Brussels>
European Council – It’s a political body, leaders meet here
European Parliament – Directly elected MPs <MEPs> vote on almost all the issues now days. It sits in Strasbourg <where is Strasbourg?>
European court of rights – name explains everything <where is its headquarters?
Why do Brits want to leave EU?
Sovereignty – that Britain ceded its sovereignty, right to pass its own laws to bureaucrats sitting in Brussels <Doesn’t India lose its sovereignty by being member of UN?>
Regulations – That Brussels imposed too many regulations that hurt British business interest
Money – Billions of pounds of entry fee with very little to show in return <Britain don’t have many farmers to get agriculture subsidies>
Open borders/ migration – even though Britain is not part Schengen, workers from rest of the EU can come their freely and work there. Large numbers from eastern europe came just to claim British benefits, social security and all <so called welfare tourism>
Ever Closer Union – detested the idea of United states of Europe <closer political union, confederation sort of thing>
Why did Cameron want UK to stay in EU?
Single market – much easier to sell things while being member of single market
Britain’s status in the world is enhanced as part of EU
How is single market different from free trade area?
In FTA there are no tariffs except on some negotiated goods and services but in single market, even labour mobility is free
In Single market, you impose common tariffs on all imports, it;s like a single country for the purpose of trade and commerce
There are common standards etc. <environment, labour, quality etc.>
What is European free trade association (EFTA)?
It is FTA of 4 European countries -Iceland, Norway, Switzerland, Liechtenstein <do you recall they are all part of Schengen>
All of them have signed FTA with EU. Britain can sign similar FTA with EU now
What happens now?
Britain would negotiate its exit <under Lisbon treaty>, But the fear is of contagion. Eurosceptic parties of other countries would also press for similar referendums.
Plus as Scotland has voted overwhelmingly in favour of stay (68%), there would be fresh demand for referendum on Scottish independence. Similarly is the case with northern Ireland.
Impact on India
No direct impact but expect turbulence in stock and forex market. Panicky investors may withdraw their hot money out of India