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BW Businessworld

After Euro, What?

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India is negotiating a free-trade agreement with the European Union. The negotiations have been much fun for bureaucrats from Brussels and Delhi. They have dragged on for years; the longer they last, the more the meetings, in Europe as well as in India, the greater the travel and daily allowances, and the greater the savings to put away. In a way, the European Union is the ideal partner for India to negotiate with. Both are extremely formal and bureaucratic, so they can find much to negotiate. Both have weak central governments, so they can plead inability on a large number of issues. So they can maximise negotiations per unit of agreement.

A major sticking point has been India's agricultural import duties. Like India, the European Union produces too much; like India, it mollycoddles its farmers; like India, it buys up agricultural goods and puts them away in silos. But India, being an underdeveloped country in the art of silo-filling, only stores wheat and rice. The European Union facilitates storage by its members, who store whatever they think is of political advantage. Thus France has vast cellars full of wine.

The European Union would like to find export markets for those agricultural products; for many such as wine and cheese, India is the perfect market. Its prosperous middle classes are perfect consumers for the luxuries, and India's output is minuscule, low-quality and high-cost. But that is precisely why India would like to keep European products out. If all our high-cost producers were weeded out, who would run after our bureaucrats and politicians for favours?

Creating markets for Indian exports is not of much interest to India, for in goods markets India is a weakling. It has fallen far behind China; especially in manufactured goods, its presence in the world markets is trivial, if we ignore textiles and machinery. But it considers itself a mighty exporter of services; its software services have found a sizeable market in the US and the UK. It would like to repeat its success in Europe, but there is a small problem. Like India, Europe speaks in many tongues — tongues in which Indians are not very good. So even if the European Union were to relax its  visa rules for Indian programmers, they are unlikely to find many takers in Europe.

With a lack of major opportunities, India-EU negotiations may still fail — or may go on for some more years, to the delight of the bureaucrats. But a new danger looms. The southern members of the European Union have been teetering on the verge of fiscal collapse. One, Greece, actually collapsed, and was propped up by Germany; its banks bought up Greek debt. They did not have much choice, for they were major investors in Greek public debt, and would have lost most if Greece had failed. But they would not have continued propping up Greece if Germany had not come to its rescue.

But if it was Greece yesterday, it may be Italy tomorrow and Spain the day after. Italy suffers from a weak government, which found it easier to borrow than to tax. Spain had a great tourist boom as prospering Germans sought the sun; its cities ran up huge deficits while they spruced themselves up. The Germans shudder at the thought of having to bale out Italy and Spain.

But the potential consequences of not baling them out are dire. If one of them reneges on its debt, its loans would become junk, and European banks would take big losses. Whether it is governments or banks, they try to ward off disaster by borrowing on the market. As they try to do so, interest rates in Europe will go up, including interest rates in Germany. So for no fault of theirs, German businesses will have to pay more for funds.

So, many Germans are getting rather fed up with their southern neighbours, and are veering around to the view that their union has outlived its utility. They think it is time to dissolve the European Union, and to revive the once redoubtable Deutschmark. The dissolution will not be costless. The southern countries will not stop at reviving their currencies; they will have to erect import barriers, which were dismantled when the European Union was created. Germany's markets in the south will shrink. The free movement of labour will also have to cease. There are more Italian restaurants than German ones in Germany; maybe they will have to go back to selling sausages and sauerkraut.

And the European Union will cease to be India's second biggest customer. So maybe, if the Indian bureaucrats linger long enough over the free trade agreement, they will have nothing left to negotiate over.

The author is Consultant Editor of Businessworld.

ashok dot desai at gmail dot com

(This story was published in Businessworld Issue Dated 10-01-2011)