As Europe goes down, we need to be prepared for consequences

http://prof-vaidyanathan.com/2013/03/04/as-europe-goes-down-we-need-to-be-prepared-for-consequences/

As Europe goes down, we need to be prepared for consequences

March 4, 2013 · by Prof Vaidyanathan · in Economy, Globalization,  

The European economic and social crisis is becoming worse with each passing day. One business channel asked me in 2008 how long it might take to recover and I responded saying 40 quarters — they never came back to interview. But now I forecast it may never recover.

Sri Aurobindo said that India will rise on the ashes of western civilisation and it seems to be coming true. It is important to recognise that the dominance of the West has been there only for last 200 odd years. According to Angus Maddison's pioneering OECD study, India and China had nearly 50 per cent of global GDP as late as the 1820s. Hence India and China are not emerging or rising powers. They are retrieving their original position. In 1990, the share of the G-7 in world GDP (on a purchasing power parity basis) was 51 per cent and that of emerging markets, 36 per cent. But in 2012, it is the reverse. So the dominant west is a myth.

Europe is facing three types of crisis – economic, demographic, civilisational and it is not in a position to come out of these. All three are not recent ones; they were developing over a period and are now culminating into a catastrophe.

The Debt to GDP ratio of most of Europe is at unsustainable levels with our own Britain having above 500 per cent — I say our own since we are going to have to help them run their country sooner than later. There are three major constituents of debt — Government debt, corporate debt and household debt. Of the three, we find household debt has reached nearly 80 to 100 per cent of GDP in most of these countries. The reason is simple — unlike India, households in Europe and USA have forgotten one simple word — savings. They live on debt and are interned by debt.

The situation is made worse by the unemployment situation. Youth unemployment has reached 55 per cent in Spain and hovering above 30 per cent in most of the other countries. Youth is defined as being between the ages of 16 to 24, unlike in India where even a 43-year-old is a 'youth icon'. The overall unemployment is at more than 25 per cent in most countries and it is creating social turmoil.

Along with this is the demographic crisis. The population of Europe during the First World War was nearly 25 per cent. Today it is around 11 per cent and is expected to become 3 per cent in another 20 years. This is mainly due to low reproductive rates and in some countries is as low as 1 when 2.1 is considered as equilibrating rate. Europe will disappear from the world map unless migrants from Africa and Asia take it over. That is why Europe is being referred to as Eurobia and London as Londonistan.

The root cause of the issue is the attempt in Europe to nationalize families and privatize business. Old age issue/ health issues/ child care issues are all normal family activities that have been taken over by the state and the state is broke. Funded security schemes are facing crisis since not enough numbers are getting in to labor force due to low reproductive rates and unfunded
security system is in difficulty since taxes are not adequate due to low population growth.

Coupled with economic and demographic crisis is the crisis of civilization in Europe. It has renounced the Church and has become secular. Church attendance has fallen significantly and churches have become tourist attractions rather than places of worship.

Most of the migrants, particularly those doing 'brown colour work' – like garbage removal, cleaning plates in restaurant, porter jobs, and grape-picking — are people from Mauritania/ Somalia/ Algeria etc and most are Muslims by faith. Due to a high degree of unemployment, there is resentment against migrants and this anger is turning into anger against Muslims. Added to this is the new front started by France in Mali to fight Islamic fundamentalists. Africa may become a new Vietnam for Europe.

Europe is sitting on a time bomb and any small spark could ignite it. Remember that all conflicts in the last 2000 years have started in Europe and became 'world' conflicts. India has already given $10 billion or Rs 56,000 crore – nearly one per cent of GDP to help Europe. Not a single European paper or leader has thanked us openly. One can only hope that we need not give more of our GDP or become cannon fodder in anglo-saxon conflicts.

We can never be certain about our Government. It may involve us in the emerging conflicts since our foreign policy is generally subservient to the anglo-saxon interests and we muddle along instead of doing strategic thinking. The sooner we evolve a strategy, the better, and it should be de-coupled from conflicts and focus on the eastern front.

 

Author is professor at IIM-Bangalore --Views are personal

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R.VAIDYANATHAN                     

PROFESSOR OF FINANCE               

INDIAN INSTITUTE OF MANAGEMENT     

BANNERGHATTA ROAD

BANGALORE