It?s injurious to the health of the business-dominated economy if management students and faculty alike remain unmindful of the global political phenomena and future possibilities. Hardly any economy today can escape the international economic forces completely. This article examines the possible effects of the European crisis on Indian exporters and importers and how a future manager must be well-positioned to make the most of whatever happens around us.
As the European economic drama unfolds, the dilemma of policy choices before the debt-ridden European countries gets more and more evident. Getting a bail-out by the ECB and IMF will force these countries into an austerity drive that is bound to push them deeper into the economic slump they are already experiencing. Leaving euro and devaluing own currencies would be like leaving safer terrain to venture into unknown jungles. To avoid default, they can take ?euro holiday?, that is, leaving the common currency for a while and enjoying monetary sovereignty to lift the economy out of the crisis, before joining the euro back again. This will immediately create opportunities for Indian imports from Europe and import-based exports, though not exports to Europe.
If the fiscal policy dictum of the European authorities is going to hurt the domestic economy and the common monetary policy of the ECB is different than the one required by the individual economy, then the member-country can explore the option of opting out of the common currency for a stipulated period of time, devaluing to reduce BoP deficits, regaining economic strength, letting the currency appreciate to the pre-holiday levels, and then join euro back again. And if the European authorities don?t wish to see cracks developing in the edifice of euro, they would encourage such ?euro holidays?. After-all, ?extra-ordinary situations require extra-ordinary measures?. An alert manager can reap extra-ordinary benefits from bilateral trade with European countries in this event.
There are three levels of tolerance zones around the common monetary policy adopted by the ECB. One, wherein the member nation has highest tolerance because the policy is in sync with its own requirements. Two, wherein the member-nation can adjust to the common monetary policy even if it?s going tangents. And three, the member country foresees deeper crisis or prolonged recession because of the common monetary policy. In the third case, the country would consider leaving the common currency and devaluing, risking a plunging country-rating, rising yield on sovereign bonds, greater difficulty in raising funds to further stimulate domestic economies etc. A closer look at some macro-economic indicators would make this point clearer.
Evidently, Ireland, Greece and Spain with negative growth rates and high unemployment rates urgently need fiscal stimulus, probably by running further deficit, no matter what their debt-to-GDP ratio is. An austerity drive would compel them to curtail government expenditure and raise taxes, exactly what they should refrain from at the moment. Also, given the nexus between the fiscal and monetary policies, they need a separate monetary authority that can accommodate their deficits. As for the euro authorities, bailing out a number of member countries waiting in the wings may be a less feasible option, what with their trillion-dollar kitty, than letting them go on a ?euro holiday?.
When member-countries are faced with crisis situations of different natures needing opposite monetary policies, the sustainability of common currency comes under question. Several European countries went through similar pains before the birth of euro in 1999. In 1992, Bundesbank started monetary tightening by raising interest rates. This put an upward pressure on the Deutsch-Mark and simultaneous downward pressure on the trading partners’ currencies, e.g. Italy and France. Being in a fixed exchange rate agreement (European Monetary System) with Germany, they faced difficult choice between leaving the fixed exchange rates and devaluing their currencies, or defending their exchange rate by raising interest rates to match the German rate hikes. The problem in raising domestic interest rates was the recession these European countries were facing. Some countries complied by raising rates that deepened recession, but they remained in the EMS. Great Britain refused to go along with German monetary tightening and decided to leave the fixed exchange rate system.
In the current situation, austerity drive for a sluggish economy is not an option. The choice really is between defaulting on the sovereign debt, or leaving euro. Quitting euro forever will waste the effort they had taken to comply with stringent conditions to join euro. So, a better option would be ?euro holiday?. Indeed, on running expansionary policies, their inflation and debt-to-GDP ratio will rise, but they will have gotten over the recession and huge unemployment. And devaluation will have pulled them out of BoP deficit. Immediately on regaining a sound growth rate, they can follow self-imposed fiscal discipline, start tightening and also repaying sovereign debt with better tax collection, which can come only from an economy wherein people have jobs.
Management students must be ready to take full advantage of such global phenomena as soon as they enter the industry, or especially if they start their own business. It?s a very encouraging trend that country?s best B-schools are creating new entrepreneurs and they can surely utilise this knowledge.
The author is corporate trainer and guest faculty of economics at Symbiosis, DMAT-Raipur, IIPM, IIEBM-Pune
shubhadasabade@hotmail.com