Greece is having unprecedented economic problems and so is Spain which is seeing the rise of a new party Podemos. France too is in economic trouble and Germany is facing flattening out of exports and slower growth prospects.
On the other side of Eurozone, the BRICS are facing acute problems so much so that its existence is becoming fragile and is threatened by the emergence of new groupings. What is happening to Eurozone in terms of economic decline is also happening to some members of the BRICS.
The main problem with Eurozone countries is mounting debt in the face of rising public expenditure. Austerity measures like cuts in social spending and privatization have resulted in a huge rise in unemployment. Much like the rise of the Aam Admi Party, public outrage towards imposed expenditure cuts led to the rise of the Syriza party in Greece and the Leftist Prime Minister Alexis Tsipras has reiterated that he will not accept any more harsh austerity measures for any debt relief package like labour reforms and more privatization. Tsipras has also declared that he needs time to implement reforms and shake off the mismanagement of the past.
Tsipras wants a bridge programme to be put in place for a few months while a new deal is agreed to replace the bailout which has already forced drastic cutbacks in social security measures affecting the poor and elderly. Greece has received 240 billion euros ($274 billion) in bailouts already and Germany wants Greece to continue with the reforms. Greece's current bailout expires at the end of February. May be Greece will have to leave the Eurozone. Where will it go from there?
Take another case -- France. Not only has it seen terror attacks that resulted in the death of 17 persons, it is undergoing a deep economic crisis along with a rise in unemployment. As a founder member of the European Union, it is the second most important country in EU. It is resisting the solution offered by the Troika (IMF, European Commercial Bank and the European Commission) to mounting debt through more austerity measures. France's budget deficit is at 4.3 per cent.
The French people are not prepared to undergo more expenditure cuts to meet the fiscal deficit requirement of the Eurozone at 3 per cent. Marie Le Pen, the extreme rightwing leader, has said that France should get out of the Eurozone and have a more competitive currency. If it leaves the Euro, where will it go?
In the case of Spain, mainly young people are supporters of Podemos founded on January 16, 2014. Podemos is led by a left wing political scientist Pablo Iglesias, who is against expropriation of property by the state in the cases when people are unable to pay mortgages due to fall in incomes on account of austerity measures. Podemos proposes to get out of the Eurozone in order to democratise the economy and has called for a renegotiation of austerity measures. Where will Spain go if it leaves the Eurozone?
The BRICS are in trouble as well and are in need of some fresh blood and support from outside. The idea of a BRICS bank has been mooted and it now needs the support of the all the members to operationalize it and become a viable alternative to the World Bank, the IMF and the ADB.
The problem with BRICS is also serious. About $88 billion have been pulled out of Russia last year. Standard & Poor has downgraded Russia's credit rating to junk status(BB+)recently putting it below the investment grade for the first time in a decade. A junk status for a country or company suggests that it is likely to default on its debt. But Russia has $379 billion in reserves and in case of real need, China has 4 trillion dollar denominated assets. It could easily lend to Russia. It is however true that Russian exports have fallen sharply and imports (due to counter sanctions by Russia) have also declined which has already started to have an adverse economic impact on Germany. Russian sanctions are beginning to hurt the Eurozone countries now.
Brazil also is facing problems in its exports comprising mainly of commodities because of falling prices. Brazil has iron ore and agricultural commodities like Soya, coffee and sugar whose prices are falling. It also has a big budget deficit and there have been allegations of excessive social expenditure. Only India seems to be poised for better economic growth prospects and a bright economic outlook. India is expected to grow at 6.5 per cent this year. India has also many problems and there are still 22 per cent of the population below the poverty line which means around 300 million people are very poor.
South Africa too is facing major problems that would jeopardize its economy. It had only 1.4 per cent growth in 2014 and the unemployment rate was at 25 per cent. But given the fact that it has valuable mineral resources and skilled manpower, it may tide over its difficulties.
Whatever may be the problems today, the fact remains that the BRICS will be the economic powerhouse of the future. There is no doubt that the solid progress achieved by all these five countries cannot be wiped out by temporary market related turmoil that involve falling commodity prices especially oil.
In 2014, the five BRICS represented 3 billion people or 40 percent of the world population and a combined nominal GDP of US $ 4 trillion. BRICS represented in 2014, 18 per cent of the world economy.
China has had an average growth of 10 per cent for 30 years. It is but natural that it would have to slow down. It is already an economic giant and the factory of the world and the latest deliberate move by the government has been to move away from export led growth strategy followed for decades to more domestic demand driven growth. It seems a reasonable quest because unless the Chinese people have higher incomes and are able to demand more goods and services produced by China, higher growth cannot be sustained. China has already had a very high rate of investment so now is the time to encourage domestic consumption. Also, the global economy's outlook is getting clouded with uncertainties and export led growth is clearly not a viable option for China today.
But BRICS will collectively be larger than the GDP of six leading industrial countries combined by 2030. As India's Prime Minister Narendra Modi said "For the first time, it brings together a group of nations on the parameter of 'future potential' rather than existing prosperity or shared identities". The very idea of BRICS is thus "forward looking". BRICS is a cause for worry for countries that have long dominated by the current economic order.
To be able to reach their potential by 2030, BRICS and specially India has to grow faster. BRICS will represent a huge part of humanity and global resources. That is why they chose to have their own development and cooperation agenda and have their own bank. It will liberate them from the clutches of the IMF or the ADB if they want to borrow for development purposes, especially infrastructure, in the future.
All the Eurozone member countries that are in trouble today with the Troika may be forced to leave the Eurozone and they can join the BRICS which has its own bank and sooner or later will have its own currency.
BRICS members are following their own fiscal and monetary policies. In contrast, the IMF from Washington and the ECB from Frankfurt decide when to bail out a beleaguered country in the Eurozone and by how much and they also decide along with the European commission what kind of austerity package the country has to follow and even when there is visible and unprecedented human suffering, they do not seem to relent. Belt tightening measures have led to a fall in the living standards drastically in Greece, Spain and France. It has led to the youth from not having jobs for long periods which can demoralize them for the rest of their lives. The adverse psychological impact on youth of being jobless for a long time is great. As a result of austerity measures, the Eurozone is facing an economic crisis with recession as it has affected demand. There will be no growth in the Eurozone in the next one or two years at least.
BRICS on the other hand has to remain a cohesive group. They have to settle their internal differences like the border issues between India and China. They are today a challenger of the western powers' clout in the UN, WTO, and the Bretton Woods twins World Bank and the IMF. It must be remembered that all the members are developing countries except Russia. The group intends to expand in the future. They need help in health, education, banking and infrastructure. France as a developed industrialized country can offer support to the BRICS.
The BRICS need to be protected from balance of payments fluctuations. In fact, the New Development Bank has a Contingency Reserve Arrangement ( CRA) of $100 billion which is aimed at relieving countries faced with problems in the balance of payments. China will be contributing $41 billion, Russia Brazil and India will each contribute $18 billion and South Africa $5 billion to the CRA.
The New Development Bank's headquarters will be in Shanghai and there will be a democratic approach to the governance with each member getting equal voting rights. Its primary focus will be lending for infrastructure projects with authorized lending of up to $34 billion annually. South Africa will have the African Headquarters of the Bank. It will have starting capital of $50 billion with capital increased to $100 billion over time. Brazil, Russia, India, China and South Africa will initially contribute $10 billion each to bring the total to $100 billion. Each member cannot increase its share of capital without all other 4 agreeing. The bank will allow new members to join but the BRICS capital share cannot fall below 55 per cent. It would be possible to accommodate EU members who may want to leave the Eurozone and join the NDB.
One driver for BRICS Development bank has been "to promote their interests abroad? and (they) can highlight the strengthening position of countries whose opinion is frequently ignored by their developed American and European colleagues." Basically the idea is to have a bank for the global south which was badly needed. Two members of BRICS, Russia and China have also undertaken currency swap deals.
In October 2014, Russian and Chinese leaders met in Moscow and signed 40 inter governmental agreements. Among them is a $24.4 billion yuan-ruble currency swap facilitated by the CRA and a $400 billion natural gas deal. The swap is among the first concrete steps the BRICS has taken to eliminate the dollar from international trade and the natural gas deal is the second.
A parallel reserve currency is needed in the world today and it is likely to be fulfilled by the yuan. The US, EU and Japan have been reviving their economies by quantitative easing which has devalued their own currencies and promoted their exports. But it has not been beneficial for the development of the emerging markets. They have received unprecedented dollar inflows into their stock markets which have led to strengthening of their own currencies vis-à-vis the dollar, hurting exports. They do not need the volatility that the QE has been causing to their stock markets.
Greece, Spain and France are developed countries which may have to leave the Euro and they have expertise in many areas with which they can contribute to the BRICS. After all, Russia is the only developed country which is a member of BRICS. France has been a challenger of the Bretton Woods system before - when President De Gaulle demanded gold for France's dollar reserves and brought about the collapse of the Bretton Woods system. In February 4, 1965, President Charles De Gaulle denounced the dollar and gold system supporting it. He ordered the Bank of France to begin converting its dollar reserves into gold. The result was a steady drain of America's gold supply and there was a worse threat that other countries would join France in a gold rush.
America went off the gold convertibility and went for an alternative to gold and Washington proposed that IMF establish SDRs as an international credit account among countries. De Gaulle vetoed the proposal and continued to demand gold for dollars. His move changed the entire international financial system and Nixon ended the dollar convertibility to gold.
France has a lot of clout at the IMF and together with UK, US, Germany holds a huge proportion of quotas. France has customarily supplied the IMF with administrative heads over the years and there have been many French nationals who have been Managing Directors of the IMF.
With its clout as an industrialised nation with significant contributions in various specialized industries from aerospace to cosmetics, it is well equipped to catalyze a change in the IMF quota regime. The reforms of the IMF quotas has not taken place and is a sore point with the BRICS which together only have 11 per cent of the quotas.
There can be a paradigm shift in the balance of powers with new members like France, Greece and Spain joining the BRICS or supporting it from outside. They will have access to funds in the democratically set up New Development Bank that will be operating from 2016 for all their balance of payments and debt relief requirements. This arrangement will give them breathing space to have a bridge which is being denied to them by the Troika.
By Jayshree Sengupta
sourche: Observer Research Foundation (www.orfonline.org)
sourche: Observer Research Foundation (www.orfonline.org)
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