EU referendum a vote for greater protectionism

EXIM MATTERS

Although it was widely expected during the run up to the referendum, the actual rejection of the proposed constitution for Europe by the French and the Dutch peoples shook the confidence of the markets and the Euro fell significantly against the US dollar.

Even the poor job growth figures released by the United States failed to arrest the sentiments and the statement by an Italian minister that a referendum must be held on whether Italy should revert to Lira worsened the situation.

What the rejection of the proposed European Constitution did was to convey the message that the Europeans are a lot more distressed than what the statistics indicate. Unemployment is growing and the real purchasing power of the Europeans is getting eroded. That is bad news for the exporters from other countries, including those from India.

What is at stake is the future of Europe as an economic power. There is too much rigidity in the system. The immigration laws are stiff. The labour markets are much too inflexible. The laws relating to mergers and acquisitions are rigid. The tax rates are high to support the aging population. The politicians are unwilling to make tough decisions.

Through the referendum the French and the Dutch people conveyed their perception that very little is being done to address the key issues simply because the national governments have surrendered the sovereign decision-making powers to institutions like the European Central Bank.

They want no more of a situation where the national governments give up more powers to institutions of the European Union and act helpless about doing anything to correct the deteriorating situations.

Even after the demise of the proposed constitution (it needed ratification by all the 25 member countries), the European Union will carry on as hitherto but the big questions will be whether the politicians in the founder countries of European Union like France, Italy and Germany muster enough courage to do what is needed, that is carry out economic reforms and make the economies a lot more flexible.

Unfortunately, in all these countries, resentment against immigrants is high and the workers' unions are strong enough to resist any measures aimed to make them work longer hours or accept lower wages.

The proposed constitution for Europe is dead certainly but not the concept of a united Europe. The enduring appeal of lasting peace through greater integration is undoubted.

There is enough innovation and leadership in European businesses to get the economies moving again, if the politicians sell the idea of economic reforms to the people and show enough daring to carry out the necessary policy changes.

Asian countries that rely on export-led growth strategy have a great stake in growing consumer demand in Europe. As such, Japanese economy is still stagnant. The high fiscal and trade deficit in the US are worrisome.

The oil prices have again shot up above $50 a barrel. To rely only on the US growth is risky enough. For India, the major points of interest will be whether Europe will become more protectionist to ease the fears of the people threatened by cheaper imports, whether its negotiating stance at the World Trade Organisation will get more aggressive and whether the common agriculture policy of enormous farm subsidies will ever be reduced in Europe.

tncr@sify.com