The message from Europe

Socialist Party candidate Francois Hollande's election as the new French President – plus the good show put up by non-mainstream, anti-European Union (EU) parties in Greece's parliament polls – represent a clear vote against fiscal austerity policies that have crimped growth across the region's economies. Currently, seven of the 17 euro-zone countries (Italy, Spain, the Netherlands, Belgium, Ireland, Greece and Slovenia) and three outside the bloc (United Kingdom, Denmark and the Czech Republic) are officially in recession, suffering two or more successive quarters of negative growth. Fiscal fundamentalists defend austerity and balanced budgets, which, they say, promote growth by keeping interest rates low and inspiring confidence among private investors. This strategy has, however, proved counterproductive in Europe, where private consumption and investment demand has been weak despite interest rates already ruling low and the European Central Bank's extending over $ 1.3 trillion-worth of refinancing support to banks. The latter action, while helping to infuse liquidity, has not fundamentally altered the anaemic private demand scenario. Public spending cuts under the circumstances have only further curtailed growth and boosted unemployment levels, denting consumer confidence even more. Falling growth rates have, moreover, adversely impacted government revenues, worsening their fiscal and public debt problems.

Doubtless as these results are for a return to Keynesian policies of massive public intervention in the macro economy, it would be wrong to extrapolate them as relevant in the Indian context. The problems for the Indian economy stems not so much from the absence of any fundamental growth impulse as has been for Europe, but from what can be termed as an absence of a ‘governance impulse'. While Europe probably cannot do without a strong fiscal stimulus, what India requires really is a demonstrable commitment from the Government that it is serious about mediating among various stakeholders to resolve their conflicting interests and get major investment projects off the ground. Investors also wish to see tangible evidence of the Government's commitment to reforms and clearing the various taxation and other regulatory hurdles coming in the way of doing normal business. In other words, more than a lack of confidence in India's growth potential, it is a perception of governance deficit that is keeping investors away. That cannot be addressed through fiscal or monetary policies alone.

The election results in France and Greece are bound to raise doubts over the future of austerity programmes and reignite fears of sovereign debt defaults. Mr Hollande has already called for renegotiating the budget discipline treaty signed by EU leaders in March, shifting the focus away from austerity to growth. The stability of the euro and economic well being of Europe has obvious implications for India, given the region's importance as a market for our goods and services. The European banking industry, moreover, is a significant financier for India as well.

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