The Euro Crisis
We have more housekeeping to do in an inter-connected world
— MURLI DHAR
By virtue of its openness, Mauritius is highly dependent on exports and imports for its survival. This has been the case for centuries past and will no doubt so remain for the foreseeable future. The dependency on external markets has at times been the source of our economic progress but at other times, it has caused distress amongst the population. This is a reason why we should always be attentive to international developments so as to be able to take pre-emptive action to defend our interests. This pre-emption is not a discrete one-off act in response to a crisis but rather it forms part of a continuous process of re-adaptation to changing global conditions.
When the oil crisis of the late 1970s, bringing forth a quadrupling of the oil import price in a short span of time, hit the economy, we very quickly ran out of foreign exchange reserves. We could not afford enough foreign exchange to even obtain certain items of daily necessity. The little foreign exchange reserves we could lay our hands on had to be rationed out among competing uses. But those days are now behind thanks to the major economic diversification drive undertaken in the wake of this crisis to insulate our economy from the fragility of its then narrow economic base. When financial deregulation came on top of the global agenda under the influence of the Thatcher-Reagan policies in the 1980s, we thrived even better by giving a further fillip to the growth of our international financial services. The effect of economic diversification was to make us even more entrenched into the global economy than before.
It is good that it was so. However, we did not learn the lesson that we needed to be very highly inventive at this level of inter-connection with the global economy. We took more time than it was necessary to draw the advantage of being the first movers of change in telecommunications and the digital revolution, for instance. Countries which did so developed an edge against countries like us so that by investing heavily in the new technology, they not only got into the products of the new age but equally built up a well-educated, trained and disciplined workforce which has gone on consolidating its edge over laggards.
Nevertheless, we have moved on and accentuated our presence in diverse markets in traditional areas of activity (e.g., sugar, textiles, tourism) and non-traditional trades (e.g., offshore financial services, business process outsourcing). Moving out to the world has resulted in exposure to international currencies, interest rates and price changes even more than in the past. It is reckoned that some 40% of our international trade is conducted in the euro, the rest being principally in US dollars but also in other currencies like the Pound sterling. Concentration of transactions in euro and US dollar arises from the fact that we have hardly been too successful at diversifying our trade to other markets than those of Europe and of countries which habitually invoice goods and services in US dollars. There has been talk of moving on to other markets that have been affected to a lesser extent by the recent global economic downturn but unless we develop complementarities in our structure of production with the new targeted markets, we may not make much progress in this direction. Not being able to buy/sell more from/to regional countries in Africa and the emerging economies of Asia has the effect of tying us down even more to our traditional markets in Europe for the major part of our exports.
Since the economic downturn of recent years has hit Europe harder, our continuing dependence on very slow-growing European markets tends to keep our pace of development equally slow. We need not neglect this market that has been acquired by dint of tremendous hard work over several decades; we can consolidate it to the extent we can; but we have to reckon that our scope is bound to remain restricted to Europe’s own pace of growth which is not at its top for the moment. We can get on to niche markets within Europe, as we have done with selling our refined white sugar, and hope to sustain our market share but there is not much we can do unless we can match skill input into such products as to be able to keep up with the competition. This calls for inculcating best practices and developing an innate ability to match up on-going product improvements at the global level.
Looking at the bigger picture, it is seen that a crisis has been dogging the European single currency for some time now, beginning with the sovereign debt crisis of Greece. A lot of dithering about the issue has put Ireland and Portugal into the firing range of markets for presumed failure to keep their public debt within manageable limits. While these fires had barely been lighted up, everyone on the markets started having an eye on Spain as the next potential casualty in the chain but sparks flew up instead in Europe’s third largest economy, notably Italy. It was sufficient for the Italian Prime Minister, Silvio Berlusconi, to get into an insulting public row on July 8th with Guilio Tremonti, Italy’s respected Finance Minister, for the markets to suddenly stop buying up Italian government bonds, this irresponsible behaviour causing the sovereign debt crisis in Europe to amplify. The northern states of Europe started distinguishing themselves from the more profligate southern states, thus dimming the prospects of an overall solution to Europe’s debt crisis. The markets have been asking whether in the light of such self-seeking individualism by states forming part of the euro zone, there is indeed hope for a future of the euro. Political leaders appear to have been summoned to their better senses but having jolted the markets, they have more to do now to keep the confidence in the single European currency alive on the markets.
This uncertainty about the euro and the absence so far of plausible mechanisms in place to salvage the currency from imminent distress should warn us about another aspect of our exposure. If the currency were to prove untenable due to the parochial attitudes of Europe’s leaders, we might have to grapple with the problem of the single market falling apart. At this stage, it appears that good sense may finally prevail without passing the buck from one party to the other because the prospect of the euro no longer being the unifying trade factor for Europe is gloomier than if the situation were cured. There are also issues of common tariffs for goods entering Europe and these will need to be preserved to our advantage if ever the worse were to happen. We are too small to exert any influence when big issues like this crop up but it is clearly in our interest to support the commonalty of Europe and its currency in forums where we have a voice, however feeble.
Mauritius is a small economy. It would not make much of a difference to Europe if we were to go out of their radar. It must also be said that the scale of the European currency crisis and its fiscal arrangements are for the Europeans to set right. Insofar as the euro crisis, if it were to amplify, would send several major European banks, that have lent money heavily to hugely indebted European governments, tumbling down into precariousness, there could be a large melt down of economic structures in Europe. By extrapolation, the world economic situation would deteriorate at once if that were to happen. We would find our economic space narrow down in that case. We are not there yet.
The situation would be untenable if America on its part also failed to prevent itself from defaulting on its debt due to political brinkmanship over there in the struggle for power. In that case, the European crisis might lead to an economic blackout on a larger scale than if Europe alone were unable to put its act together. Even though we are small, we have to keep our eyes open and that might prompt us at last to maintain more self-sufficient lines of economic interaction with our regional neighbours. It is an opportunity for us to reconsider re-positioning our trade pattern without breaking any existing trade ties with our traditional markets. Will we draw the lessons? It would be good if we could start acting substantively on them as well.