Top
PGDM colleges in Delhi NCR have been following the turn of events in Europe and
Great Britain very closely. In the aftermath of BREXIT, it seems there has
begun a fear psychosis that seems to be self perpetuating. To this extent it
may be said that the downslides observed in the stock markets of the periphery
countries of Europe have been the biggest since the crash of 2008. The pound is
now down to $1.30 which again is a matter of concern for British policy makers.
There has been no word coming out from the business captains and probably the
damage is maximized when top corporate leaders decided to stay mum. It is the
lull before the storm. Since the publication of the results of the BREXIT
referendum the excitement in media circles may have died down because of the
consequences becoming imminent and a leadership crisis swelling in the
political circles of Great Britain so much so that even the leaders that had
supported BREXIT are wary of taking on the reins from the resigned British PM
David Cameroon. There are questions that remain unanswered though. These are
the questions that are toughest to answer. At Ishan Institute of Management
& Technology, one of the top PGDM colleges in Delhi NCR, we have analyzed
piles of data pertaining to BREXIT and have come up with this list of the most
important ones. Take a look.
What Will Europe Look Like?
The
referendum conducted in Great Britain was a political exercise and the fear it
has stirred is a political crisis, not purely a financial one. There are
political questions that hover over the future of institutions that had been
created and maintained by member nations as a mark of unification of Europe in
the aftermath of the Second World War. The European Union was one of them. The
other was NATO. European Union was an economic institution that worked with an
aim of financial integration and the creation of a free trade area that could
facilitate the perfect mobility of people and capital. In the era of the Cold War,
staying together and united against the perceived threat of communist erstwhile
Soviet Union was a strategic imperative. In the presence of NATO, European
Union seemed a very feasible and profitable institution because a free market
that was artificially created through the Treaty of Rome and the European Economic
Community was defended by a web of stable political and military alliances under
NATO. In the presence of a fragile European Union, NATO seems to be the biggest
loser. Now that countries like Great Britain have voted in favour of economic
sovereignty, could political sovereignty be far behind? Can Great Britain
sustain itself under the fire from Scotland and Northern Ireland? Can a divided
Great Britain with scattered and fragmented nuclear stealth capabilities
continue to have the same importance in NATO? How shall European leaders from
countries like Germany, Italy and France deal with an ally that is more of a
liability than an asset? The BREXIT issue has the potential to redraw economic
and political borders.
Can the Euro Survive?
Great
Britain during its tenure of membership of the European Union had its own
currency. But as Europe has progressed from the ruins of the Second World War, through
the travails of the Cold War and then the disintegration of the USSR, it has
become evident that a two speed Europe is not just a much debated possibility
but a reality. Rates of economic growth and GDP paths have continued to diverge
despite being united by a single currency for most of the member nations of the
European Union. The divergence was best gauged from the fact that 2 years ago
during a match at the FIFA World Cup between Germany and Greece, social media
was overflowing with memes of a debtor Vs creditor match. PIIGS countries have
done woefully in the last decade. Despite the fact that Italy has pacified its
internal strife by sprinkling austerity measures, the fiscal profligacy of the
periphery is putting a drag on the economic growth rates of the centre. How can
the Euro survive as a viable currency and as an instrument of investors in the
foreign exchange derivatives market? In the aftermath of BREXIT the sudden rise
in the price of gold bear testimony to the fact that investors believe gold to
be safer than the Euro. Even if this is just a passing phase the consistent
sickness of Euro will come under question. Does the fragility of Euro give
teeth to the idea of BRICS replacing the EU as free trade area? After all
European Union accounts for one third of the global GDP.
What Happens to the Short Spell of
Recovery?
European
Union had seen a small spell of economic recovery. What happens to that brief
spell of recovery that Europe was looking forward in the aftermath of the back
to back shocks of 2008 and 2010? The truth remains that economic recovery looks
not only difficult but there is a likelihood of Europe slipping back into
recession mode. Article 50 of the European Treaty allows a time frame of 2
years for a member nation to negotiate a bargain with European Union for a new agreement
on membership. Markets, banks and financial institutions are in no mood to wait
for 2 years. If the actions of the British leadership are to be taken at face
value, then it is amply clear that Great Britain for one does not have the
credibility that it once had after doing the somersault on BREXIT and second, a
negotiation for a new agreement with the European Union looks unlikely. The
longer that the business of political diplomacy and negotiation drags the murkier
it gets for the European Union. Austerity measures that have been implemented
by the governments of France, Italy and Germany have not yielded desired
results and let us not forget that United States of America has been able to
halve its fiscal deficit compared to what it was in 2012 and hence has an
option to pump prime but not the European Union.
What Policy Tools Can Leaders and
Institutional Heads Use to Counter the Recession?
Institutional
heads and bankers have been waiting with baited breath in expectation of an
unwanted liquidity crisis that may be imminent in the aftermath of BREXIT. As
such most bankers and leaders are ready with liquidity infusion and
quantitative easing if required. In emerging economies like India, it is widely
believed that companies with exposure to European Union may be adversely affected.
Any rate hike by central bankers is likely to be postponed for the next six
months. Yet none of these tools may yield results. The likely fall in export
revenues, drying up of export orders and outsourcing from Europe to India and
other emerging economies shall at one point turn viral but the fact remains that
the crisis is largely political and mandates a political solution not
necessarily a financial one.
