Businessworld, October 8, 2011

Unfortunately, it takes a crisis to see how inter-connected the world is today. The US is still to recover fully from the economic downturn that started with the sub-prime crisis of 2008. The sovereign debt crisis in Europe threatens to spell doom for not just the Euro zone, but also for countries like China that depend on exports to Europe. The crisis could hit emerging markets including India, warns Frank-Jürgen Richter, founder and chairman of Horasis, a Zurich-based global business community. Richter, who was in New Delhi to attend a management summit, spoke to BW’s T.K. Vineeth about the European crisis, how it affects businesses the world over, and what Indian companies should do. Excerpts:

In a recent BBC interview, you said the problem with Europe is that it doesn't have proper leadership. Isn't the real problem there are too many leaders, pulling at different directions?
I think it's both. On the one hand we have too many leaders. If you look into European Union (EU), for example, we have Mr Barroso (EU Commission president Jose Manuel Barroso). Then we have the national leaders in Berlin, Paris and London. But the division of labour - who is doing what - is not clear. And whenever the US President visits Europe, he doesn't really know whom to talk to. The same is true for the Indian Prime Minister. We are definitely losing out for the time being in terms of our identity and economic strength. Europe today is like bits and pieces of different tiles put together. It is not like one big Europe.

When I come to India, I feel extremely comfortable, more at home than maybe going to some European country. It tells you a lot of about Europe. And Europeans still live and work in the country they are born into. Only a small margin of people cross the border and look for opportunities outside. Migration is happening, but to a very small extent. The country with the most migration is Switzerland (40 per cent), but then it is not part of the EU.

Do you think the European crisis has reached the tipping point where only outside help - for example help from China - could save it from collapsing?
You know it is a new trend to call China as the paymaster. The view on China is two-fold. For one, there is still some protectionism especially in Europe and the US (against China). On the other hand, we welcome China putting money to buy our bonds and bailing us out. We should treat China as a peer or partner and help Chinese companies to thrive because China also provides employment in Europe. This should be the way to go, to advise Chinese companies to invest in Europe; in industrial assets, not just in bonds. I think in the short term, we should accept China's help.

But Europe will need to compromise a lot, because the Chinese are not giving anything for free. They want to get the market economy status, which is on the forefront of their wish list. And secondly, the Chinese want to be welcomed in Europe and want to be treated as a partner.

But is there a consensus for that? Are the talks on?
China has already had consultations with Italy, Spain and Greece. Negotiations with Portugal are also coming up. Of course, China is the new hero coming over to Europe. Whenever a high-level Chinese delegation comes to Europe, they are welcomed with open arms. I think the Chinese would love to buy into the Euro zone bond, discussions for which are underway.

But Euro zone bonds are still in the works…
Yes, because Germany is against it. Also countries such as the Netherlands, Austria, Sweden, and Finland are opposed to it. But in the long-term it will happen. But first we have to balance our economies. Before having a European finance minister or a Eurobond we need to have a level-playing field all over. One idea would be to have a flat tax, to have fiscal discipline all over. For example, today you can go to Bulgaria or Romania and enjoy very low taxes. But in Greece, the tax is very high. So it is definitely a competitive disadvantage to Greece.

You said Euro bonds will eventually happen. But when?
My feeling is that it wouldn't happen before the next four to five years. We have to work on fiscal discipline, have to cut back on government expenditure and have to be more competitive. You can't find so many competitive companies in countries like Portugal or Greece. Spain has large companies - for example Telefonica. But what is missing in Spain is the vibrant, small and mid-size economy. Italy, too, has quite a big class of entrepreneurs, but the state-owned companies are not very strong. So you need to put emphasis on the small-and-medium sector as the new backbone of economic growth in Europe.

There is a school of thought that defaulting countries like Greece should be expelled from EU. How do you react to that?
Yes, of course - one approach would be Greece should leave Europe for some time. Yes, that is an option. But what we need to consider is speed. We shouldn't wait for too long: it is matter of yes or no. To bail out Greece or not. The decision has to be taken because the markets are not waiting any longer. Investors want to see quick results. They want to have some kind of stability and truce.

What's your gut feeling - how long will the current European crisis last?
I am very skeptical though I see a silver lining on the horizon. I think Europe will remain in crisis for at least the next two years. But the most important question is: how will it spill over to the emerging world? For example, what impact will it have on India and China? I would say there would be less impact on India than China. Because China, unlike India, is dependent on exports to Europe to some extent. Similarly, if Euro's value declines, Chinese goods will turn expensive.

Horasis is a global visions community committed to enact visions for a sustainable future. (http://www.horasis.org)