Indiana State University Newsroom



Visiting scholar: Europeans unconvinced about leadership in economic recovery

August 5, 2011

Europeans are not convinced that European Union leaders dealing with the region's economic bailout "have a clue as to how to solve this," an Indiana State University visiting scholar said.

There is a high degree of disagreement amongst the various EU institutions and their key actors, said Professor Sandeep Gopalan, head of the law department at the University of Ireland, Maynooth, who was a visiting scholar to the Scott College of Business at ISU. His visit is sponsored by the college's Networks Financial Institute (NFI).

He said that the European Central Bank is speaking with one voice, while politicians in Europe - chiefly Chancellor Angela Merkel - are talking with another. While they are fighting to resolve the situation, he noted that financial markets have reacted "adversely to that uncertainty."

Rather than addressing the lack of confidence in the markets, EU leaders are playing to their home constituencies and dodging doing what is good for the EU as a whole, Gopalan said. "When ratings agencies and others reveal the truth, EU leaders try to coerce them with threats," he added, referring to recent statements by Merkel contemplating an EU controlled ratings agency.

"There is not the same level of democratic oversight or accountability [as in the U.S.] because it's not one country," Gopalan said, "so ultimately the dithering at the European level is punishing the citizens of these countries to varying degrees without a mechanism to ensure accountability." Gopalan argued in the Wall Street Journal last year that the Greek bailout was unlawful and that major changes were necessary in the EU treaties to facilitate such rescue packages.

Despite the bailouts, there are internal pressures for countries such as Greece, which were at risk of default, to exit the Eurozone, Gopalan said. Yet as some Europeans want it to dissolve, countries such as Germany want to keep the Eurozone in place because of the investment the nation has in it, Gopalan added.

He foresees tighter fiscal integration as the only lasting solution for EU states if the union is to survive.

"You have these contrasting trends. On the one hand, you have very little democratic oversight over decision-making in the EU currently, and when you have that problem, you can't in good conscience ask for more integration, because that just means more power to bureaucrats without commensurate accountability," Gopalan said. "Yet, without that integration, the whole EU project is fundamentally flawed. So without resolving these sorts of intrinsic structural problems, it's hard to see how the EU is sustainable in the long term."

Gopalan thinks the jury is still out despite the second bailout package recently given to Greece. "The ratings agencies have called the bluff of EU leaders and it is a default despite their attempts to frame it in" sophisticated yet unsound logic, he said.

He has seen some of the economic dilemmas unfold firsthand. In his current home, Ireland, which received a bailout from the EU and International Monetary Fund, leaders have made reforms to start changing the country's long-term economic problems. New levies on pensions, a property tax, household water charges, welfare cuts and hiring bans have all been imposed following the crisis. Still, credit ratings giant Moody's this month downgraded Ireland's bonds to junk status, which makes it more expensive for Ireland to issue new debt.

The downgrade, Gopalan said, was more of a reflection of problems within the European Union, rather than Ireland specifically.

"So to some extent, the Irish are being punished despite being the good guys and taking the pain and doing all the hard stuff that the bailout has imposed," he added. "It's surprising. It's the only country which has taken all that poison willingly. They have taken the axe to the public sector and imposed redundancies and pay cuts to the tune of about 20 percent" to slash expenditures.

He noted that Ireland has not incurred the debt that Greece has, nor does it have that country's structural financial deficiencies.

"There's a lot of pain that the average Irish person has had to deal with as a result of this bailout, which has not yet happened in places like Greece," Gopalan said, "and yet the Irish are being punished just as much as Greeks."

He points out that there also have not been the protests in Ireland to oppose cutbacks and other economic reforms, which have occurred elsewhere in the European Union. Still, he believes that there is a growing resentment among the Irish, who feel as if the EU and IMF are profiting at their expense.

"The one silver lining in the second bailout for Greece is the lowering of interest rates for Ireland. Without that, cheery Irish acceptance of pain might have changed to anger and protest," he said. "It might also convince the thousands of Irish emigrating to Australia and Canada to stay on in Ireland in the hope of a recovery."

The financial problems in the EU are different from the United States, where some of the debt has been incurred through massive stimulus and bailout packages and the ongoing wars in Iraq and Afghanistan, while in Europe spending is largely the result of "welfare state" entitlements, Gopalan said.

Recent negotiations between congressional leaders and President Barack Obama demonstrate that the risk of default is not just a European phenomenon. Credit ratings agencies have warned the U.S. of a potential downgrade of its bond rating if it does not cut spending.

"It's no longer the case that the U.S. can think its rating is safe and can carry on business as before," Gopalan said. "Hopefully the politicians will get their act together before things get out of their control."

Photo: http://isuphoto.smugmug.com/photos/992192758_DQaey-L.jpg
Sandeep Gopalan

Contact: Sandeep Gopalan, visiting scholar, Networks Financial Institute, Scott College of Business, 812-237-2011 or sandeep.gopalan@indstate.edu.

Writer: Austin Arceo, assistant director of media relations, Office of Communications and Marketing, Indiana State University, 812-237-3790 or austin.arceo-negrich@indstate.edu.

Story Highlights

There is a high degree of disagreement amongst various EU institutions and leaders, said Sandeep Gopalan, head of the law department at the University of Ireland, Maynooth, who visited the Scott College of Business last year in a visit sponsored by NFI.

See Also:

Indiana State’s international student enrollment edges higher

Indiana State looks to expand study abroad experiences to more students

Indiana State professors research growth of genomic development

Brazilian MBA students study U.S. financial system during trip to Indiana State

Operations and supply chain management unveils online center of excellence

Former prof follows Indiana State teaching grad’s success