Why Europe will not collapse after Brexit: Ruchir Sharma

Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, is a bestselling author. His latest book, The Rise and Fall of Nations: Ten Rules of Change in a Post-Crisis World, talks about the 10 indicators of a nation’s health. He talks to Fortune India about the state of the global economy. Edited excerpts:

After Brexit, do you think the European Union (EU) will collapse?
I think it would take a much deeper economic crisis to set in motion the collapse of the EU. Right now, growth is finally picking up a bit after the continent suffered two recessions in the space of seven years. The success of the nationalist Right in these relatively benign conditions is one of the big surprises of the current European scenario. However, the fundamentals probably would have to decay further before the nationalists would have a chance to unwind the union.

Was the euro doomed to fail, and was the idea of the common currency fundamentally flawed?
There is no question that the euro made it impossible for individual countries to respond to financial crises by allowing their own currency to drop in value, which attracts foreign investors and makes exports more competitive, thereby rebalancing the economy. This adjustment mechanism was lost to the Eurozone members.

If ever the Eurozone dismantles, what will be the impact on the global economy and free trade negotiations?
I think that is a low-probability scenario. Remember, Britain was always a reluctant participant in the EU, and never joined the euro. The EU has cracked with the

departure of perhaps its least committed member, but the Eurozone is as yet untouched. Clearly, it would be hugely disruptive if, say, France took inspiration from Britain and left the union and the euro. But France was one of the founding pillars; not a late and lukewarm entrant. The European centre is not permanent, nothing is. But I think the collapse scenarios probably overplay its weaknesses for now.

Coming to the global economy, is growth for the sake of growth an idea we ought to give up?
That’s a question more and more people are asking, but economic growth is never just “for growth’s sake”. Right now, weak global growth is accompanied by rising inequality, a particularly toxic mix. This is critical because rising inequality undermines political support for policies aimed at promoting growth and creating new wealth. Historically, these have been indistinguishable from policies that lower poverty, improve schooling, and so on.

In countries such as Brazil and India, one often hears the argument that the government can’t focus on growth at the expense of human development, but this is a false choice. Every year the United Nations releases its Human Development Index (HDI), which ranks countries by educational measures like years of schooling, health parameters such as life expectancy, and basic infrastructure measures like access to running water and electricity. A nation’s rank on the HDI often aligns closely with its ranking on per capita income, which is the result of its long-term growth.

India, for example, has risen in the rankings, but only as its economy grew. Back in 1980, when there were only 124 countries on the HDI, India ranked 100th. Over the subsequent decades, India’s economy expanded by 650%, while the global economy expanded by less than 200%, and as a result India climbed in the HDI rankings. It now stands at 89th among the original 124 countries (up 11 spots).

However, countries with stronger economic records made bigger gains. China’s economy expanded by 2,300%, and its HDI ranking climbed 30 places, from 92nd to 62nd. In general, if a country focusses on economic growth, human development will follow.

We have been accustomed to thinking of different regions of the world as being the centres or engine of global growth at different times. What could be the future of such a region? Or is this way of thinking a thing of the past?
The idea of regional engines is still relevant. Economies do tend to pick up with their neighbours, and throughout the postwar era, superfast growth has tended to appear in regions—starting in southern Europe in the early years, and moving to East and Southeast Asia. Currently, the hottest region is South Asia, which has the highest concentration of accelerating economies in the world.

The problem is that the economies with bright prospects, including South Asian economies such as Sri Lanka and Bangladesh, don’t have the scale to lift the rest of the emerging world with them, the way China once did. Even if India, another nation with more than a billion people, continues to grow faster than 5%, it won’t have the impact of China, which sustained 10% growth for decades before 2010. This is another reason why every nation needs to recalibrate its definition of success, and avoid wasting money in pursuit of growth rates that are no longer possible in the post-crisis era.