Draghi and the unveiled oracle

What, at the start, was billed as a global crisis has increasingly become  a devastating  euro zone crisis. Mario Draghi has stressed the policy of the ECB based on the mix of three questionable arrows.

The financial crisis that culminated in the United States in the fall of 2008 with the collapse of Lehman Brothers was immediately compared to that of 1929. A reminder that generated a global alarm . What kind of judgment on the crisis can we pass six years later? There are four points that can help to assess the comparison.

1. The first point relates to the collapse of the banking system which, in both crises, was the trigger of the economic crisis. Here is a first important difference. The banking crisis of the autumn of 1929 dramatically worsen during the years. When, three years after the start of the crisis, Franklin D. Roosevelt became President, he faced the mass panic and the long lines of depositors in front of the bank counters, and ordered the temporary closure of all banks, while the Administration was preparing to take extraordinary measures to produce a dramatic overhaul of the banking system.

Luckily, those scenes have been consigned to history, The American banking crisis of the black Autumn 2008 did not go on for years, but only a limited number of months. In the summer of 2009, after having performed the first post-crisis stress test, Tim Geithner, former chairman of New York Federal Reserve , having been appointed Secretary of the Treasury by Barack Obama, announced the end of the red alarm. Notwithstanding the crisis of some old institutions and, mainly, the collapse of Lehman Brothers, the rescue of the big American banks was, at large, a done deal.

In Europe, the banking crisis was parallel and not less alarming. The “ core” countries, that is , Germany, France and the United Kingdom , were able to set up quick solutions, undertaking massive public interventions, including nationalizations. (Different was the fate of the peripheral countries, but this would require another chapter). Six years later, the big business was able to drink to an outcome that no financial wizard would dare to predict. The Wall Street indexes marked the highest levels in American history, and a similar result has been recorded in Europe. The financial elites, who had been at the origin of the crisis, benefiting from unlimited and crucial help of the governments, came triumphantly out of the crisis.

2. The economic outcome of the crisis was very different . A big gap was created between the United States and Europe. And, more precisely, between the Eurozone’s countries and the others. The United States’ recovery went above the 2008 GDP level. On the contrary, the Eurozone is still below the pre-crisis GDP level, while Italy shows a dramatic setback close to 10 percent of GDP.

Even more striking is the trend of unemployment. In 2010, unemployment rate had reached, across the two sides of Atlantic, an average 10 per cent of the workforce. Four years later, in the United States, the unemployment rate has fallen to a level close to 6 percent; while, in the Eurozone it continued to rise, touching about 12 percent, with a catastrophic peak of 25 percent both in Greece and Spain.

If these differences point out two opposing trends in the development of the crisis, the outlook is even more worrying. The current growth rate is around 3 percent in the United States, while in the eurozone, it fluctuates around zero, being negative in Germany and Italy. The most intriguing aspect is that the two major EU countries outside the eurozone, Britain and Poland, record a GDP growth of around 3 percent.

It is fair to conclude that what was billed as a global crisis is more and more a deep, long-lasting, eurozone’s crisis. In other words, the policies imposed by the irresponsible technocracy of Brussels, supported by Berlin and by the national elites, have turned a serious, yet manageable, crisis, in an economic catastrophe with dire social and political consequences.

3. On this background of failed policies all eyes and hopes were turned to the ECB temple, waiting for a miracle of Mario Draghi, his President and supreme priest. After an intense as confused debate, following this year’s Jackson Hole (Wyoming) symposium of central bankers, on how it should interpreted Draghi’s Delphic oracle, the response arrived clear and unequivocal, in occasion of the ECB Governing Body’s meeting in Frankfurt,

Let's take a look at the two main announced measures. The first is a new, indeed symbolic, cutting by one-tenth of a point (from 0.5 to 0,05) of the interest rate, warning that this is the last one. The second measure is focussed on the purchase of ABS, "Asset-backed Securities": in essence, bonds issued by banks, based on packages of loans to businesses and households. This measure, to which it must be added the possible purchase of “covered securities"), and the implementation of the already decided loans for the financing of small and medium-sized enterprises, are designed to stimulate the credit expansion.

Having been questioned whether it is could be regarded as a sort of "quantitative easing" - largely experienced by the central banks of the United States, Britain and Japan , Draghi pointed out that it is more correct to speak of a "credit easing”. However, he did not rule out that “should it become necessary to further address risks of too prolonged a period of low inflation the (BCE) Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate”. A “unanimous commitment” remains, in any case, far from the possibility to achieve the necessary consensus on allowing the direct purchase of long term sovereign bonds, which is the very core of the "quantitative easing".

So Draghi, after the famous "to do whatever it takes to preserve the euro," in the summer 2012, that successfully cut off the claws to great speculation, has nowadays shot what actually is the last monetary arrow. Certainly important, but hardly enough to reverse the Eurozone’s deflationary trend, as the same Draghi had admitted in the keynote speech in Jackson Hole, when he warned that in the current circumstances of stagnation and mass unemployment "monetary policy loses its effectiveness in generating aggregate demand". It is a matter of fact that , given the vertical drop of investment and consumption, the fundamental problem is not the lack of liquidity, but the substantial lack of demand for credit by firms and households.

Given this caution on the effectiveness of the monetary arrow, Draghi evokes the second arrow: Fiscal Policy, the responsibility for which rests with the National Governments. The devised fiscal policy measures are primarily aimed at reducing the tax burden on businesses. However, Draghi, even here adds a tough caveat: the lowering of taxes must be implemented "in a budget-neutral way", that is, in respect of budgetary constraints imposed by the Stability and Growth pact. A challenging operation, recognizes Draghi, since "the high level of debt ... inevitably reduces the space of public budgets".

Facing the limits of monetary and fiscal policies, Draghi focuses on the third arrow: the structural reforms and, more precisely, the labor reform. A theme generally presented in a confused and misleading way, as it is the case with the "Jobs Act" promoted by Renzi’s government in Italy. But at the press conference in Frankfurt on September 4, answering the question from a journalist, Draghi was unequivocal. "There are three tools to boost growth. Structural reforms, fiscal policy and monetary policy ". (The hierarchy of the instruments is not random). "During the presentation, I started by monetary policy to move to tax , but then I concluded that there is no fiscal or monetary stimulus in degrees to produce any effect without ambitious, important and strong structural reforms. Therefore, in a sense, the key point is the implementation of structural reforms “. Meaningfully adding that the "priority" is the removal of the "rigidity of the jobs market".

What kinds of rigidities? "I see two crucial issues ... (first) collective bargaining at the enterprise level that enables you to better reflect the conditions of the labor market at the local level and the development of productivity, with a larger differentiation between workers and between industries”. Second, the removal of the "rigidity in the adjustment of employment levels ... in order to make for quicker reallocation of productive resources and work towards more productive sectors." In other words – we can fairly assume - the downward flexibility of wages at the enterprise level, along with the freedom of workers’ firing , aimed to raise business productivity.

Nothing new under the sky, from the standpoint of the neoliberal orthodoxy. But the novelty lies in making the claim explicit, stressing the relatively minor importance of the monetary and fiscal measures in opposition to the crucial role attributed to the labor reform. The discourse here is clearly addressed to Italy and France, since the other eurozone’s countries have already shown their compliance with the dogma of a full deregulation of working conditions, wages and employment.

Not surprisingly, Draghi praises of the Irish and Spanish experiences. In Spain, Mariano Rajoy’s conservative government has paved the way, by allowing the companies to cancel the agreements at industrial level, and letting the workers with the alternative between the reduction, up to twenty percent, of the wages, and the dismissal. Draghi shows his appreciation: "In Spain, as in other countries in crisis labor reforms have removed many rigidities in the labor market through structural reforms with positive effects."

Yet Spain, indicated by the eurozone authorities as a model and example to imitate, is an absolute paradox. Consider three data that give us an idea of the claimed effectiveness of the model. Before the crisis, Spain had a sovereign debt of just over 40 per cent of GDP, the lowest among the major the eurozone’s countries; in 2014 it is close to 100 percent. The budget deficit, non-existent before the crisis, for 2014 is forecast around 6 per cent of GDP, equal to twice the Italian one. Meanwhile, unemployment has reached, just as the Greek one, the appalling figure of 25 per cent of the workforce. This is the model that, finally, Draghi, in tune with Berlin and Brussels, proposes to Italy and France.

However, Draghi doesn’t hesitate to recognize that in the short to medium- term these labor reforms can’t improve, let alone to worsen, the conditions for growth and employment, since they are inevitably bound to restrain the aggregate demand. So, waiting for an uncertain and far away future, one can guess that the more concrete prospect is a sort of eurozone’s economic "Japanization".

Then , what is the rationale of the obsessive insistence on the reforms (as the final deregulation) of the labor market? The first answer is that it is a wrong strategy. But it is an answer half true, since it takes in consideration only the current stage. From the structural point of view, the labor reforms indicate a deep and radical upheaval in the social relationships through the enhancement of an authoritarian management in the workplace, substantially freed from the constraints of the collective bargaining and the function of representation, intervention and control on working conditions and wages by the trade unions. A return to the dawn of the twentieth century, passed off as a tribute to be paid to the technological revolution and the global competition in the twenty-first century.

4. Finally, back to the comparison between the current crisis and that of the Thirties, the difference is, for at least another aspect, mostly revealing. In the mid-Thirties the New Deal generated a new social model that radically changed the American landscape, and influenced the Western world, at large. Among the major reforms were the achievement of the universal public pension system, the unemployment benefit, the legal minimum wage, the "welfare" for single mothers with children, the direct creation of hundreds of thousands of socially useful jobs.

And the most valuable and a historical reform was the Wagner Act of 1935, which granted to trade unions the right of organization, representation and bargaining at the enterprise level, paving the way for the development of the strongest trade union movement among the old Western democracies. All these achievements were attached in the U.S during last thirty years, the outcome of which is the reduction of the trade union representation in the private sector to a scanty seven percent of the workforce.

In the European democracies, the welfare systems and the rights of representation and collective bargaining have undergone various vicissitudes; however, until the current crisis, they showed a undeniable capacity for resistance. It is no coincidence that, from this point of view, the crisis is used to get rid of the European social "exceptionalism".

In this framework the most striking feature is not so much the predictable use of the crisis by the rightwing governments, as the long silence, if not the complicity, of the official left. In Italy prevails a sort of spell that Renzi has created around his young image of solitary and winning leader. In effect, a leader who moved back in front of the only true battle that matters: the radical change of the catastrophic policy in the eurozone.

In France, also because of a more ancient "Republican" tradition, Arnaud Montebourg said aloud the truth that everyone knows: that is, the politics of the Berlin – Brussels axis is producing fatal consequences to the economy and the social assets of the countries that have succumbed to its hegemony. It is a visible truth, held by economists and politicians around the world, as well as by the protest movements that emerged in Spain and in Greece, where the Tsipras’s party ranked first in the recent European elections.

Montebourg has the merit of having broken the spell. François Hollande, the French president, with the lowest level of popular support in the Fifth Republic history, reacted by dissolving the executive, moving further to the right the axis of the government , and replacing Montebourg, the ministry of the economy, with his young collaborator, coming from the bank Rothschild . Angela Merkel and Wolfgang Schäuble have appreciated.

We can’t guess the future of the Socialist party in France, anyway we owe gratitude to Montebourg for having had the courage to show that there may still be a critical thinking in the Left. Possibly opening a new phase of political struggle in a country that has been decisive in the birth of the European Union, and that is also decisive for the future of the eurozone. The hope (or delusion?) is that the French political rebellion in the leftwing area could find imitators, equally convinced and combative, in Italy, as well as elsewhere in the troubled Eurozone’s countries.