Eurozone at the crossroads – 2015, Year of a Turnround?

The responsibility for the crisis cannot be attributed to Berlin and Brussels. National governments are accomplices of austerity policies. Meanwhile, the economic crisis is corroding the democratic foundations of member states.

The crisis was announced in the fall of 2008, after the collapse of Lehman Brothers, as basically global, comparable to that of 1929. But as we enter the seventh year after the crisis that judgment must be corrected. The risk of a global crisis has been averted. The only area that remains trapped in the crisis is the eurozone. This is not a fatal outcome. It is increasingly clear that the problem is not in the very nature of the crisis, but in the tools adopted in dealing with it. Tools not only ineffective, but a boomerang unfortunately destined to extend and multiplies its disastrous consequences.

The responsibility for this state of affairs is generally attributed to the austerity policy imposed by Berlin and the Brussels technocracy. It is a biased truth, and, in many ways, an alibi. The austerity, now universally considered wrong and devastating, would not have been practicable without the consent and the more or less overt complicity of the governments that share the responsibility for eurozone policies.

The case of France and Italy is indicative. They are the two countries that, along with Germany, are at the origin of the euro. It was particularly the result of the determination of France with Mitterand and Delors, in a context of uncertainty of Germany, at the end bypassed by the determination of  Helmut Kohl who saw the euro as an element to stabilizing the new European order after the German unification.

Austerity adopted as a response to the financial crisis of 2008 was consistent with the traditional German policy directed to balance the effects of restrictive domestic demand with a constant and extraordinary trade surplus based on its industrial power. Austerity, rooted on the increase of tax and the cut of public spending, fiercely squeezing domestic demand for consumption and investment, has paralyzed the economy, raised unemployment, created new poverties and boosted the sovereign debt that theoretically had to be abated.

In this regard, given their costs in terms of growth failure, it would be bizarre a so large compliance with austerity policies, without taking into account its collateral element, that is the structural reforms. Closely intertwined, they have formed an indissoluble couple. So, from the point of view of the governing elite, the downside of austerity is more than compensated from what they consider the long-term benefits of the structural reforms. The austerity, with its constraints and the emergency climate it creates, is a key condition to implement an array of reforms that, otherwise, given the unpopularity, would be difficult, if not impossible, to implement.

Beyond the variations on the theme, the heart of the structural reforms rests on a fundamental triptych: the reduction of public spending on welfare; the deregulation of the labor market with the firing freedom; the privatization of the manufacturing and services enterprises that can generate profits.

The austerity-structural reforms trap worked perfectly with the rightwing governments, as Rajoy in Spain or Samaras in Greece have shown. Nothing unusual so far. The surprise rather rests on the policies of the two center-left governments, which, with Francois Hollande in France and Matteo Renzi in Italy, have set the structural reforms at the center of their programs, hoping to get some tolerance from the eurozone authorities in regard to the austerity parameters, which impose a forced and deadly march towards a balanced structural budget and the sovereign debt reduction.

Hollande and Renzi, at the helm of the second and third largest economy in the eurozone, could have been able to challenge, with compelling, reasons the disastrous austerity policy. They did not. Hollande, according to the polls, the most unpopular president in the history of the Fifth Republic, is eager to maintain the appearance of a partnership with Germany; meanwhile Renzi, head of the Democratic Party strives to get some benevolence from Berlin, putting forward on a golden plate its labor reform, harshly challenged by the unions and a part of his own party.

In this context of resignation France and Italy rely on the pledge of the Juncker's plan, the new E.U. Commission president, and on the new strategy announced by Mario Draghi, ECB president. On a closer examination, the Juncker’s plan (R. Paladini:I 300 di Juncker) appears as a pure instrument of mass distraction. The pledge of 315 billion euro to be shared among 28 countries in three years would be a drop of water in the desert of investments. It is worth to remember that the first move of Barack Obama, when he assumed the presidency, was an appropriation of $ 800 billion - an amount considered insufficient by many American economists, but that eventually helped to stop the fall of the economy and to incentive the resumption of employment. In any case, beyond its insufficient small size, the three hundred billion of the Junker plan do not actually exist, since the funds made available by the European Commission added to those of the European Investment Bank correspond only to 21 billion, while the fifteen times total amount should be the product of imaginary private investment.

By far more significant is the expectation of a turnaround of the European Central Bank that, according to the intent of Mario Draghi, should  inject into the real economy at least 500 billion euro, providing liquidity to private banks and - the big news – allowing the direct purchase of sovereign bonds. Yet, as for the banks, it is worth noting that the problem is not a lack of liquidity, but the lack of demand for credit by businesses, as evidenced by the fact that they are not using, except in extremely limited extent, the resources already made available by the ECB at rates close to zero. In effect, a badly needed revival of investment cannot come from this side.

The novelty of an European quantitative easing is meaningful only to the extent that national states can draw on the resources offered by the Central Bank not only for the renewal of maturing debt, but to finance a major investment plan immediately operational, able to mobilize idle private resources, and boost growth and employment.

But the growth of government expenditure would increase the deficit beyond the thresholds of the European parameters. In fact, they do not distinguish between current and investment expenditure. So, even the messianic expectation of an ECB's helpful intervention conflicts with the eurozone’s unreasonable constraints. A dog chasing its tail, in a paradoxical game  between Draghi’s  pledge of an expansionary monetary policy aimed to promote investment and the European authorities' bureaucratic determination to block any fiscal expansion.

In this grim scenario the economic crisis turns toward a hefty political crisis increasingly depending on the different governments’ politics. From this point of view, surprisingly, just Greece, were five years ago erupted the financial crisis, could become the trigger of a deep political changeover. According the opinion polls, Alexis Tsipras, Syriza leader, is bound to win next general elections, likely held at the beginning of 2015, so opening a new landscape not only in Greece but in the whole eurozone.

The noteworthy political novelty is that, while Tsipras in principle excludes an exit from the euro, he does claim a renegotiation of the budget constraints, a debt restructuring and a revision of the structural reforms that, combined with the austerity policies, have massacred Greece, submitted to the loss of 25 percent of GDP along with a shocking 25 per cent unemployment.

In other words, Tsipras strategy points to go beyond the blackmailing stark alternative: In or out of the euro. The refusal by the European authorities to renegotiate the disastrous conditions imposed to Greece could not be attributed to the uncooperative attitude of a member state, but to the arrogant, hardly justifiable choice of eurozone’s authorities. And this first breach could pave the way to a chain reaction, involving other countries in the similar condition.

Let look at the Spanish political framework. The Rajoy government has lost 20 per cent of the vote in the recent European elections, while Podemos (We can), heir of the Indignados movement, according to the current opinion polls, has become the first party supplanting the Popular Party as well the Socialist Party, which have alternatively lead the government during the past decades.

The paradox is that in the countries governed by the right-wing parties, leftwing movements are emerging as political alternatives. At the same time, the center-left governments are bound to be defeated by the center-right oppositions. In France, the first party, according the polls,  is the National Front of Marine Le Pen, which plans the exit from the single currency. Meanwhile, in Italy, Renzi’s government will be confronted in the likely early general elections (probably next spring), on one side, with Grillo’s Five Stars movement, that is organizing a referendum on euro, and, on the other side, with a rightwing coalition within which it is growing an overt anti-euro stance.

It is hard to make any reasonable forecast about the development of the eurozone’s crisis. Yet, it is fair to say that the eurozone’s economic failure has paved the way to a deep social and political crisis. It is also deeply corroding the democratic balance in the member states. The outlook appears very uncertain. In any event, 2015 promises to be a crucial turning point.