The Ionesco Euro

1. We have entered in the tenth anniversary of the 2008 crisis which began in the U.S. with the collapse of Lehman Brothers. Since then the world economy has completely changed. The eurozone is the only area on the planet that, considered as a whole, is still struggling to get out of the crisis. And, in 2017, Italy was a typical example of one of the lowest growth rates and of the highest unemployment countries in the eurozone.

The paradox is that the euro was represented, at the beginning of the century, as a parachute set up against possible crises on the international landscape. Things had gone the other way round. The United States has regained a sufficient growth rate, and reduced unemployment to 4 percent, the lowest level for two decades. And Japan suffers from a lack of manpower that risks blocking its growth. Instead, in the euro area, unemployment fluctuates around an average of ten percent - in Italy at 11, and in Spain at 16, not to mention Greece.

It is worth noting that this fissure is not a characteristic of the European Union, but a typical feature of the eurozone. Most EU member states outside the eurozone are, in fact, characterized by sizeable growth rates ranging between 3 and 5 percent, as is the case of Sweden, Poland, Hungary, the Czech Republic, and so on.

This is the general picture. But, as it often happens when you consider average figures, the general picture is misleading,. The German scenario is significantly different. Germany has not been hit by the eurozone's hardship.  The euro has, indeed, strengthened its position in Europe and in the world. Its growth rate is steadily above the eurozone average, the current 3.6 percent unemployment rate is the lowest in its history for many decades. At the same time, it boasts the strongest and most stable worldwide trade surplus, only comparable to the Chinese one, while the public budget has reached the formidable yearly surplus of almost € 40 billion in 2017.

In opposition to the striking performance of Germany, the eurozone that Robert Mundell, the Canadian-American economist, Nobel laureate, considered an "optimal monetary area", has proved to be the most uneven area of the capitalist world. The German star shines in the eurozone firmament, but we cannot hold the story of an "optimal" euro-area.

2.    First, the European Union, then the eurozone could not have been envisaged without the Franco-German partnership. A partnership initially under the undisputed French dominance, when Schumann and Monnet "invented" the ECSC, the Coal and Steel Community, in the middle of the last century; then, when Mitterand and Delors promoted the great leap forward of the single currency. In both the events, the French initiative was essential to strengthening the Franco-German partnership

Now, Emmanuel Macron, the French president, has taken on the outstanding task of revitalizing the unsound partnership of the last decade. His first move has been the promotion of some bold economic and social reforms, the first of which, not surprisingly, has been the labor reform. It is helpful to mention a recent editorial by the Financial Time, that proposes an enlightening summary of it. “Defying the skeptics, Mr. Macron has pressed ahead with the labor market reforms that eluded his predecessors. Most companies - the City newspaper writes - will be able to negotiate pay and conditions directly with workers and will find it easier to fire and hire” (my italic)  (5/1/2018).

Undoubtedly, a radical reform, basically aimed at the cancellation of the collective bargaining and of the worthwhile function of the trade unions, both considered a twentieth-century scrap. The Financial Times also underlined that “while these measures have inevitably alienated some of his previous admirers on the left…. People apparently appreciate the novelty of a president who can make things happen”. Adding that the effective gamble is now to take “serious steps to cut public spending or tackle tough issues such as public sector pension reform … to stay within the eurozone’s deficit rules”(ibidem).

According to Macron, his government, like the movement he founded, La Republique en Marche!, would be "neither on the left nor the right”. But the program on labor, collective bargaining, wages, and social spending is so classically a rightwing platform that it would have sparked the envy of Margaret Thatcher, forced to mobilize the army to tackle the miners' union in the historic battle of 1984. However, the big European press indicates Macron's program as a worthy policy to cope with the Eurozone crisis and, not incidentally, the Economist has dedicated a cover to Macron, electing France as the "country of the year".

It is significant that, while Macron is actively advocating in France an anti-unions neoconservative  program, in Germany, IG Metall, the main union that affiliates 2.2 r million metalworkers, negotiates a platform that includes a hourly increase of six euro, along with the reduction of working time from 35 to 28 hours a week - with a wage loss partially compensated by public intervention - for workers who demand the cut due to personal or family reasons.

Setting up this neo-conservative economic and social policy, Macron believes to acquire the right credentials to obtain from Germany a  bold Eurozone’s political and institutional reform: notably, a European finance minister, a European Investment Fund, and the establishment of the European Monetary Fund aimed to assume the IMF functions. As for the establishment of a European finance minister - we must suppose French - he could be accepted by Germany as a counterpart to the appointment of a German president at the head of the European Central Bank, as a successor to Mario Draghi. Nor should the creation of a European Monetary Fund meet particular obstacles after the conflict between Schäuble, the former German finance minister, and the IMF during the Greek crisis.

The joint document of the CDU-CSU and the SPD of middle January does not leave any misunderstanding. Europe, at the request of Martin Schulz, former President of the European Parliament and leader of SPD since March 2017, appears as the first point of the joint declaration. But, despite the commitment to expand the EU budget, and to strengthen the "European Stability Mechanism", there are no significant changes in the current political stance. To Schulz remains just the gratification to have heralded the establishment of the "United States of Europe" by 2025 – indeed, a pitiful statement for a party, which under his leadership, has got the worst electoral outcome since the end of the second world war.
 

3.    Italy is the weak link in the Eurozone chain. So, one could have imagined that the euro should have been the main issue in the debate of the next march Italian general elections. Nothing at all. Through a kind of "Gentlemen(s) agreement", the parties have progressively removed the euro from the contest. The fear is that a simple allusion to the problems arising about the euro future could entail the risk of being "ostracized", as it occurred in Athens at the Pericles epoch.

According to the current forecasts, after March 4, the Italian election date, none of the three electoral blocks will be able to claim a  parliamentarian majority, sufficient to form a new government. In any case, whichever government is going to follow the elections, it must comply with eurozone rules, that is, the goal of achieving the budget parity on the next two years, by continuing to cut public spending or increasing taxes, or by combining both measures.

In the meantime, the ECB will put an end to "Quantitative Easing", with the expected increase in the interest rates and the cost of the debt. In addition, the Fiscal compact, whose five-year validity has expired in 2017 – but that will continue to live, even without becoming part of the EU Treaties if no EU member state declares its end up – entails the reduction of the public debt, currently amounting to 132 percent of GDP, until reaching, within twenty years, 60 percent of GDP - an obligation that imposes in the first years a yearly cut amazingly amounting to about three percent of GDP, corresponding to over 50 billion euro.

 For a country that shows the lowest growth rate in the eurozone  - currently 1,5 percent of GDP but lower in the next two years, according to the IMF forecasts - and around 11 percent unemployment rate, it is a set of measures contrary to common sense. Yet the issue of the constraints deriving from the Eurozone rules does not occupy the political debate. In any case, it is accurately hidden to the eyes of ordinary voters. All this may seem reckless, a sort of pièce of Ionesco's Theater of the Absurd, where the tragic and the grotesque inextricably intertwined. A recital that has the defect of not being able to last much beyond the winter, when the knots will arrive at the comb.

The point is that one cannot aim to a balanced budget before taking the necessary measures to get growth back on track. It is not a coincidence that the budget assessment varies from one country to another due to a cluster of circumstances. Just compare the current data: Germany has a budget surplus equal to 0.6 of GDP, Italy a deficit of 2.3 percent, France of 2.9; Spain of 3 percent, and so on. If we look at the whole of the European Union, the gap is even more marked: for example, Sweden has a surplus of 1.0, while Poland a deficit of 3.3 percent of GDP. And, notwithstanding these differences, the two countries boast a growth rate between 3 and 4.5 percent.

In other words, deficits have their own dynamics and reflect a large number of factors, which cannot be caged in an abstract scheme. Instead, for the eurozone, all cows are black in the darkness of its rules. It is worthwhile resorting to the synthesis offered by Barry Eichengreen, professor of economics at Berkeley, who in a recent article highlighted the following diagnosis:

"It is past time to abandon the fiction that the ultimate source of fiscal discipline is a set of strictly enforced EU rules. Taxation and public spending remain sensitive national prerogatives, rendering outside oversight ineffectual. ...The alternative is to return control of fiscal policy to national governments, abandoning the pretense that policy can be regimented by EU rules. Governments could then make their own decisions; if they made bad decisions, they would have to restructure their debts… Any adverse consequences would no longer spread to other countries because their banks would no longer hold concentrations of government bonds. (The Guardian - Can Macron and Merkel agree on how to fix the eurozone? – 11/9/2017).

The topic is clear. The euro is the common currency, but each country must be responsible for its own budgetary policy. This does not mean that you can enjoy free meals. As each country is subject to market judgment, the deficit levels become part of the set of factors that determine interest rates. And these vary in relation to the solvency perspective of each country, with or without the participation to a single currency. If we take, for example, the interest rate of ten-year government bonds, we can observe, at the beginning of the new year, the following differences: Germany owes an annual interest of 0.45; France pays 0.76; Spain 1.50; Italy around 2; and so on.

In a nutshell, participation in the eurozone offers the advantage of the exchange rate stability, but this cannot imply the paralysis of the fiscal policy that, for its nature, falls under the responsibility of each member state. Yet the freezing of the fiscal policy paralyzes the whole macroeconomic and social policy at national level, with the ruinous consequences we are witnessing.

 
Where does the stubborn resistance to an open discourse, free of prejudices about the euro and the eurozone, come from? Why submit every eurozone member state to the rules of an economic policy that experience shows ineffective and self-defeating? In a recent article, Dani Rodrik, a professor of international economics at Harvard, argues a plausible explanation.

There are scenarios, he writes, in which “restraints may be instituted by special interests or elites themselves, to cement permanent control over policymaking. In such cases, delegation to autonomous agencies or signing on to global rules does not serve society, but only a narrow caste of “insiders”. Such “liberal technocracy” may be at its apogee in the European Union, where economic rules and regulations are designed at considerable remove from democratic deliberation at the national level. And in virtually every member state, this political gap – the EU’s so-called democratic deficit – has given rise to populist, Euro skeptical political parties. In such cases, relaxing the constraints on economic policy and returning policymaking autonomy to elected governments may well be desirable. Exceptional times require the freedom to experiment in economic policy”. (Dani Rodrik, In Defense of Economic Populism, Project Syndicate, Jan 9, 2018).

After the March Italian general elections, a new government, assuming that there will be one that can reach the next autumn before new elections, will have to deal with the incompatibility between the rules imposed by Brussels and the come back to a normal, rational policy. Or to put it in positive terms, it has to prove the compatibility between belonging to the eurozone and a policy of national responsibility for policies of growth, employment, and social progress.

Indeed, a compatibility could exist. But it requires a deep change of the current failed paradigms. First of all, the unveiling of the best- hidden unknown in the European political debate: the eurozone crisis, and the possibility of resolving it, even without leaving the euro, provided that the fiscal rules that imprison the politics of the member states are changed.