Uncertainty is not about therapy but about its adoption by the eurozone's goverments.
What strikes us most about the coronavirus pandemic is that we know the consequences, in too many irreparable cases, of the disease, but we do not know the remedy. Medical science needs time. In the autumn we will have to take cover by taking the measures we have learned in the toughest months. In other words, coronavirus imposes a more or less long phase of uncertainty.
We are already witnessing the closure of production and commercial activities with the creation of a new army of unemployed. For the time being, the most affected countries have tried to repair these immediate consequences by expanding unemployment benefits and all possible forms of assistance.
The OIL expects global unemployment to rise to several hundred million individuals. And the European Commission forecasts a dramatic unemployment increase in the European Union. More than one million new unemployed are expected in Italy. In the Bank of Italy's annual report at the end of May, Governor Ignazio Visco spoke bluntly about the reasons for the alarm, mentioning a possible collapse of the economy between 9 and 13 percent. It's the worst post-war situation that we can remember. But with an aggravation: the fall today is sudden and vertical, and its impact is so rapid that it does not allow an adequate remedy. In other words, we know the diagnosis, but not the therapy.
We know the chain of events: the drop in production causes unemployment and this reduces the purchasing power and demand. Firms do not invest and many are destined to disappear, increasing unemployment and decreasing demand. It is a typical case of deflation - an extremely insidious process that does not allow for a simple solution.
The risk is a self-driving spiral. All over the world, governments are trying to resort to extraordinary remedies. In the U.S, Trump had begun proposing a public intervention in the order of one billion dollars. Virtually nothing. Democrats imposed more than double the size, and then the House of Representatives decided on a three-trillion-dollar intervention, which is now in the Senate where the Republicans are opposing a filibustering maneuver.
In Japan we can see the most decisive example of intervention. Initially, the government decided to increase public spending by one trillion dollars, and subsequently by increasing the intervention up to one thousand seven hundred billion dollars.
The comparison with the European Union is instructive and depressing. The Franco-German proposal of 500 billion euro of grants to deal with the pandemic has been raised to 750 billion by the European Commission, adding 250 billion dollars as loans –a total amount to be spent during four years. For comparison, it is worth mentioning that the population of the EU is almost four times that of Japan. In this framework Italy, which would be the highest beneficiary along with Spain, is expected to take a total amount, mixing grants and loans, of 170 billion euro, to be assigned to two predetermined sectors, such as advanced technologies and environmental protection, under the supervision of European technocracy.
But that's just one aspect. The bleakest is that the allocation of resources to the countries most affected by the pandemic will be available, provided that the consent of the 27 EU countries is found, starting 2021. The absurdity is blatant. It's like discovering a general bout of typhus today, and distributing the most suitable antibiotic in a distant future, after the disease has spread and has hit with devastating effects. In this framework the diagnosis of Ignazio Visco, the governor of the Bank of Italy, was realistic and merciless: the country will incur income reduction to levels never touched in peacetime – he has said - while "social hardship grows" and families fail to defend "acceptable living standards". We have seen the remedies in other countries. In the face of it, those proposed by the EU authorities are discouraging if not grotesque.
The state is the only entity that can give new impetus to production by focusing mainly on infrastructure works of different sizes, but all able to create employment in an intertwined and circular sequence of investment-employment-wages-consumption-production.
After the Great Depression of the early 1930s, the solution FOR the crises that combine the drop in production and the explosion of unemployment have been definitively identified in a massive public intervention. The process has standardized features. The government issues government bonds for the market. If there are difficulties in their absorption, it is the State itself that can buy them back by creating liquidity, but the most obvious solution is their purchase by the Central Bank on the secondary market.
Mario Draghi, President of the ECB, through the "quantitative easing" had purchased over 2000 billion loans granted by banks to the private sector. What he could not (or didn’t want) to do was buy public securities beyond well-defined limits. For the obvious reason that Eurozone member states have been asked to bring the deficit to zero and gradually reduce public debt until 60 percent of GDP.
In the face of the crises, the problem is not the crisis itself but the adequacy of remedies. For the coronavirus we must hope that the remedy is discovered and implemented as quickly as possible. But for its economic consequences the remedies are known. And they are practiced in different countries, as we have seen, regardless of the political position of the governments. Unfortunately, the Italian political forces do not go beyond an abstract approach, and do not grasp (or pretend not to grasp) the inconsistency of the solutions offered by Brussels. According to Visco's forecasts, national income set to fall in 2020 will not be able to reabsorb the loss even in 2021. It is to say that unemployment among young people, but also of fathers and mothers, will continue to rage for years to come.
Is there no solution? In the middle of an economic crisis, investments, as we know from almost a century of experience, are possible if carried out by the state. You can print money and you can spend indefinitely as long as the economy picks up its course with a boost in employment and consumes. The US and Japan are going in this direction, as we have seen. Also China is mired to using Keynesian instruments, even though under the façade of an official Marxist doctrine with a more ideological than practical accent.
But today the European monetary policy will have to face the limits imposed by the German constitutional court. It will be difficult, if not impossible, to return to Draghi's expansive monetary policy, notwithstanding the reservations and, sometimes, the open opposition of the Bundesbank.
In the new framework public investment will principally depend on the fiscal policy adopted by the eurozone’s member states. But public investments are the main field of the opposition of the Eurozone’s doctrine and European leadership summed up in the European commission. We know that public investment is a policy strongly opposed by the Eurozone doctrine, founded on the market freedom and the abstention of the state intervention. It is just the opposite of what is needed in the middle of a deep recession, when the signs of economic and social disease are raging.
With interest rates close to a historic minimum level, the state should provide all the monetary resources needed to aliment public investment mired to the recovery, the expansion of growth and employment. Resources that can be found on the financial market taking into account the large accumulation of inactive private savings in bank deposits with low or zero interest rates.
Being public expenditure favored by low rates and the absence of inflation, the aim should be to realise a growth rate and a physiological level of inflation that should increment the national income, reducing over the course of the next years the public debt in relation to the growing GDP. There is nothing new as the economic doctrine of the last century teaches us.
Finally, uncertainty is not about therapy but about its adoption. Its adoption is currently opposed by the current government’s link to the fateful discipline of the eurozone policy. But this is not a divine condemnation. Policy can be changed under the pressing needs of the crisis. This is also the condition for the current government’s survival. The pandemic crisis is unfortunately a matter of fact. A governments’ policy that can successfully tackle it is a possible choice. But it remains uncertain making uncertain also the future of Italy in the eurozone.