The Greek etymology of Europa (εὐρυ- "wide" or "broad" and ὤψ"eye(s)" or "face"),
suggests that as a goddess she represented a cow (with a wide face). See also Antonio Carracci (b. ca. 1583, Venice, d.
1618, Rome),The Rape of Europe, currently being
shown at the exhibition "From Guercino to Caravaggio", Palazzo
Barberini, Rome.
1. Costs and
benefits of the Euro
The introduction of the Euro
involved for all the EMU member states significant benefits and costs. Benefits include: a greater economic and
financial integration of trade and investment; a rate of inflation lower than
the Bundesbank best performance with the DM; and ten years of an interest rate
on public debt rapidly converging to a common, decreasing level.
At the same time national
governments lost the use of several instruments of economic policy: monetary
policy, delegated to the ECB; the nominal exchange rate of the national
currency (the alternative “internal” devaluation through lower price and wage
inflation than competitors being conflictual and impopular), and fiscal policy
now subjected to a much stricter discipline (Maastricht, Growth and Stability
Pact, followed by the Fiscal Compact).
Italy had the additional cost
of a fiscal squeeze undertaken in order to approach the required pre-requisites
– an excellent investment in view of the benefits obtained as a result. In the transition to the Euro, Italy and
Greece recorded an initial burst of inflation caused by the lack of price
monitoring and control on the part of the government; this immediately eroded
the international competitiveness of both countries, which could no longer be
restored through devaluation. Monetary
sovereignty had already been surrendered by the government to the Italian
Central Bank in 1980. A greater
financial integration turned into a channel of contagion in the subsequent
crisis. And, above all, on 19 October
2010 in Deauville, Angela Merkel and Nicolas Sarkozy decided that ESM bailouts
would inflict losses on government creditors – a position ethically
unimpeachable but infelicitous, because it caused a further widening of the spreads
of long term interest rates on the public debt of member states with
respect to German Bunds. Thus
began the Eurozone tribulations, characterized by stagnation, record
unemployment, deflation, still today in the grips of the deepest crisis ever experienced
by modern capitalism.
In fact the Great Crisis of
1929 had seen a rapid recovery already from 1933 thanks to the public
investment of F.D. Roosevelt’s New Deal, while the crisis that began in 2007
and is still rampaging has been aggravated and prolonged by the perverse
austerity policies imposed by International Financial Organisations and the
European Union.
2. Euro’s diseases
The Euro suffered from policy
errors by various national governments, including the fiscal profligacy of
Southern members, but above all from two congenital diseases and a subsequent
degenerative disease.
First, the Euro’s premature
birth, before political and fiscal integration (and before defence and
foreign policy integration): the Euro should have been the very final stage of
European integration, its crowning, instead of which it was used to
accelerate integration processes, pushing la finalité politique through
the tensions generated by monetary dysfunction.
Second, the ECB was born
incomplete, not to say mutilated, not so much because of its independence,
which is common to the major central banks in the world, but because it was
modelled on the Bundesbank, and even more than the latter was totally separated
from fiscal policy, without the virtually unlimited power to buy government
bonds enjoyed by other central banks otherwise equally independent (as the Fed
or the Bank of England or the Central Bank of Japan). Moreover the ECB was born
without the usual powers of supervision, recapitalization/consolidation/liquidation
of commercial banks, and without the safety net of a common European insurance
of bank deposits (the amount nominally insured today is the same throughout the
Eurozone, but is the responsibility of national Treasuries, and is therefore
worthless in case of a country’s default).
The degenerative disease of
EMU has been the progressive economic divergence of member states, not
only in terms of monetary and fiscal parameters for which a statutory
convergence was envisaged but not observed, but also in terms of other real and
financial parameters whose convergence should have been a condition of entrance
and continued membership of the Eurozone but was not, such as the unemployment
rate, the share of non-performing loans, international competitiveness. Such progressive divergence created strong and
increasing centrifugal tensions.
3. Possible
solutions
Monetary policy on its own is
not sufficient to re-launch the European economy, in spite of the original and
courageous initiatives of the ECB President Mario Draghi (LTROs, OMTs and other
unconventional initiatives), also because of the policy constraints imposed by
Treaties and/or by the pressures of Northern member states. It is enough to consider the failure of
Japanese policies of Abenomics, i.e. monetary expansion accompanied by
modest fiscal stimuli and structural reforms.
International trade, which
since the 1970s had been a dominant factor of global economic growth, in the
last years has slowed down more than global GDP; the IMF confirms that it has
reduced considerably its earlier role in growth promotion.
Many quarters invoke
“structural reforms”. A reform by
definition ought to be a change for the better, and a structural reform a significant
change for the better, which therefore should be politically
uncontroversial and unanimously acceptable. But such reforms raise three
serious problems. There is no agreement
on the desirability of this or that reform, in view of their re-distributive
effects; any positive effect, if any, can only accrue in the long run (5-10
years); and there are structural reforms that, although clearly beneficial in
the long run, in the short run can have strong negative effects. For instance,
a competition increase reducing prices today would promote undesirable further
deflation; this kind of structural reform is like an investment that although
beneficial is not always sufficiently profitable to be recommended.
A reduction of public
expenditure in order to reduce taxation (as anticipated but not yet implemented
by the Italian spending review) has a positive effect only if it reduces
the waste of resources, but otherwise a balanced reduction of both public
expenditure and taxation can only have a recessionary impact on income and
employment, as demonstrated by Haavelmo.
What might be desirable is an increase of public investment funded by
the reduction of current public expenditure.
A superior solution would be a
collective large-scale public investment undertaken at the European level. The
trouble is that Europe’s so-called virtuous countries, which would be in the
best position to undertake a growth-promoting role – thanks to the low interest
rates at which they can borrow and their greater margin for fiscal manoeuvre –
are stubbornly reluctant to do it. And
the Union budget, at a miserable 1% of European GDP (compared to 20% in the
USA), does not allow any large scale initiative.
It might seem that the recent
Juncker Plan, with investments of the order of €315bn over three years
beginning in the autumn of 2015, represents an important progress in this
direction. But in truth these
investments include a presumed and unrealistic multiplier effect on private
investments, of the order of almost 15 times.
European Union funds would be only €21bn, of which 8bn diverted from
other important uses, 8bn consisting only of guarantees, and 5bn provided by
the EIB and unlikely to be fully available without its re-capitalisation. It is believed that at the moment the funds
really available for the Plan are of the order of €2bn – a sick joke (“Europe’s
alchemist”, “Laughingly inadequate” The Economist 29 November. See also Mazzucato and
Penna, The
Guardian, 27 November).
Jacques Drèze and Alain Durré
(CORE 2013) have proposed
the issue of bonds indexed to average growth rate of the Eurozone on the part
of the ECB or other EU agency, which would then swap them with government bonds
issued by member states indexed to national growth rates, in proportion to
their share in European GDP. In such a
way the EU agency would be able to insure member states against macroeconomic
shocks, paying a subsidy to under-performing states out of the profit made on
the bonds of over-performing states, at zero cost. This is a brilliant scheme, which however in
case of default by countries participating in the scheme would inflict
serious capital losses on the emitting European Agency.
Pierre Pâris and Charles
Wyplosz (2013, 2014) have proposed a
scheme called PADRE – Politically Acceptable Debt Reduction in the Eurozone,
similar to a proposal of mine of
2013 – consisting in
the mobilization of ECB seigniorage for the purchase and retirement of
government debt of all countries holding shares in the ECB (including 10
countries that are members of the EU but not of EMU), in the same proportions
of the shares they hold. Therefore even
a possible default by a large country would not damage other members and
would not involve a Transfer Union.
In his Caffè Lectures of 2011 Willem Buiter estimated the present value
of ECB seigniorage at about €3300 billions, but seigniorage mobilization for Eurozone
debt reduction is unlikely to be acceptable to the Northern members of EMU.
4. Disintegration
of the Eurozone?
Over the last years there has
been frequent discussion of the possible disintegration of the Eurozone, with
the return to national currencies by the weaker or the stronger members.
The recovery of national
monetary sovereignty would allow weaker members the use of all the instruments
of monetary policy, and the ability to recover international competitiveness
through exchange rate devaluation. However
European fiscal discipline would continue to apply to all EU members even after
ceasing to be members of EMU, by virtue of the Growth and Stability Pact.
The initial exchange rate
between the Euro and the new national currency would be irrelevant, because the
same rate would apply to prices. But its
use as an instrument of economic policy would involve for the weaker members
the cost of successive devaluations, higher inflation and higher interest
rates, as well as the revaluation of debt; exiting stronger members would face
the cost of revaluations making them lose international competitiveness. All exiting countries would also face the
large scale cost of exit from the entire European Union, that requires the
single currency as a part of the obligations of membership – the acquis
communautaire (except for Denmark and the UK that negotiated a derogation
from the Maastricht Treaty before signing it).
Even under unchanged current
policies, sooner or later the economic crisis might well come to an end thanks
to the automatic mechanisms that always operate in the course of any economic
cycle in a capitalist system. Once the floor
of zero gross investment is reached, further falls of investment come to an
end, stabilizing national income; at that point net investment is negative
and gradually eliminates excess capacity; gross investment resumes first to replace excessive
capacity losses, then to exploit the superior technical opportunities
accumulated during the crisis; and the ensuing multiplier/accelerator
interaction boosts growth further. Growth
revival, however, might happen too late to prevent the disintegration of the
Euro (just as it happened with the ruinous disintegration of the USSR and the
rouble in 1992).
If this happens this Europe of
ours will have betrayed the vision and the values of its Founding Fathers. And we would not even be able to cry over the
inglorious end of the European project because the Europe we have today is no
use to us, and it most certainly does not deserve our tears.
[Note: An Italian version of this paper was presented at a Round Table on “Perspective of European Economic Policy”, at
the Conference for the Centenary of Federico Caffè’s Birth, Sapienza University
of Rome, 4-5 December 2014].
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