Antonio Lettieri – The “Great Divergence” and the Pain Caused by the Euro

The gap between the United states and the Eurozone a decade after the financial crisis

Antonio Lettieri is Editor of Insight and President of CISS – Center for International Social Studies (Roma). He was National Secretary of CGIL; Member of ILO Governing Body,and Advisor of Labor Minister for European Affairs.(


As we reach the end of the second decade of the century, it is possible to draw a first balance after the global crisis that marked the autumn of 2008 in America. On the one hand, the trade war between the United States and China appears to be coming to an end with a compromise. An important but probably temporary solution since is a struggle for global hegemony destined to last and intensify in the coming years. On the other, the widening of the gap between the two major capitalist economies: the eurozone and the United States. It is worth dwelling on this second aspect that characterizes the main relations within the western world

From this point of view, the decade bequeaths an completely different picture. The United States is about to end the decade with the longest period of economic growth in its history and, from a social point of view, with the lowest unemployment rate in the last fifty years, albeit in a context of persistent great social inequalities. On the contrary, the eurozone closes the decade in the middle of economic stagnation when not in a recession.

In 2010 the Eurozone seemed to come out of the global crisis with bearable damage, not much different from what the United States had suffered. But it was a great illusion. In the middle of 2011, eurozone economic policy authorities embarked on a path that soon proved to be completely unfounded.

For Jean-Claude Trichet, who led the ECB, the greatest danger was not the recession, but inflation. His position, although unfounded, was combined with that of Germany, which, after the first difficulties of the 2008-2009 crisis, had remained the main axis of policy for the EU economy.

In other words, two opposite policies were implemented on both sides of the Atlantic. The United States adopted a strong expansive fiscal policy by the Fed, which was continued under the new Barack Obama Administration; in the Eurozone, instead, a recessionary policy characterized by the “austerity-structural reforms”. The deus ex machina of this policy was the same Jean Claude Trichet, serving the will of the Germans, who decided to increase interest rates not once, but twice in the middle of 2011! The following move was ordered by Angela Merkel who managed to impose with the consent of Sarkozy, the  then French President, the Fiscal compact, aimed at reducing public deficit and reduce debt to 60 percent of GDP of EU nations and that in the middle of the crisis: indeed, the opposite of a normal economic recovery policy.

The follow-up is now a chapter in the odd history of the eurozone. A chapter of history characterized by what we can call the Great Divergence within the capitalistic world. In comparison of the longest trend of US growth
, we see an incredibly poor economic performance in the eurozone during the post-crisis decade. The current almost zero growth of Italy and Germany, over a decade after the outbreak of the crisis, is the most striking demonstration of the eurozone’s self-punishing economic policy.

However, it is not just a matter of comparing the second western economic power with the United States. The Great Divergence is also revealed within the European Union itself. The countries of the European Union that do not participate in the single currency show significant economic growth: e.g. Poland with an annual growth rate of around 4 percent, one of the highest in western countries.

The European Commission, notwithstanding the changing of the guard with the election to the presidency of of still another German, Ursula von der Leyen, continues to profess a deflationist approach. The objective remains a balanced budget and the reduction of the public debt. Goals achieved by Germany and Holland, but which remain a chimera for many of the 19-eurozone countries in a context of substantial economic stagnation and high unemployment. The result is a vicious circle: the goal of eliminating the budget deficit blocks investments as well as consumption, hindering growth and, finally, increasing the public debt- GDP ratio.

The eurozone’s policy is characterized by paradoxical contrasts, as in the case of the Italian government, which had to cope last autumn with the European Commission “recommendation” that established a maximum deficit of 2.1%, instead of 2.2 % finally set up by the Italian government. All this, while the Italian economy was closing the year with virtually zero growth and an unemployment rate stubbornly remaining at around 10 percent. It is also worth noting that, at the same time, France announced a 3.2 percent budget deficit, but the Macron government could not be attacked by the European authorities, as it was feared that his would contribute to addtional tension between the Franco-German pair.

In other words, the Great Divergence between the two major areas of the capitalist world – US and eurozone – is reflected in a growing political divergence within the European Union itself. Not to mention Britain’s “secession” as an event that is hard to underestimate in relation to the origins and the development of the European Union.

The reasons for the eurozone crisis are obvious if a simple question is asked: Is it reasonable to reduce the budget deficit in a climate of economic stagnation, when austerity and structural reforms have already damaged the incomes of
workers and most of the middle classes, through the erosion of the welfare state and the reduction of real wages, increasing at the same time the precariousness of work? Questions that seem obvious, but which can’t be raised, without being accused of either right or left populism.

However, the question remains: how is it possible that the ruling classes and the policy at their service are indifferent to these facts? The answer stems from a circumstance, which is scrupulously kept in the shade. The
Leisure Class, as it was defined in a famous study by Thorstein Veblen more than a century ago, has not suffered the consequences of a stagnant economy.

Here are a few figures, which are rather illuminating. 2019 has just ended with financial gains that mark exceptional records. In this framework the major countries that have achieved the highest gains from stock market have been China and the United States with respectively 36 and 29 percent capital gains. An exceptional increase in the United States with very few precedents.

Yet, given the performance of the US economy, the result may not be surprising. But it is, instead, surprising that within the G7, the Group of the most advanced capitalist economies, we find, immediately after the United States, Italy with stock market gains of 28 percent – just a point behind the US – followed by France (26%) and Germany (25% ). In other words, the three main eurozone countries, even though fluctuating over the past two years between recession, stagnation and low growth , have by far outperformed the stock market gains of Japan (18%), Canada (15%) and the United Kingdom (12%).

The most obvious explanation is that in the euro area the progressive reduction in interest rates and therefore the quantitative easing promoted by Mario Draghi, president of the ECB, have not been translated into real economic investment but largely into stock market speculation. So, from the financial point of view, the Great Divergence between the eurozone and America ends up being an unexpected convergence.

Nevertheless, the Great Divergence is indeed there if you look at the social picture. The growth in financial wealth is strongly offset by the increase in the disparity between the economic elite, the middle and the working classes on which economic stagnation weighs more heavily . In Italy, for example, average per capita income decreased by 5 percent over the past decade. But also this disappointing index masks enormous differences. Wealth has, in fact, mostly increased at higher income levels, while poverty is spread between medium and low-income people. In particular, the gap in average incomes, has increased between Northern Italy and the Mezzogiorno, where unemployment has doubled hitting around 20 per cent of the workforce.

This crisis does not mean that the construction of the European Union – which began 70 years ago with the Coal and Steel Agreement (ECSC) promoted by France – was wrong. Or that the sharing of a single currency by a group of EU countries was necessarily unsustainable. Indeed, the origin of the failure lies not in the adoption of the euro, but in the policy in which the money unification has been imprisoned.

A policy that is not only the origin of the Great Divergence between the eurozone and the United States, but also within each member state through the growing gap between a narrow privileged elite – which, profiting of a strong and stable currency on the global financial markets – and a large mass of citizens, who due to austerity, imposed at national level by the European authorities , has been impoverished.

There are limited signs of a leftist policy emerging in two countries that have suffered severely from the crisis: Portugal and Spain. Here centre-left and left-wing parties, such as Podemos, have taken on new government responsibilities. Italy is, instead, in an uncertain and dangerous situation: it is not clear who will win the next general election, the current alliance between Democratic Party and Five star or the extreme right.

However, forecasts are a futile exercise, having been chronically incorrect in the recent past. The key to the eurozone’s change of policy lies, on the one hand, in abandoning the constraint of fiscal policy as an objective to which economic and social policy should be subordinated; and, on the other, in the return to the role of the State as an engine of growth through the revitalization of public investment and a new progressive social policy.

The issue is not the currency. Using the dollar, the United States has experienced over the past twenty years – the lifespan of the euro until now – a short recession in 2001 followed by years of slow growth, then by a strong recovery, which in turn has been followed by the most devastating recession since the 1930s. And, finally, a long period of growth. All this within two decades, and, of course, using the same currency.

A clear demonstration that the performance of the economic system does not depend on the currency, but on the political economy drawn by the government.
A neoconservative dogma such as that imposed on the euro area can only translate into a deflationary policy and a poor economic and social result.

This is a framework that should mobilise all progressive forces in the eurozone to enable us to stop the inexorable economic decline of the EU. In any case, it is the only chance to save the euro, if that is still considered a common objective.

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