Antonio Lettieri – The Misadventures of the Eurozone

The ultra-liberal principles that govern the eurozone exclude direct public intervention. The result is a decade characterised by lower growth and higher unemployment in the developed world.

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.(

Cross-posted from Insight



What strikes us most about the coronavirus pandemic is that we know the consequences, in many too many irreparable cases, of the disease, but we do not know the remedy. Medical science needs time (to discover a solution). 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 cannot say as much about its economic long term consequences, but some of theirs have already been experienced. Indeed, devastating social consequences, the main manifestation of which is the closure of productive and commercial activities that have created a new army of unemployed people. For the time being, more or less all the most affected countries have tried to shelter it by expanding the unemployment benefit and all possible forms of assistance.

The International Labour Organisation (ILO) predicts an increase in global unemployment of many hundred million people. The European Commission expects unemployment to rise sharply in the eurozone. In the Bank of Italy’s annual report at the end of May, Governor Ignazio Visco spoke bluntly about the reasons for the alarm. The collapse of the economy could be, in Italy, between 9 and 13 percent of GDP. It’s a post-war situation, we’ve been reminded. But we can also add an aggravation: the fall today is sudden and vertical, and its impact so fast that it does not leave an effective and prompt remedy. We know, in other words, the diagnosis, but not the therapy. We also know the chain of events: unemployment causes a fall in the purchasing power and in demand and consequently in the production. Businesses do not invest increasing unemployment – a vicious circle. That is an extremely insidious process of deflation that does not allow for a simple  exit .

1. At the heart of the problem is the fall in investment that follows the fall in demand. It is typical in a traditional crisis. The difference is that the current one is rightly deemed the most serious in the post-war time in a self-driving spiral. Governments are trying to resort to extraordinary and unprecedented remedies. In the US, Trump had begun proposing a public intervention in the order of one billion dollars. Virtually nothing. Democrats imposed more than double the amount, and then Democrats in the House of Representatives passed a three-trillion-dollar intervention, which is now blocked in the Senate under the Republican filibustering.

In Japan we can see the most decisive and striking example of intervention. Initially, the government had decided to increase public spending by one trillion dollars. Subsequently the government intervened again, resulting in a commitment of one trillion seven hundred billion dollars.

The comparison with the European Union is instructive and depressing. The Franco-German proposal of 500 billion grants to help the European Union’s recovery has been increased to 750 billion with an addition of loans proposed by the European Commission. For comparison, it is worth remembering that the population of the EU is almost four times that of Japan and the European commitment less than half. However, the bleakest aspect is that the allocation of resources to the countries most affected by the pandemic – especially Italy and Spain – will be available (provided that the consent of the 27 EU countries is found), in 2021. The absurdity is blatant. It’s like discovering a general bout of typhus today and distributing the most suitable antibiotic in a far future, after the disease has spread with devastating effects. Not only is the therapy delayed, it has to be added that its destination determined by the European technocracy is limited to two predetermined sectors: advanced technologies and environmental protection. In any case, on the basis of the directives of the technocracy in Brussels. The diagnosis of Ignazio Visco, the governor of the Bank of Italy, has been realistic and merciless: the country will incur income reduction to levels never touched in peacetime, while “social hardship grows” and families fail to maintain “acceptable living standards”.

We are seeing remedies in other countries. In the face of them, those proposed by the EU authorities are bleak if not grotesque. After the Great Depression of the early 1930s, crises combining falling production and mass unemployment resulted in a spiral of fall of supply and demand. The solution was definitively identified as public intervention. The state is the only entity that can reactivate production in a big way by focusing mainly on infrastructure works of different sizes, but all able to generate employment in an intertwined and circular sequence of investment-employment-wages-consumption-production.

The comparison of these figures with the interventions underway in the eurozone is staggering. The European Commission has with great fanfare promised to invest 750 billion to be distributed in the twenty-seven countries of the European Union partly as grants, partly as loans. It can be discussed on the merits, which I shall do later. But for now it is interesting to note that this is less than half of the Japanese fiscal intervention for a population about four times greater.

The picture changes profile if we look instead at Germany, which has planned over a thousand billion as a guarantee for loans and in support of the economy. Then the government made an unusual choice for Germany consisting of a direct commitment of 130 billion from the budget to support household income and public investment. Significant, among others, the choice to reduce the different VAT rates, lowering the highest from 19 to 16 percent for the second half of the current year – for a comparison, in Italy it is currently equal to 22 percent. Other measures concern household income, such as a 300 euro allowance for each child. Social Democrat Olaf Scholz, deputy chancellor and finance minister, stressed that this is the largest public intervention since post-war times.

2. We can resume the comparison with the intervention envisaged by the European authorities. Italy and Spain – the two eurozone countries most affected by the pandemic – are allotted around totally 300 billion, including grants and loans. But in this case, more than the amount, the conditions set by the European Commission are relevant. The funds cannot be utilised until 2021 after the approval of the twenty-seven member nations of the EU. It is like postponing the necessary economic support in contrasting the consequences of the epidemic disease until it has already produced devastating and, in many ways, irrecoverable social and human consequences.

But it is not only a matter of time, although decisive. Looking, for example, at Italy, the use of resources in the form of grants and, mainly, loans of around 180 billion (but according to the calculations of the Cottarelli Institute, around 150 billion) is conditioned by the objectives set by Brussels. That is to say that the funds must be allocated, under the control of the Commission over the course of four years, to two specific sectors: the environment and new technologies. Nothing that will counteract the devastating economic and social effects of the pandemic.

With what effects? According to ECB calculations, the crisis entails an average fall in national income in the eurozone of over 8 percent – a fall that in Italy, according to the forecasts of the governor of the Bank of Italy, Visco, can extend up to 13 percent of the GDP during 2020. With the consequence, according to the European Commission, of an unemployment increase of over one million employees. Incidentally, this will result in a higher unemployment in the most fragile regions in the South of Italy than experienced in Greece in the worst moments of the crisis after 2010.

It is in this unprecedented scenario that the European institutions propose financial aid with the limits we have seen, over the next years, when the crisis resulting from the pandemic has already produced such disastrous effects, in many ways irreparable,for millions of families. But the ruling class with the mainstream media at its service seem not to notice it or, presumably, preferring not to notice it, in order not to cast any doubts about their approval of the policies dictated by the European technocracy.

3. Probably aware of the ineffectiveness of the European Commission’s intervention, we have seen the ECB’s decision to add 600 billion to the 750 already available for interventions tackling the current economic crisis. Christine Lagarde was proud of a decision that bypasses the warnings of the German Constitutional Court tending to restrict the ECB’s activity, by calling into question its independence.

But in the present case, the ECB’s decision does not violate the rules invoked by the German Constitutional Court, since all funds are earmarked for the private banking sector and not as aid destined to the Member States. Jens Weidmann, president of the Bundesbank, a rigorously vigilant mastiff vis-à-vis the ECB in Draghi’s time, not only fully justified the central bank’s decision, but also, surprisingly, declared himself in favour of a greater financial commitment.

Beyond institutional disputes, what can be the effects of the ECB’s intervention? A step backwards can be illuminating. Mario Dragh – albeit lagging behind the choices made in America by Ben Bernanke since the first signs of the crisis in 2008 – inaugurated European quantitative easing in 2015. Initially, it was limited to one year. But Draghi prolonged it repeatedly, even against the Bundesbank opinion,  mobilising a total of 2,200 billion destined to  support the euro. The initial effect was satisfactory averting a euro crisis. But, from the point of view of economic growth, the result was in the end rather disappointing.

In 2018-19, when the coronavirus had not yet occurred, the eurozone economy showed worrying signs of slowing down. And the most surprising aspect was that not only Italy but also Germany suffered a slowdown, sliding into an open recession in some quarters. It was irrefutable proof of the limits of quantitative easing that Draghi, in contrast to the Bundesbank, had prolonged for a period that went beyond his mandate, in the hope of reviving the fortunes of the eurozone, which had become the area with the lowest growth and highest unemployment in the developed world.

Will Lagarde manage to perform the miracle that Mario Draghi was unable to accomplish? There is no reason to think so. The problem of the recession is not the lack of monetary resources. The point is that the horse doesn’t drink. Private investments disappear not due to the lack of financial resources but to the drying up of consumption which is reflected in a substantial deflationary climate, testified by negative interest paid by the ECB on bank deposits.

Does this mean that the resources made available by the Central Bank are useless and without possible effects on the real economy? Obviously this is not the case, as shown by the examples on which we have focused, from the United States to Japan, and to Germany itself. The crucial point is that the ECB cannot provide resources to the member states of the Eurozone except within limits and specific conditions. That is to say: it cannot provide credits to member states to be directly destined to public investments, as part of a policy aimed at resuming growth and employment.

Since this practice was adopted after the economic and social catastrophe of the the Great Depression of the early Thirties there have been no new crisis policies for almost a century. We need not go very far back to confirm this. In the 2008-09 crisis in America, faced, according to many authoritative critics, with insufficient tools but, nevertheless, capable of initiating such policies resulting in a ten-year recovery of the economy, the longest in the US history, marked by the lowest unemployment rate in the past half century.

4. Public investments in an extraordinary quantity of fields, both direct and as a stimulus for private ones, are part of a common experience: from building bridges and roads, to creating housing, to water systems (the major intervention Roosevelt’s New Deal was the TVA, the regulation of the water course in Tennessee Valley). Not to mention the support for all public works, even minor ones, which can involve the activities of small and medium-sized enterprises, which represent the greatest source of employment.

The public debt, of course, increases – as would  that of private companies if they decided to invest. But public debt is measured as a share of national income. And as national income grows, debt as a share first stabilizes, and then begins to decline. The aim is to constrain the crisis and resume growth. The state has no difficulty in obtaining supplies on the capital market in a framework, such as the Italian one, in which private savings concentrated in banks, with low or zero interest rates, are calculated to be over 1,500 billion euro.

Nothing new compared to the past experiences in all the countries facing a serious crisis. But the ultra-liberal principles that govern the eurozone, based on the exclusive role of markets and free competition, categorically exclude direct public investment.

But the discredited policies of the eurozone, the result of which is a decade characterized by the lowest growth and the highest level of average unemployment in the developed world, prevent it. Or, to be more precise, the member states adapt themselves to this policy which favours the upper classes, holders of large financial capital, who operate on supranational financial market, ignoring the miserable conditions of a huge part of the population.

The government can obviously reverse this situation providing public investment and growth of mass employment. And, since debt is a share of national income, it will obviously tend to increase, as national income returns to growth. In Japan the new public investments will bring the debt over 250 percent of the national income. But with the the resumption of growth it will gradually decrease as a percentage of the GDP. In Argentina, instead, the debt calculated on GDP is lower than in Japan, but the country is again on the verge of bankruptcy because the economy is in recession.
The pandemic coronavirus crisis poses enormous social and economic problems. But governments in a normal democracy are elected not only for ordinary management of society but also, and above all, to intervene on crisis situations to provide the needed protection for its citizens. We have seen that this happens normally, regardless of the political constellation. If the European Commission opposes and threatens sanctions for the presumptive violation of fiscal rules, we have to remember that Italy is not Greece, but the third largest economy in the European Union.

The problem is not in Brussels but in Rome. In reality, the government contributes to the intensification of the crisis with unbearable social consequences for the subordination of its position towards European technocracy, bearer of an ultra-liberal ideology that does not allow a democratic confrontation. But the responsibilities remain with the national government. The current crisis, like all past crises, is not without solutions. The problem is in the refusal to adopt them, irresponsibly denying their necessity and possibility. The question we must ask ourselves is: until when?

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