The new geopolitical situation, which has profoundly changed the globalisation process, shows the enormous limits of a Union born thirty years ago on very different assumptions. But the EU ruling classes do not seem to realise this and continue to propose instruments such as the European Stability Mechanism (ESM) and new rules that do not change the logic of the past.
Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.
Translated and edited by BRAVE NEW EUROPE
You can read the original Italian version from MicroMega here
The government, the Bank of Italy, the European Commission, the OECD, the International Monetary Fund: all of them, at the beginning of the year, estimated Italian GDP growth in 2023 at 0.6%. And all, today, correct the estimate to around 1.2. Certainly we should be happy that Italy is growing twice as fast as forecast and above the eurozone average, even if (as Attilio Pasetto notes in Eguaglianza & Libertà) important factors such as industrial production (in April -7.2% year-on-year) and exports (-5.4%, again in April, year-on-year) are going badly and the increase is almost only due to consumption and tourism.
“How beautiful is youth, Which yet flies quickly away”, poet Lorenzo il Magnifico. He was quite right: one cannot help but notice that the estimates of all those authoritative bodies have made a 100% error in the space of a few months, moreover in a period in which, economically speaking, there have been no particular shocks. And who could have foreseen – one could object – that Italians would start spending again and that so many citizens from around the world would feel the desire to visit Italy? No one, of course. Just as the pandemic was unpredictable, at least in the dimensions it has taken, or the Ukraine conflict, two events that have abruptly and profoundly changed the economic picture. Reality is full of unpredictable facts.
The problem lies in the fact that European technocrats, and various politicians in countries obsessed with budget balances, claim instead to predict them, and believe that European rules must be based on such estimates. The ESM has the final word on the sustainability of the public debt of the unfortunate nation that should resort to it, and even the new EU rules provide for an analysis of debt sustainability as the basis for defining a path of return with the country concerned. Estimates of the trend of this variable are not a few months, but even ten years. What credibility can they have?
But here a conditioned reflex is triggered by almost all economists, even those very critical of the EU conception of economic policy. Of course, they say, these are estimates, which as such can also be wrong, but ‘one must have a criterion’. Really? But if the criterion is uncertain, and has proven to be grossly mistaken over and over again in the past, isn’t continuing to apply it tantamount to deciding in an even more random way than if one were to toss a coin in the air, in which case the chances of success are theoretically 50%, i.e. much more than these estimates have so far been right? Would a debt sustainability analysis produced on 25 July 2012 (the day before Mario Draghi’s “Whatever it takes”) have yielded the same results as one produced on the 27th? And in this case it would not have been a matter of considering the possibility of a random event: that was a political decision by the European Central Bank, whose attitude is a determining factor for the sustainability of public debts.
One of the ‘novelties’ of the reform of the ESM is that the sustainability analysis is also carried out on those who have not resorted to it, in order to be ready – it is said – in the event of an urgent request for intervention (see for example what Andrea Guazzarotti wrote). Let us imagine that this rule was prior to whatever: with a debt/GDP (2012) at 127%, up 6.83% from the previous year, the spread at 535 points, a cost of debt at 5.18% (but the 10-year was at 6.50), negative growth of 2.2% and a net foreign position that was also negative at the time, what could have been the result? A result that – it is said – would remain for domestic use only, but one can be sure that a ‘secret’ known by more than one person (and in that case the number of people would be many) is no longer a secret. Certainly the markets would become aware of it, and the consequences could be devastating, with a classic case of ‘self-fulfilling prophecy’.
So these assessments should not be made? Certainly not the ESM, which by statute must first and foremost protect creditors, which can lead to biased judgments. In general, these econometric exercises can be useful, but they cannot be the basis for imposing economic policy choices, especially drastic ones. The econometric estimate may change according to the latest statistical data, but this is of little use if the previous one led to economic policy decisions that had negative effects. The former chief economist of the International Monetary Fund, Olivier Blanchard, admitted a few years later that in the case of Greece, the multipliers used to decide on the ‘cure’ were wrong, but this certainly did not make up for the increase in infant and general mortality that followed the measures imposed on the country. Besides: with less money than was used for the ‘bailout’ (in reality the bailout of the German, French and Dutch banks) the entire public debt that Greece had at the start of the crisis could have been wiped out; instead, last year its ratio to GDP was still over 170%.
Most EU politicians bring to mind a famous phrase by Keynes: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back’. (from General Theory). But this judgement unfortunately also applies to the economists who advise them and devise the complicated mechanisms by which the so-called ‘rules’ work. The ones that were in place until the suspension decided upon at the outbreak of the pandemic were completely wrong, as even the Commission admitted in presenting its proposal for new ones. Also because – the document says – they were based on unobservable parameters, such as the output gap (the difference between actual and potential GDP). So the new rules should be based on less dubious data, such as net public spending. Fine, except that, as verified by those who took the trouble to read the technical annexes, where they go into the details of the calculation system, what was thrown out the door comes back in through the window, i.e. this calculation system once again requires estimates based on unobservable parameters (Giovanni Carnazza in lavoce.info, ‘Patto di stabilità: cambiare tutto affinché nulla cambi‘). Moreover, the debt reduction path that nations like Italy are required to take will be designed according to the Commission’s sustainability analysis, the plausibility of which we have already mentioned. What is more, for the ‘austeritarian’ politicians (German liberals in the lead) this is still not enough, and they have insisted that another rule be added requiring an immediate 0.5% cut to the deficit if the fateful 3% is exceeded.
From the point of view of rules, therefore, this EU is hopeless. The ones proposed by the Commission may still change marginally (probably for the worse), but the logic is still the same, and the mechanisms are just as deadly as the ones it is claimed to want to change. They are mechanisms and an economic logic conceived 30 years ago, in a world radically different from today’s. In 1992, the year the Maastricht Treaty was signed, Francis Fukuyama’s famous book ‘The End of History’ came out. In it, he expounded a thesis that corresponded to a generalised feeling: with the collapse of the Soviet Union, there were no more alternative models to capitalism, and therefore no more obstacles to the march of triumphant globalisation under American hegemony. Fukuyama was actually talking about the spread of liberal democratic systems around the world, which he considered to be linked to capitalism. But most capitalists care very little about the quality of democracy: any regime is fine if it facilitates their business.
With the former Soviet Union in full meltdown and a China that at the beginning of the 1990s was just a huge reservoir of cheap labour, Europe could think of itself as nothing more than an economic area that functioned according to the principles of the economically strongest country, ordoliberal Germany. An area that, while remaining under US military protection – now considered almost superfluous – would have a strong currency and sufficient specific weight to exploit the advantages of globalisation. The Germans, moreover, had well understood what a great advantage it would give their mercantilist policy (i.e. growth based almost exclusively on exports) to merge the mark with currencies of weaker economies. In the Maastricht Treaty it is clear that economic regulation is the main aspect, with precise directives and defined targets for deficit and debt (the famous 3 and 60 per cent) and an inflation rate requirement even for joining the single currency. Social objectives are spoken of much more vaguely – almost as a matter of obligation – and are in any case subordinate to economic ones, as the ordoliberal doctrine envisages. Of political objectives – a possible evolution in a federal sense – on the other hand, there is no talk at all.
The EU we have today is still that, but, as we said, the world has changed profoundly. Geopolitics has taken over the scene again, first with the US-China rivalry, with Washington worried about the emergence of the new economic giant it has stirred up, then with Russia’s aggression against Ukraine, which has further – and heavily – contributed to segmenting globalisation, whose limits had already been severely tested with the pandemic. Being a large economic area is no longer enough to play a role in world affairs. Not to be nothing more than an American province, one would have to be self-sufficient in defence and have a common foreign policy (the two, moreover, are closely linked). In simple terms, to be a federal state, which not only the EU is not, but neither does it show any intention of becoming. And all the talk about how being in Europe is necessary because no state alone, not even the strongest ones like Germany and France, can count for anything in the world order? But those were made thinking – precisely – that history was over, and the world would by now be driven by nothing but globalised trade and capital. So, it was enough to be a strong and integrated economic area, because there were only the agreements of ‘turbo-capitalism’, such as the infamous TTIP, to negotiate.
Today there is an agenda to gain at least partial autonomy over a number of strategic products and raw materials for which Europe is entirely or almost entirely dependent on imports. But we are still talking about 27 states whose most important decision-making body (the Council) is intergovernmental and can be blocked by a single veto, with a ridiculously large common budget, refusing to issue common debt – the NextGenerationEU seems destined to remain an exception – even to finance investments declared to be of crucial importance.
History has taken its revenge, proving to be far from over. But Europeans do not seem to have realised this, as the absurd debates on the ESM and EU rules show. A united Europe is an illusion, and its ruling classes, who have built a cage that makes no sense for today’s world, show that they do not want to change it. Perhaps they are prey to a kind of ‘Stockholm syndrome’, they have fallen in love with the prison they themselves have built.
Is there a way out? Not unless the logic and outlook are completely changed. And if at Union level this seems a distant possibility, it would perhaps be the individual states that would have to attempt a Copernican revolution. A possible path is indicated by a recently published essay (‘Goods without borders – How free trade depresses employment and wages’, by Aldo Barba and Massimo Pivetti – ed. Rogas). It is one of the not so many books that, at the end of its analysis, draws a framework of proposals for an alternative economic policy, on some aspects of which one may perhaps disagree, but which nevertheless has its own overall coherence and is, precisely, different from the policies of the last thirty years, the results of which should have long since been thrown out.
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