In the Italian daily Corriere della Sera, Lucrezia Reichlin, a very authoritative economist, proposes a new version of the “Europe is making us an offer we can’t resist” in which she backs Italy applying for a loan from the European Stability Mechanism (ESM).
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.
Originally posted in la Repubblica
Translated and edited by BRAVE NEW EUROPE
The European Central Bank can currently do what it is doing, says Reichlin, because there is a political consensus, the same that at the height of the euro crisis in 2012 enabled Draghi to say the ECB would do whatever it takes. Presently the ECB is in fact financing states – something explicitly forbidden by its statute – and what is more, it does not even respect the established proportion (according to the capital key, i.e. the relative weight of each country in its capital): in fact, for example, it buys more Italian securities than would be expected. Yet neither the Council nor the Commission call it to order. This happens – the economist says – precisely because a political consensus has been reached on what policies are necessary to confront the crisis.
But the consensus, says Reichlin, was formed around a set of instruments: Recovery, balance sheet, and also the ESM and the Sure (the fund against unemployment). This means that all of them must be used, otherwise that consensus might break down. So Italy should not be not squeamish about the ESM and Spain about the Recovery Fund, because otherwise there is a risk that the ECB “tap” will be turned of, because no central bank can implement unlimited interventions if political consensus is lacking, as we saw in 2011, when interventions did not work because there was no agreement on what to do in the eurozone.
But others – Francesco Saraceno, another economist – reminded her on Twitter that those interventions did not work precisely because there was no statement that ECB aid would be “unlimited”, the only thing that discourages speculation from going against a central bank. This is a crucial point that many economists and a few central bankers – not to mention the President of the Bundesbank, Jens Weidmann, – seem to miss. Those who refuse to accept this concept show that they have not understood how financial markets work: an incomprehensible refusal, since history has provided evidence that should have convinced those who are not blinded by ideology. One may recall, for example, the “Plaza Agreement” (named after the New York hotel where the G5 meeting of ministers and central bankers took place in 1985), which put an end to the appreciation of the dollar; the ruin of the European Exchange Rate Mechanism in 1992, caused by the refusal of the Bundesbank to continue its interventions, in violation of the exchange rate agreement; the now mythical phrase of Draghi, who crushed the attack on public debts without the need to utilise a single euro. And finally, more recently, Christine Lagarde’s unfortunate statement (“It is not the ECB’s job to deal with spreads”) immediately followed by a storm in the markets, which was equally abruptly calmed by the ECB president’s hasty backtracking.
What is most striking in Reichlin’s thesis, besides that she knows the European mechanisms very well, having been, among other things, the director of research in the ECB, is another aspect: we should utilise the ESM not because it is necessary or because it is convenient (as other supporters of membership point out), but to achieve “discipline”.
Better to say “as an act of submission”. The ESM was born in 2012, formally to help countries in crisis, but, in fact, it was the price paid to get the German consent for Draghi’s whatever it takes: whoever asks for help must be chastised. If it is a “submissive” government, it is treated more leniently. Spain, led by the conservative Mariano Rajoy, who used it for bank bailouts, was not required to adopt any special programmes. But with Greece led by the “nefarious” Alexis Tsipras we know how things ended.
We learned long ago that Europe is dictated to by a de facto power, i.e. a nucleus of nations gathered around Germany. Some due to economic dependence, others for ideological consensus, but also in the case of France trying to give the illusion – in this with the help of Berlin – of having equal dignity and power in the EU. The trouble with this situation is that German ideas in economics – horror of debt even if it serves to invest, low domestic consumption, growth driven only by exports – may perhaps work for one country, but not for a union of 27. And above all it cannot expect one of the three most important economic areas in the world to grow only through exports. It is inevitable that sooner or later this will provoke reactions, and indeed with Trump the reactions have materialised. China has understood this: its record exports are a fading memory, and now it is betting on domestic consumption.
Let’s take stock of the German leadership, its way of managing crises, its ideas on the economy. The result is that imbalances between and within countries have increased and growth in the euro area has been the lowest in the world. The objective of reducing public debt, which is considered fundamental, has resoundingly failed, that of having stable but moderately positive inflation as well. The cuts in public spending in the past, has, with the Covid emergency, presented us with the bill. In all nations, large protest movements have been periodically unleashed, and the parties that have led politics in the last twenty years are far below their zenith in the best cases, in the worst cases they have collapsed to levels of irrelevance or have even disappeared. Should we take note of these results?
Someone will say that in fact, with this crisis, new and important choices have been made, such as the suspension of the Stability Pact, the Recovery Fund, which includes an important portion of grants (but also those, in time, we will pay these back almost completely), the issue of European bonds, the policy of the ECB. True, but these are all decisions presented as exceptional in response to an extraordinary situation, and voices have already been raised calling for a return to “normality” as soon as possible. True, but states are fiercely arguing against very small increases in the EU budget. It is true that reforms in the pipeline – from that of the Stability Pact, to those for the completion of the banking union, to that of the ESM itself – are moving in the logic of the past, indeed exacerbating that logic and adding errors of assessment whose outcome would be disastrous, at least for some countries and first of all Italy.
The ESM is the quintessence of that logic. Saraceno writes: “The ESM today does not help member countries. In some of them it poisons wells, it distorts institutions. The ESM was created for a different purpose: financial stability. It seems clear to me that it is a loose cannon because of the political consensus that Reichlin defends. So, taking Reichlin’s invitation seriously, I ask myself: in order to save the European political consensus, shouldn’t we economists suggest to our leaders to abandon once and for all the ESM that no one wants (and which no one except us Italians is talking about)”?
But that is not all, because Reichlin neglects to say that it is not only Italy and Spain that are “endangering” the European political consensus. Portugal has already declared that it will do the same as Spain and it is probable that France will do the same. And what about the ESM, since no state (no one!) is going to ask, what will become of the “consensus”? Perhaps Reichlin is referring to Angela Merkel’s invitation to Italy to take out loans to stabilise the Italian economy. (Who ever thought we would witness this! A German leader encouraging a country to go into debt…). But let’s say it another way: Germany has spoken, we don’t want to oppose it, do we? It is the “political consensus” that counts… Let’s forget, then, the “consensus on the package” claim, and let’s see things as they really are: Reichlin wants Italy to sign the ESM loan so that, if necessary, this opaque and irresponsible ( politically and legally) instrument can be used to dictate and impose neo-liberal policy. If necessary, that is, should the Italian government or one of its neighbours deviate from what the “European Consensus” (i.e. Berlin….) deems right. This is the eternal logic of the “external constraint” (vincolo esterno): even that has proved to be exceptionally detrimental to Italy, and deserves a place on the rubbish heap of wrong policies that Italy and Europe have been pursuing for thirty years.