Sergi Cutillas – The only possible Eurozone reform is the one that doesn’t change a thing

This article was written before the collapse of the planned government and helps explain  the EU political elite’ panic.. The 5 Star Movement is right. Although convicted of tax-dodging or corruption you can be a minister in Italy. If you are critical of the EU or German hegemony, that is not the case. The EU political elite has once again demonstrated that democracy is when the policies they dictate is followed, everything else is “anti-democratic”. They are systematically digging their own grave.

Sergi Cutillas is an economist and currently Secretary of Economy and Work of Podemos Catalonia.

Originally posted in Makroskop in German

On May 7 of last year, Macron became president of the Republic of France, the youngest in the country’s history, and was presented by the mainstream media as the white knight who had come to save the EU after the shock of Brexit. The aim of his presidency, Macron announced, would be to reform and modernize France (privatizing, lowering wages and cutting welfare) to reduce the country’s competitive gap vis-à-vis Germany, thus encouraging the latter to engage in greater financial risk-sharing with the rest of the Eurozone. For a year now, Macron has been relentlessly attacking the rights of French working and popular classes, and is paying the cost in terms of consensus: students and workers have been demonstrating and on strike since the end of March against his reforms, and the mobilisations are broadening. However, Macron has not achieved his main objective: convincing Germany to move towards fiscal and political union in the Eurozone.

Macron symbolizes a new centrist politics that, in fact, represents a do-over of the same neoliberal euro-federalist current predominant in the European institutions, especially in the European Commission, which for decades has aimed at creating a ‘United States of Europe’. In Macron’s speech on September 26, 2017 he defended this idea with proposals for sharing risks and increasing the financial capacity of the European institutions. Macron’s proposal was to “equip the European budget with a financial instrument that would give it more capacity, in the form of a fund within the treaties, with the capacity to issue debt,” as well as the creation of a European Finance Ministry under the control of the Euro group. He also proposed the establishment of compensation mechanisms such as “a guarantee fund for European bank deposits, an EU-wide unemployment benefit system, and an instrument that would promote investment”. These proposals were the same as those presented by the Commission in a report titled ‘Reflection paper on Deepening the Economic and Monetary Union’, which shared Macron’s aim of reforming the EMU in a direction even more favourable to the interests of the Atlantic elites, especially the financial capital located in New York and London, by disempowering nation-states in favour of transnational technocratic bodies and consolidating a large economic zone between Europe and the USA. This reform would finally complete the architecture of the Eurozone, which is still unfinished due to the design deficiencies attributable to Delors, who in his 1989 report proposed to create the euro without a unified tax structure among adhering countries, a proposal that went against previous reports by Werner (1970) and by MacDougall (1977) that warned that this would lead to failure.

Macron’s election to the French presidency apparently improved relations between Germany and France, and for a while Merkel showed greater receptivity to the idea of ​​creating an increased fiscal capacity for the European budget, a European Ministry of Finance and the creation of a European Monetary Fund. However, since autumn 2017, the insurmountable differences that German and French dominant classes have regarding Europe have come to the fore again. The German industrial and export-oriented elites have never been interested in giving up their fiscal sovereignty in favour of supranational institutions. The French ruling class had hoped in the 1980s that the creation of the euro would be a way to reduce German power and achieve monetary hegemony in Europe. The decision to create the euro was possibly the biggest mistake by French elites in the country’s recent history. What occurred was very different: thanks in part to Germany’s reunification, and to wage restraint policies adopted since the adoption of the euro, Germany emerged victorious in the struggle with France over control of the Eurozone, and currently imposes its neo-mercantilist strategy on the rest of the Eurozone, supported by austerity forced on the periphery.

The German elite feels strong and has no interest in further integration of the euro, which would dilute its power. At present, the consensus in Germany would only allow for a slightly improved European budget, albeit much smaller than the one proposed by Macron, which would support neoliberal reforms in Member States, discarding the issuance of new debt. With regard to the European Monetary Fund, German conservatives, stronger than ever within the grand coalition and within Merkel’s party, would only accept strengthening the existing rescue fund, the ESM, so that it has more power for supervision and intervention, without increasing its financial capacity. They have also ruled out redistribution mechanisms such as a European deposit guarantee scheme, EU-wide unemployment benefit system, or an instrument that promotes investment. The European People’s Party, in line with the German government and other Central European governments in its orbit, has also strongly opposed any European unemployment insurance and would have serious doubts about the deposit guarantee fund.

Some were hopeful about the formation of the new German government, especially the fact that the integrationist Martin Schulz, at the head of the SPD until recently, could lead the German ministry of finance. However, Schulz was forced to resign due to bad results in the election and the new finance minister, Olaf Scholz, has already made clear his positions on European reforms: despite being a member of the SPD, “a German finance minister is a German finance minister, regardless of his political affiliation.” The next stop of the reform agenda is at the end of June, at the next meeting of EU leaders, set as the deadline for making a reform proposal. Merkel’s and Scholz’s “no” (as well as that of a great number of central and northern European countries) to Macron’s deposit-guarantee scheme is taken for granted.

One aspect that should be highlighted in relation to the reforms that Germany would accept is that its leader would allow the new European Monetary Fund to support the Single Resolution Fund (to recapitalize banks in resolution processes) only if there is a greater risk reduction through (Schäuble dixit) “change in the regulatory treatment of sovereign debt” in banks’ balance sheets. In other words, in order to move forward with the Banking Union, it would first be  necessary that the periphery states  “put their banking systems in order”. This means that Italy, the state with the greatest banking problems in the Eurozone, before being able to enjoy these European support mechanisms, should restructure its banking sector without external assistance. This task is practically impossible given that Italian banks have €300 billion of non-performing loans, 60% of which are very problematic. The Italian banks maintain their apparent solvency thanks to large amounts of public debt that they hold in their balance sheets, assets that don’t consume regulatory capital. The idea of ​​the German leaders is to change the regulation of sovereign debt in banks’ balance sheets so that it ceases to be a risk-free asset, thus forcing Italian banks to sell much of the public debt securities they hold. The objective would be to accelerate the assumption of losses, forcing write-offs while undoing the dangerous loop between banks and sovereign debt. However, this regulatory change could cause a shock and generate a vicious circle of sales of bank assets and sovereign debt, as the solvency of the state would be questioned in the expectation that it would have to intervene to save the banks, creating a new debt crisis in Italy, and thus in the entire Eurozone – one much more lethal than the Greek crisis of 2009, due to the economic and political weight of Italy within the Eurozone and the EU. As many economists have pointed out, this step could only occur safely if Italian banks could resort to acquiring a new ‘safe asset’ that could replace state sovereign debt, but as stated already, issuance of European public debt is a red line for German conservatives. Renowned economists such as Pisani-Ferry, who is close to Macron, have proposed other options such as implementing an automatic mechanism for the restructuring of public debt, with a bail-in system that would limit the risk of contagion and insolvency for indebted peripheral states. This solution, which we must be remember comes from the federalist camp, is equivalent to admitting that it is not possible to solve the structural deficiencies of the Eurozone, since the proposal would establish a new mechanism in which each state would assume the costs of the crisis that affects their sovereign debt, thus closing the option of mutualising debt and proceeding towards political integration.

The Italian political situation, where the elections of March 4 have given an absolute parliamentary majority to Eurosceptic forces, reflects the fact that Italian society is less complex-ridden in relation to Germany than other neighbours from southern Europe. Italian society, which has practically not seen its economy grow since its entry into the single currency in 1999 and now faces aslow-motion bankruptcy of its banking system, is suffering from unemployment, precariousness, and increasing poverty. With this vote, Italians have said that they are willing to say ‘enough is enough’ to the damage the euro is causing. The country will soon be led by a coalition that is opposed to complying with the deficit targets. In fact, there is no doubt that the popular mandate that emerged from the election clearly indicates that restrictions on public spending engendered by the Stability and Growth Pact (and the European Fiscal Pact) must be lifted so that the economy can be reactivated. However, it is not easy to implement such a mandate without support of the Italian left, which continues to remain beholden to the euro.

If the new Italian government challenges the EU by trespassing the deficit limit, the institutions would have to decide if it should introduce sanction against Italy. If so, Italy would be the first state to be sanctioned, since neither France nor Germany in the 2000s, nor Spain and Portugal more recently, were ever sanctioned.  A sanction against Italy would very possibly be read as an attack on Italian sovereignty itself, which could further inflame the mood against the euro and the EU. On the other hand, if the institutions don’t sanction Italy, it would be a complete victory for those who challenge the fiscal limits imposed by the EU, and a slap in the face of all those who have imposed austerity in their countries at high political costs in the past. In the latter case, the institutions would confirm that the punitive mechanisms were only used as deterrent weapons, but that the EU did not intend to use them if they led to crises that could end with the possible expulsion of important members such as Italy. Knowing that they would not be expelled from the euro, countries such as Italy and Spain could then be released from the chains of austerity. This dilemma is a situation of ‘lose-lose’ that the EU’s elite have tried to avoid, by insisting that pro-Euro parties join the next government, which would serve to dilute its rebellious stance and help to justify a certain relaxation in the EU’s deficit rules without a strong narrative of winners and losers emerging. These attempts have failed as we saw by the formation of a new government of the 5 Stars Movement and the Lega, with reputed Eurosceptic Paolo Savona as most likely the future finance minister.

The margin of manoeuvre of the euro project is coming to an end. It is trapped between the divergent interests of Germany, which dominates and imposes its neo-mercantilist, anti-risk-sharing agenda; France and transnational liberal elite on the other, which aims to subtract sovereignty from states and transfer it to supranational institutions; and Italy and its social majority, which is beginning to say ‘enough is enough’ to its impoverishment in exchange for little, only in the name of the high values ​​ that the European project supposedly embodies, and to consider options to emancipate the country beyond the institutional prison imposed by  the Eurozone.

Be the first to comment

Leave a Reply

Your email address will not be published.