The coronavirus at the center of the eurozone crisis

Sottotitolo: 
The crisis is now hitting an economy already damaged by a long irrational economic policy.

The virus that has affected several continents was unknown and this makes the time needed to confront  it extremely uncertain. But the destructive economic  and social consequences that accompany it are already evident. So far the proposed remedies are inconsistent or at least patently insufficient. Even though the virus is unprecedented for its severity in modern times, its economic and social risks are tremendously evident.

Just take a look at the past experiences. Two economic crises have shocked the United States, investing the entire West, with different intensity in the past.

The first was the Great Depression which devastated the early 1930s in America as the epilogue of the policy that followed the 1929 crisis: in effect, a self-punitive economic and social policy with catastrophic consequences.
Andrew Mellon, the banker, who as president of the central Bank  had led the American economy under three presidents, was convinced that the crisis was inevitable and that the solution was to overthrow of the current economic and social model. The heart of the therapy was summarized in his famous sentence: "liquidate work, liquidate stocks, liquidate farmers, liquidate buildings".

In short, the crisis that was upsetting America had to be considered a necessary, painful but long-term beneficial drain. " John K. Galbraith, in his famous study "The great Crash 1929" concluded, icastically commented: “:Our determination to deal firmly and adequately with a serious depression is still to be tested. But there is a considerable difference between a failure to do enough that is right and a determination to do much that is wrong”.(The Great Crisis 1929, p.192).

More than half a century later his essay, this analysis is corroborated by the radically different  policy adopted to face the crisis. When in the fall of 2008 America was hit by a crisis that was not far from confronting that of 1929, the policy adopted by the American ruling class was radically opposed to the old bankruptcy experience.

The policy adopted  within a few months triggered the longest growth period in American history and the lowest unemployment rate in the past half century. It has been the demonstration that one of the most serious crises in the history of capitalism could be  coped with a courageous and adequate policy.

The solution was identified in the joint intervention of the administration and the Federal Reserve. Henry Paulson, Secretary of the Treasury, took the first step, asking for and obtaining 700 billion dollars from the reluctant Congress to save the banking system shattered by the crisis.

Barack Obama, who went to the White House in the following months, decided on an extraordinary intervention of 800 billion to revive the practically collapsed economic system. In mid-summer,  a radical reversal of the economic trend began to emerge, And it was also the beginning of  the longest growth phase in the United States accompanied by progressive  unemployment reduction until 3.5 percent, the lowest level in the last 50 years.

The European Union hit by the crisis chose the opposite path. Trichet at the head of the ECB, paradoxically convinced that the problem was the risk of inflation, in 2011  imposed a policy of restricting public spending to repay public debt. The result was the economic collapse of the European economy and the governments of many EU countries, including Greece, Spain and Italy.

Of course, the economic and social crisis has not been resolved. On the contrary, it was the beginning of the longest and deepest crisis in the European Union history. Mario Draghi, who took over the presidency of the ECB, tried to remedy it by reducing interest rates and promoting the Quantitave easing, albeit with delay, given that it had been adopted in the United States several years earlier, immediately after the  beginning of the crisis.

But the economic policy in the hands of the European Commission has remained firm on the line of deflation under the banner of austerity that should have balanced the public budget in the midst of the crisis. The result could not have been different from what it has been: the euro zone with the lowest economic growth and highest average level of  unemployment in the capitalist world.

The coronavirus pandemic is now an immense problem, but it cannot be held responsible for the past inconsistency of European economic policy. The crisis is now hitting an economy already damaged by a long irrational economic policy
The solution is not easy, but the way to confront the crisis is obliged. European countries need an immense economic commitment to promote  investments.

But this needed mass of investments can't be the task confided to private companies. They will not be able to  choose an investment policy in the middle of a simultaneous  supply  and demand shock  at national and global level. Specially, when the economy is hit not only  by  the crisis in the manufacture depending of the world supply chain, but specially at national level  by the crisis of a grand mass of services that account for the largest part y of the GDP and employment.

The Thirties crisis was confronted by the massive public investment promoted by the Roosevelt’s administration culminating in the New Deal. The Twenty-one century crisis in the US has been confronted mobilizing, firstly, 700 billion dollars to control the banking crisis and then, under Obama's presidency, 800 billion dollars to revive investment and public and private consumption. In total, around one tenth of the national GDP was mobilized. The equivalent in the euro area would be around 1200 billion euro. And Italy should participate with public commitment of at least 180 billion.

What to do in the current  crisis in the  eurozone?
Ms. Lagarde, the chief of the ECB, paradoxically asked an implicit, substantial, return to the early Thirties. The line is to remove the European central bank from any significant intervention in the crisis, leaving the solution to the market. Instead of promoting public  investments with  interests close to zero, states should  withdraw to avoid an increase of the public debt. On this basis, .the financial speculation has found a free field. and in Italy, the spread increased until to 250 basis points in a few hours.

A policy that recalls the infamous choices of the early thirties that were considered definitively abandoned in the history garbage basket.To avoid a disastrous deep recession, the eurozone’s  economy needs a mass of public investment that inevitably increases the public  debt, that can only be tackled and in the future reduced by confronting the crisis and revving growth.

Ultimately, debt is a greater or lesser amount in relation to the size of the GDP. In the last ten years the public debt has increased more or less in all countries not because of the increase in investment or public consumption but because of the stagnation, if not the contraction, of national GDP, of which it is a variable share.

The European Commission now admits that the national budget deficit could increase following the coronavirus crisis. But it is only the recognition of the situation, not an effective change from the bankruptcy past of the fiscal policy imposed on the eurozone.

It is not the beginning of the solution of the crisis. More likely, the latest unfortunate act of a self-injurious policy that began ten years ago. In this case, the coronavirus would be the virus that triggers the self-destruction of the eurozone. In effect the eurozone is at a crossroads. the eurozone can contend the crisis  taking into account the old  mistakes,  or it  can persevere in a neck rope policy. In this case the virus risks leaving its traces on a sick body, already on the brink of a  final collapse.

While China appears to be coming out of the crisis and Trump is looking for a solution to save the presidency, the eurozone is following a fragmented and bankruptcy policy.It may be that this criticism of Eurozone policy over the past decade is wrong. However, given that the results are manifestly disappointing compared to expectations, a different and more convincing analysis of the  policy of the dominant oligarchies in Brussels and Frankfurt  would be welcome.

It is surprising that a serious and unscrupulous debate is lacking on the eurozone ruling elite, when it is widely and strongly exercised with respect to the most representative leaders of the western world as in the case of Trump and Jonson or Merkel and Macron.

The freedom of opinion which marks the Western world, and Europe in particular, would be improved by exercising it in front of the unelected European  oligarchy. And the future of the EU and particularly of the eurozone could be strengthened, if that is still possible, by a free and reasoned debate.

Antonio Lettieri

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.(a.lettieri@insightweb.it)

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Free thinking for global social progress