The Euro and the disputable legacy of Mario Draghi

Sottotitolo: 
He has saved the euro, but he has even supported as a counterpart the deleterious combination of austerity - structural reforms, which have made Eurozone the area with the lowest growth and highest unemployment in the developed world. 

Mario Draghi’s expected speech, given on September 12, did not contain particular surprises, but could be a stimulus for changes in the current course of economic policies. In recent weeks it was anticipated that a restart of a quantitative easing program of bond buying would be announced, and at the same time further cutting interest rates into negative territory. According to forecasts the bond buying program by ECB could have been between thirty and forty billion monthly. Instead only twenty billion will be made available, but on the other hand the measure has no predefined time limits, designed to last until the average inflation approaches the 2 percent threshold.

A prospect that appears to be even more distant due to the low growth likely to continue in the euro area. Unsurprisingly, growth forecasts were further reduced to 1.1 in 2019 and 1.2 percent in 2020. In this lackluster prospect, banks are pushed to increase loans to businesses to avoid the liquidity placed at the ECB paying, except for the exceptions expressly provided, a rate increased from 0.4 to 0.5 per cent. In essence, it is yet another appeal to companies to resume investments by exploiting the availability of capital at the lowest historically known levels of interest. Whether this happens is extremely doubtful, as it is a measure that in broader terms (60 billion a month) was already in operation during 2018.

Mr. Draghi's mandate will end on October 31st leaving  a future full of uncertainties. The worm that rips the fabric of the euro zone has, indeed, deeper roots than purely monetary ones. But it is a fact that Draghi has played a decisive role during his tenure, characterized by the evolution of the eurozone crisis. We will briefly discuss this issue, although we have to wait for more detailed analysis and assessments of the role played by Draghi during his eight years as president of the European Central Bank.

1. Undoubtedly, when Mario Draghi was appointed ECB president in November 2011, he came across a minefield. The eurozone had already entered a deep and unexpected crisis. Indeed, the year had begun differently. The euro zone seemed to have emerged without serious damage from the global crisis that between 2008 and 2009 had initially affected the United States. Draghi was still the governor of the Bank of Italy and his annual report at the end of May had been prudent in terms of prospects, but not pessimistic. Italy had suffered a budget deficit  at the beginning of the crisis but to an extent even lower than that of Germany.

Then everything changed in a few weeks. At the end of July, the European Commission discussed the Italian situation and Jean-Claude Trichet, ECB president, along with Mario Draghi as governor of the Bank of Italy, sent a "strictly confidential" letter to the Berlusconi government setting out a number of pretty detailed and quite prescriptive to-do list of economic and social measures, which could have undermined the political structure of any country. (A similar secret letter, revealed only many years later, was even sent to the Spanish government chaired by José Luis Zapatero).

The letter, whose content was revealed a month later, in September, by the Corriere della Sera imposed a set of economic and social measures whose radical nature was even embarrassing for the traditionally neoconservative circles. Within a few weeks, the Italian government should have taken a turn in economic and social policy that the same newspaper described as "a public finance maneuver of an entity never seen before in the history of the Italian Republic". After the resignation of the Berlusconi government, weakened by the attack of financial markets, Giorgio Napolitano, the President of the Republic, entrusted the implementation of the Brussels program to the technical government chaired by Mario Monti, not by chance an old member of the European Commission.

However, Italy was not the only country destined to undergo the economically and socially devastating treatment reserved for it by the ECB binomial, led by Trichet, and by the European Commission under the presidency of Barroso. Angela Merkel and Nicolas Sarkozy had already decreed in a dramatic meeting with George Papandreou in Cannes the end of the Greek government. While, at the same time  forced Zapatero in Spain to anticipate the elections, favoring, under the impact of the crisis, the victory of Mariano Rajoy, the candidate of the Conservative party supported by Germany. Thus ended 2011, the year that changed the political physiognomy of the old European Union.

2.  The financial crisis, started in the US in 2007-08, had appeared so profound as to be compared to that of 1929. In Europe, however, after the first jolts, the crisis appeared controllable. Trichet even raised interest rates in the summer of 2011 - his latest manifestation of craziness. Just the opposite of the line adopted in the USA by Bernanke at the head of the FED in agreement with Paulson, Treasury Minister, in the autumn of 2008 - the season marked by the crisis of Lehman Brothers. Later, Barack Obama, judging the financial maneuver aimed at saving the banking system  necessary but insufficient,  promoted to boost the agonizing economy  a budget maneuver that involved an additional public expenditure of 800 billion dollars aimed at stimulating economy crushed by the weight of 14 million unemployed. The therapy, although considered insufficient by the economists of the democratic left, had worked, and  in mid-2009 America had resumed growth.

In Europe, between the summer and autumn of 2011, the Central Bank and the European Commission did exactly the opposite. The European Commission launched the strategy of structural reforms. In other words, the withdrawal of the state from the economy, a growing process of privatization, the attack on the welfare state and, above all, the savage deregulation of the labor market. A policy that, due to its radicalism, would have made Margaret Thatcher green with envy and disbelief. Draghi arrived at  the head of the ECB in November, and could not have find more appalling conditions.

However, the ultraconservative decisions adopted in the second half of 2011 had not been able to put the euro back on track. It is in this context that Draghi in the summer of 2012, intervening in the Global Investment Conference in London, orchestrated the most important turning point in the history of the ECB. To the surprise of both governments and markets he made his famous statement: "I have a clear message to give you: in the context of our mandate the ECB is ready to do everything necessary to preserve the euro. And believe me: it will be enough ". Market speculation in the face of the central bank's announced firepower was not destined to stop completely, but it had lost its claws. In a sense he could only act to the extent that it was allowed.

3.  The euro was saved, but the same cannot be said of the fate of the eurozone. The comparison with America is, once again, enlightening. Ten years after the crisis had began, America can boast the longest period of growth in its history, and unemployment has reached its lowest level in the last fifty years. When you look at the euro zone, you see a reversed scenario. The eurozone has the lowest level of global growth, and the highest level of unemployment among developed countries.

It is difficult not to ask the question: how could it happen? The answer, although generally overshadowed, is definitely transparent. It is in the economic policy imposed on the eurozone in the name of the binomial: austerity and structural reforms. This is not the place for a detailed analysis.

But we know what it is. Austerity meant reducing the budget deficit to around zero, substantially reducing public investment and social spending. The structural reforms (privatization, reduction of pensions and healthcare spending, and above all the final liberalization of the labor market) have been the salt of austerity. The goal was (and is), in the rhetoric of Brussels and of acquiescent governments, to foster growth and employment. It would have been difficult to identify a more disastrous neoconservative strategy.

Not only has the crisis proved to be the longest and most profound in the history of the European Union, but it has seriously affected Germany itself, the largest European economy and the fourth industrial power on a global level.

 4.   Draghi's policy will be the subject of analysis and critical judgment in the coming years. However, a first evaluation is possible through the observation of some aspects of its fundamental approach. First of all, it is a fact that he has saved the euro: indeed, a currency without effective roots applied to economic systems historically characterized by their lack of homogeneity.

Let's consider the unassailable stability of the German Mark since the end of the Second World War and the exporting power of the German industry. Austerity and structural reforms aimed to make the eurozone a sort of Germany, imposing a euro as a translation of the German Mark, a  currency historically supported by a large   surplus in the trade balance that compensated for the constant low domestic demand of the German economy.

In this context of imbalances, the ECB led by Draghi has had the merit of having safeguarded the euro; but at the same time Draghi has always been a strong supporter of the deleterious combination of austerity and structural reforms, as a complement to monetary policy. The September 12 speech, although with some articulation, was still a testimony of his doctrine. Given that the eurozone remains the area with the lowest growth rate, countries with balanced budgets should choose the path of public expenditure to stimulate growth. In effect, the reference concerned just two countries, Germany and Holland - the only ones having a surplus in the public budget.

And the other 17 eurozone countries? The goal remains the same that it has dominated over the last decade. "The transparent and coherent implementation of the economic and fiscal governance framework of the European Union – has stated Draghi -remains over time and in all countries essential for strengthening the resilience of the economy of the area”.

This is the European context in which the new Italian government of Giuseppe Conte must move. The government program, despite its approximations, is oriented to a new approach, more or less a leftwing one. But the obstacles are still again in Brussels, where the European commission decides on the compliance of the public budget with the deflationist rules of the euro area, regardless of the circumstances, which are currently characterized by a general tendency to stagnation in all the eurozone. Just a framework that would require a very remarkable expansion of public spending.

Public debt is higher in all euro area countries than the conventional and arbitrary 60 percent of GDP set at the origin of the euro. And in Italy,  due to the ten-year stagnation, it has exceeded 130 percent of GDP. But its reduction, as a share of national income, implies precisely the increase in GDP . And this is only possible if  based on the growth of public expenditure, finalized to increasing the public investments as well private ones. Just the opposite of the current eurozone philosophy aimed at the permanent contraction of the public expenditure until  reaching 60 percent of the debt level – a goal to achieve, according the EU Commission, in the 20 years following the budget parity

All this is a clear nonsense. Indeed, only growth in both real and monetary terms is the condition for reducing in the medium term the debt as a percentage of GDP. The expansive monetary policy, which Draghi lefts as his legacy, acquires meaning only in this perspective. Instead, the expansive monetary policy, once again combined with a continued deflationary fiscal policy, is going to produce no more than it has produced in the past. That is a lack of growth, high average unemployment, and a growing poverty.

The Italian government has fortunately changed. The question is whether it will succeed in producing a substantial change in the domestic policy in the context of a general change in the policy of the eurozone. The awareness of negative effects of the past policy is a condition for strengthening the  urgency of a radical change to  escape the cage of the past decade, allowing the continuity of eurozone in the next future.

Antonio Lettieri
Insight - Free thinking for global social progress

Free thinking for global social progress