The Euro twenty years later

Twenty years ago, with the advent of the single currency, the eurozone was moving towards the end of the century in a climate of great optimism. The process had started in the early nineties under a strong commitment from Mitterrand, president of France, and of Delors, president of the European Commission.

It had encountered some uncertainty especially in Germany, but the euro had become the main focus of  Helmut Kohl, as the pillar of the German-French partnership essential for the German unification. For Italy in particular, it was a success that, up until the last  moment seemed uncertain. The birth of the euro was, in any case, welcomed into a context of great optimism. And it was not unfounded. In the late nineties, after years of stagnation, EU countries had recorded an average growth of around 3 percent of GDP.

1.   In this framework of optimism a conference of the heads of state and government was convened in Lisbon, Portugal, in March 2001 with a specific issue: achieving full employment in the European Union. The government with the greatest commitment was the French one under the leadership of Jospin, while Martine Aubry, the daughter of Jacques Delors - deus ex machina of the birth of the euro - already renowned for the introduction of the 35 hours a week in France  was the Labor minister.

Having been nominated by the government as the advisor for social policies, I organized a meeting in Paris between the Italian Minister of Labor, Antonio Bassolino, and Martine Aubry, aimed to consolidate the commitment of the two governments with respect to the final resolution of the Lisbon Conference.

In the end, the conference adopted a resolution aimed at achieving the goal of full employment. Tony Blair, the British prime minister, was the most reserved about the governments’ commitment. Full employment had to be, in the New- Labour vision, the outcome of an organized flexible labour market.

Ultimately the Conference unanimously adopted the target of full employment as a central focus of the European Union’s policy for the new decade. On the basis of the Lisbon outcomes, the European commission's office worked out a specific document outlining the goal of full-employment achievement, with different deadlines for each EU countries, before the end of the new decade. The euro was born in a framework of great social commitment, as might be expected from the vast majority of EU governments with a strong leftist vocation.

2.   Unfortunately the new optimism didn’t last long. Gerhard Schroeder, who had succeeded Kohl in Germany, inaugurated in 2002 a restrictive policy aimed at reducing the public debt accumulated in the previous decade in support of German unification. Under the impact of a restrictive economic policy, Germany entered recession in 2002-03 with a drag effect on the entire eurozone. In Italy and France growth slowed. The first years of the euro began in the worst way. There was increased unemployment across the eurozone reaching 10 percent in Germany.

In 2002, the newly-elected CDU-SPD coalition government, led by Chancellor Schroder, commissioned Peter Hartz, Volkswagen’s HR director, to design a set of policies mired to reform the German Federal Employment Agency. Between 2003 and 2004, The Hartz Commission drafted a report, Agenda 2010, resulting in one of the most extensive social policy reforms in Germany since the Second World War. Unemployment benefits were limited, while fixed-term and part-time recruitments were extended. But above all the new mini-jobs and middle jobs were extended to include nearly eight millions workers. The companies could hire mini-job workers with a salary of 400 euro a month, creating new category of working poor.

The increasing unpopularity of the reforms and the opposition of the trade unions along with the left wing of the SPD forced Schroeder to resign on February 2005 before completing his second term. Overall, the first five-year period of the euro closed in Germany with a disappointing total GDP growth of 3.5 percent: a far cry from the objective of an average annual growth of 3 percent for the Eurozone – its target at the beginning of the first new decade of the euro. The SPD lost the election giving way to the Angela Merkel’s long-term tenure.

Finally, after the first dismal five years a new period of growth began on the eurozone. Unemployment significantly dropped. With the return to GDP growth, the debt-to-GDP ratio fell in Italy to 106 percent and, according to the Bank of Italy, it would have dropped below 100 percent in the following years.  Most importantly, the unemployment rate fell in Italy to just above 6 percent – A significantly lower level than that in Germany and France.
 
3.    In the autumn of 2008, the crisis that broke out in America marked a turning point in Europe. The largest French and German banks were involved in the Wall Street financial crisis. Germany, more exposed, suffered a heavy recession that caused a fall in the GDP of around 5 percent. Italy, like the other eurozone countries, followed the same fate.

Initially, the crisis had hit minor countries such as Greece, Ireland and Portugal. Spain was still a country with a relatively low public debt amounting to about 40 per cent of the GDP before the explosion of the crisis involving regional banks heavily caught up in the real estate crisis. The bail out of the banks involved in the crisis was imposed by eurozone authorities for the safeguard of the French, German and Dutch creditor banks. However, despite the heavy consequences of the banking crisis, 2010 saw a remarkable average growth in the eurozone. It could be said that the eurozone was emerging from the worldwide crisis with bearable damages. Instead, things turned out differently.

Jean-Claude Trichet, head of the ECB, paradoxically fearing an inflationary surge, increased interest rates. It was a senseless policy whose effects spilled over into countries with greater public debt. The financial markets attacked the countries, which had to reimburse or renew their debts that had increased during the crisis. In the summer 2011 the speculation attacked the Italian banks, even though the total debt of the country, at around 5 percent of the GDP, was among the lowest in the Eurozone.
 
It is in this context that Germany elaborated the Fiscal compact definitively approved in 2012 by countries which had no alternative under the attack of the financial markets. Essentially, the budget deficit had to be set to zero and the debt to 60 percent of the GDP. To sum up, a hard deflationary policy in the middle of the recession and unemployment increase. The Pact was so incredibly at odds with the real context of the crisis that it remained an inter- governmental agreement without being subjected to the scrutiny of the European Parliament.

It was, indeed, the reverse of the policy adopted in the U.S where the crisis had exploded. Reminiscent of the beginning the catastrophic consequences of 1929,  Firstly, Paulson, head of the Treasury, asked and obtained 700 billion dollars  from Congress to use to stop the banking crisis. In the next months Barack Obama, elected to the White House at the end of 2008, decided a public expenditure of 800 billion dollars to revive the economy. In the summer of 2009 the crisis, dramatically marked by 14 million unemployed, had a turning point. Recovery began slowly, but continued until today, giving way to a decade of uninterrupted economic growth along with the lowest unemployment rate of the last half century.

The eurozone was, instead, was the victim of the lowest economic performance at a global level. And, as a definitive testimony to the absurdity of euro-zone policy, Germany, the main economy of the euro area, ten years after the start of the crisis was still hit between 2018 and 2019 by the recession followed by a growth rate near zero. Italy has suffered a similar fate. It has consequently increased its debt - unavoidable in a  stagnating economy.

That the adoption of the single currency could be a risk has been discussed at length by economists. Tony Judt had already argued about its contradictions in the middle of the 90s in his conversations held at the Johns Hopkins Center in Bologna ,reproduced in the 1995 book “A Grand Illusion?”, and then more widely explored in his monumental “A History of Europe Since 1945” published fifteen years later.

It would be , in any case, difficult to ignore the criticism of a vast number of economists such as  Krugman ,Stiglitz, Galbraith Ashoka Mody, who with their essays and books have shown the incongruities of the Eurozone policy. This  also the position of Lawrence Summers. ex Treasury minister under Clinton and then Barack Obama's main economic advisor: well addressed public investment generates a high multiple of its initial spending,  promoting  GDP growth and, in the medium term, the gradual reduction of the initially accrued public debt.

But this is not the policy adopted in the eurozone. The first twenty years of eurozone culminate with the reversal of the perspectives which heralded its birth. Eurozone was to have opened the way to a powerful new Europe in the new century. The reverse has been true.

Meanwhile, economic growth has spread over the Pacific. The United States and China are at the head of economic growth and technological progress. Other countries are central in the new century perspective. Japan, after a period of stagnation, sees today the government of Shinzò Abe deciding to promote public investment equivalent to more than 100 billion dollars aimed to increase the national growth. South Korea has shown continuous growth in the most advanced technological sectors. Vietnam keeps an elevated yearly growth increase. And India, although in the midst of great social contradictions, continues to keep its prominent place in the global economy.  As Fernand Braudel had envisaged some decades ago, the Pacific would have became the centre of the world economy.

4.   What now in the disappointing eurozone? The only known and practical solution - as we have seen in America at the height of the crisis – would be a strong state intervention to support investment and consumption. A new course could be possible by mobilizing the savings that the crisis immobilized, by putting them into investment. Here we focus on the greatest paradox. Savings have largely increased during the crisis. Private savings in the form of deposits and current accounts have reached a staggering € 13 trillion in 2018 in the eurozone.

An in Italy, the savings, that grew during the years of the crisis, have also reached about 1500 trillion euro while interest rates are close to zero and at times even negative. The subject which can activate them both directly, and together with private companies, is the State: investments in infrastructures with high employment potential as well as in support of public sectors such as health and education, not to mention the support for millions of families impoverished by the crisis.

The economists who support this line of action are aware of the fact that in the short term public spending will increase the budget deficit. But the increase of the  GDP deriving by the growth of investment and employment also generates higher tax revenues that allow repayment of additional public debt in the medium term.

The European eurozone policy moves in the opposite direction and hinders the policies of the member states, if they  try to get out of the cage in which the eurozone has forced the economic policy. In Italy, the current Conte government is a striking example of a government with its hands tied, forced to sacrifice itself in the context of an economy whose growth is not only close to zero but which, according to IMF forecasts, will still be marked by the meager increase of a few uncertain decimal POINTS in 2020-2021.

This is a framework in which the challenge leaves no way out. EITHER the government re-elaborates its policy aiming at a strong revival of growth - with or without the consent of the new European commission - or is condemned to failure because of its internal divisions and the attack of the right-wing opposition led by the League.

Overall, the first twenty years of eurozone culminate in a phase of reversal of the perspectives which heralded its birth. Eurozone was to have opened the way to a powerful new Europe in the world of the new century. The reverse has been true.

The crisis that has devastated the euro area is not a divine condemnation, but the result of a self-defeating policy. We are witnessing the failure of an experience that twenty years ago was inaugurated within the framework of a great optimism, which at the time seemed quite reasonably motivated. An optimism that, unfortunately, in the light of politics actually practiced in the last twenty years has proved to be unfounded.

Antonio Lettieri
Insight - Free thinking for global social progress

Free thinking for global social progress