Greece’s crisis has revived the debate about the nature of the Economic Monetary Union (EMU), its origin and its chances of survival. For some commentators it was a pre-announced inevitable crisis. A currency union - the argument goes - can not function without central political institutions. Or, translating the question in economic terms, a currency area is doomed to failure without what Nobel laureate Robert Mundell described, in the last century, as a number of "optimal" conditions which include, among other attributes, full labor mobility and flexibility of prices and wages. Those who share either the first or the second of these views (or both) derive from Greece’s crisis an adverse prognosis for the fate of the euro. Briefly, monetary union is bound to disintegration.

The euro at the turn of the century
Given the uncertain future, when not fatally doomed, we have to begin with a preliminary question. Was the single currency a utopian, as groundless, construction? To answer this question, we have to go back to the turn of last century, when the euro was launched. Then European Union was experiencing a moment of magnificence. At the culmination of a decade, that had begun with the fall of the Berlin Wall and German reunification, EU had finally found the path of growth and of a reasoned optimism. It is in this framework that, in the spring of 2000, an EU extraordinary summit of Heads of State and Government was held in Lisbon to outline the European strategy for the new decade. The Summit conclusions identified a set of objectives, among which two interrelated goals emerged as the most ambitious: full employment - a target long been out by political agenda – and, connected to the first, an average GDP growth of three percent per year.

Were these objectives too ambitious and unfounded? As a matter of fact, they appeared quite realistic. In the late nineties, the EU had performed very well with an average economic growth close to three percent, while ten million jobs, with a growth rate higher than in U.S., had been created. Confirming this trend the year 2000 closed with an EU average growth of 3.5 percent. So the optimism seemed well founded. And the European Commission, simulating the Lisbon agenda, forecasted for the fifteen countries of the old Europe an average level of unemployment as law as three per cent by 2010. In short, the single currency was born under the best auspices.

Unfortunately, ten years later, none of those goals has been achieved. The average growth in the EU has gloomily ranged just above 1 percent per year. The unemployment is back to 10 per cent, as it was during the first Nineties. In other terms, a lost decade. What happened? What went wrong?

*Forecast 
Source : IMF- World Economic Outlook, April 2010

Three different philosophies
I will mention, to begin with, some personal memories. As adviser for European affairs to the Secretary of Labor in the left-of-center Italian government, I had the opportunity to participate to the discussions with the governments of a number of EU countries, aimed to the preparation of the Lisbon platform. None of the governments was, indeed, opposed to Lisbon ambitious targets in terms of growth and employment. Yet, on one hand, German Chancellor, the social- democrat Gerhard Schroeder, emphasized the need for the monetary stability, under the control of the European central bank (ECB) - built in the image of the Bundesbank - as the essential issue to achieve a “sound” growth. On the other hand, the British government, which had refused to join the euro, put in the forefront of growth and "full employment" targets the “structural reforms”: in other words, the market liberalization, starting with the deregulation of the labor market. A different position stemmed from the French government which, in a joint memorandum with the Italian government, laid, as condition to get the Lisbon's targets, an “active” economic policy by the European institutions. A stance, this last one, that for many aspects echoed the attitude of Jacques Delors and, specially, his 1993 White Paper on “Growth, competitiveness and employment”.

The political and ideological differences among the major EU countries were not surprising. Three years earlier, in 1997, when the Treaty of Amsterdam, updating Maastricht, was signed, Leonel Jospin had obtained that he new pact, initially limited to the flag of "stability", was redefined as "Stability and Growth Pact". An added qualification that could be considered to be purely cosmetic but, in fact, denoted two divergent, if not opposed, conceptions of economic and social European policy. Thus, the consensus on the Lisbon agenda was, from the beginning, messed up by three different philosophies about the economic and social role of European institutions. Paradoxically, though seemingly distant, the German obsession for monetary stability winded up in marrying Anglo-Saxon commitment to market fundamentalism.

The sovereignty shift

Twelve EU states had surrendered their monetary and exchange rate sovereignty to give birth to single currency in order to achieve a double objective. The first was a defensive purpose: to utilize the euro as a common shield against attacks from the financial speculation, as those which a number of European countries had experienced at the beginning of nineties. The second objective was aimed to join efforts to facilitate a sustained growth, and perform a higher competitiveness in front of the globalization process. We can observe that the defensive goal has been achieved (at least, until the current Greece’s crisis). But, having given up, since the early years of the decade, the growth and employment’s purposes, euro area condemned itself to an increasing marginalization within the new globalization map.
 
The EU economic philosophy, interpreted by the ECB and the European commission – the Frankfurt-Brussels axis - proved very soon its ineffectiveness. When in 2001-02, United States was hit by the recession, originated by the burst of the financial bubble, the euro-zone, with a single market of the same order of magnitude than the American one, might assume the role of growth locomotive among western countries. But the opposite happened. The ECB, convinced that an average rate of inflation amounting to 2.3 percent, was an intolerable violation of the frontier of two percent (arbitrarily) set by itself, started up reiterated interest rate increases, contributing to freezing the growth - while the Fed was reacting to the US crisis, cutting rates until making them negative in real terms.

So euro-zone growth was halved from 3.5 in 2000 to 1.5 percent in 2001. But this was only the beginning. In 2002 the average growth in the euro-zone fell below 1 percent, while Germany, supposedly the main engine of the European economy, ominously entered recession. The consequence of this shift into the stagnation was an automatic increase of the government budget deficit, beyond the Maastricht sacred threshold of three percent, in several European countries, including France and "virtuous" German. And Brussels technocracy did not hesitate to denounce both to the European Court of Justice for breach of the Stability Pact.

The Frankfurt-Brussels axis was reinterpreting the Lisbon strategy along the lines of the "supply-side economy", based, among other features, on deregulation of the labor market, wage restraint and social spending retrenchment. Crucial, in this scenario, was the Stability Pact that Romano Prodi, European Commission’s president, in a burst of bold sincerity, just described as "stupid." In other terms, member states which had transferred important pieces of sovereignty, as monetary and exchange rate policy, to the Union, discovered that they had been requisitioned by a technocratic oligarchy, inspired by  the dominant neo-liberalism ideology, that reduced the economic policy to State retrenchment and markets self-regulation. In this framework, EU became an arena for beggar-my-neighbor competitive disinflation, based on multiple forms of fiscal and social dumping, as roughly demonstrated EU enlargement policy toward central and eastern European countries (see, A. Supiot, Insight-April).

The failure’s first announcement

By mid-decade, the failure of Lisbon targets was already a matter of fact. This outcome was not caused by lack of power of decision and coordination by the European institutions, as it is often claimed, but by a prejudiced and nonsense application of the powers which the member states had transferred to Frankfurt and Brussels.

Finally, the euro-zone average growth in the first five years of the decade (2001-05) stood at 1.5 per cent per annum, while the unemployment rate increased until 9 percent. Yet, the most surprising outcome was the gloomy performance of Germany, that saw over five years an average growth of 0.6 percent, mainly due to exports (the current account balance shifting from minus 1.7 in 2000 to plus 5.1 percent of GDP in 2005), in presence of growing unemployment from 6.8 to 9.1 percent. So it is worth to say that Germany’s economic attitude brought about, at the some time, a triple intertwined outcome: a deflationary domestic demand followed by growing unemployment as counterpart of an extraordinary growth of current account balance, mainly due to export within the euro area (see, M. De Cecco, Insight/Views). Briefly, Germany, as the supposed principal engine of the euro-zone,  was derailing the currency union along a path of economic stagnation and increasing unemployment. So, the Lisbon’s agenda had been already burned at the middle of the new decade. The dismal blend of monetary stability and “structural reforms” that synthesized the doctrine of the Frankfurt-Brussels axis had wrecked all euro area ambitions.

Source: IMF- World Economic Outlook, April 2010

At the beginning of the second half of the decade, EU witnessed, for a couple of years, a revival of growth, but ECB obsession for the inflation returned to strike. The sharp rise in the oil and food prices had led within the euro-zone, as well as all over the world, an increase of inflation rate. It was an imported inflation. But ECB was principally intentioned to curb the recovery of wage demands, particularly in Germany, after years of stagnation. The result was a doubling of interest rates, gradually raised from 2 to 4.5 percent between the end of 2005 and the beginning of 2007. So, not only dampening domestic demand, but also increasing the debt service of the member states.

When, in 2008, the new financial crisis, starting from the US, cast its shadow on the global economy, Jean-Claude Trichet, ECB president, amazingly went on declaring that not the recession but the inflation was the real threat. On this basis, the ECB kept rates firm up on the eve of the Lehman’s collapse. In early 2009, while across the globe, from US to China, important economic stimulus policies were set to avoid, or reduce, the deflation impact, the euro-zone persevered with its lethargy. To the French proposal for a coordination of public investment policy, Germany responded negatively, only concerned with the rescue of its banks, enmeshed in speculative derivatives of American origin. So, in the middle of a global crisis, and after a decade of joint mistaken policies with negative consequences for all, "every man for himself and the devil take the hindmost" became the EU chief principle.

The paradoxes of Greece’s crisis

Greece’ crisis is a story of paradoxes which has often been told. When, after a sweeping election victory, George Papandreou lifted the veil on falsification of the public budget, Brussels should have appreciated the turn of the new Greek government, which had unveiled the misdeeds of past administrations, and declared full availability to agree on an austerity plan to gradually put the country on a normal financial path. But this was not the case. EU, under the Berlin’s pressures, took a turn irrationally punitive. In front of the Greek financial problem the decisive factor was the time. How much time the European financial authorities would have allowed to Greece to bring down the deficit? Stubbornly, the request was a fiscal consolidation of 11 percent of GDP from 13.6 to 3 percent over three years, within the awful scenario of a forecasted GDP cumulative decline of about 8 per cent. A medicine that, rather than cure the illness, would have killed the patient. As Jean Paul Fitoussi asked: “How can Greece grow out of its debt if there is deflation?”

In effect, the euro-zone authorities had openly adopted an arrogant attitude to exemplarily punish the tiny Greece. On the other side, the financial markets, having won the test of Greece, and understood that the euro was not an effective shield against speculation, as it had been envisaged at its birth, were ready to assail other countries: Ireland, Portugal, Spain and, maybe, Italy. But without excluding Britain, where the government deficit is twice that of Italy and higher than in Portugal and Spain.

Greece will be saved, at least in this phase. The country can not be abandoned to its fate (default and/or exit from the euro) because the cost would be paid by large European banks - mainly from France and Germany - which hold at least 120 billion of the Greek debt. “It is overtly rescue of Greece, but covertly a bail-out of banks” – wrote in the Financial Time Martin Wolf. But the rescue, having been long-delayed, so giving room to financial markets speculations and a long-term worsened situation, it looks increasingly inevitable a future restructuring of Greek debt. Something that could happen after the population will have been forced to bear harsh, and at that point worthless, sacrifices in a framework of social and political destabilization.

No lack of voices complaining about a lack of solidarity within the Union. But criticism risks being misleading.  The euro-area policy failure does not draw from a generic lack of solidarity, but from the stubborn perseverance in a self-defeating policy. That is a substantial, even though undeclared, market fundamentalism policy, contrasting with the balance, that  Jacques Delors had tried to establish, over the ten years of his European Commission presidency, between European market opening and social equity. The lost decade is the dismal outcome of the euro-area political and ideological path chosen by the Union.

After Greece

Finally, in order to address the imminent risk of a widespread contagion of Greek crisis, the EU authorities have decided to put a massive intervention to shield the member states. At this end, in co-operation with IMF, a fund of 750 billion has been established . But the most innovative and effective measure is the direct intervention by the ECB on the government bond markets. It is an important step forward after months of inertia. But it is also true that this European stabilization mechanism, bound to solve immediate problems of liquidity, is not going to fix the euro-area medium and long-term solvency’s problems. According to Stuart Holland and  Jesper Jespersen (see current and April Insight), an European monetary fund should be conceived as not only an emergency  instrument, but targeted to the coordination of a growth rebalancing policy within the whole Union. Instead, the current EU proposals are heading in the opposite direction: the Fund’s main task should be bound to just strengthening those Stability pact criteria that have already proved their failure.

Abrupt fiscal consolidation without growth, in a climate of general stagnation, will perpetuate and possibly aggravate the euro-zone weaknesses of the last decade.
The Stability and Growth pact will keep giving up its growth component. But there is an important point.  In principle, European financial authorities do not deny the growth objective, the divergence being in the tools to achieve it. According to the philosophy practiced in the past decade, the key of growth  should be in the “structural reforms”. In other words, the cutback of public investments, growing privatization of public services, labor market’s deregulation, wage curb and social spending retrenchment. Eventually, the crisis as a good occasion to implement the neo-liberal policy remained unaccomplished over the last decade. However, this is not an easy goal to get. It will rather deepen social tensions and destabilize governments and democracy. ”It is hard – Financial Times writes – to embrace a reality that can only be addressed by cutting spending, firing people, slashing pensions, moving out of homes and other painful measures”.

A different way to put on new rails the currency union is it possible? An alternative policy is well known as well as wiped out.  A policy of coordinated investments in innovative industrial and service’s sectors, along a new model of compatible development, would strengthen European growth’s potential and competitiveness. Within an actual growth’s platform, employment and productivity might simultaneously increase. In the current framework, instead, these and other needed economic measures are made impossible: long term private investments are not compatible with a scenario of stagnation, while the public ones are prevented from tight austerity plans.

Yet, to implement such a policy it should not be necessary to wait for a messianic “United States of Europe”. A policy of growth’s coordination does not claim further special shifts of sovereignty from the member states, but collective new political choices. The first one is to liberate the Stability Pact by the rule that, inappropriately, states as equivalent the current budget expenditures and the public investments. The second should be the issuance of European bonds for selected and agreed major European investments in infrastructures and in advanced technologic and research sectors of common interest. This would be a minimal, but consistent, economic governance for the euro-area. To do this you do not need new treaties, a challenge that no government wants to face after the gamble of the Lisbon treaty. What is needed is a change of political philosophy and policy. France has often proposed something like this, not distant from the Delors’s old proposals. But, Germany is fundamentally hostile, fearing that a European governments’ initiative could jeopardize the ECB autonomy and the stability stance. Or, more substantially, invade a ground, as the industrial export area, in which it has a leading position.

But Germany should know that, without a new growth’s perspective, the euro-zone is doomed to agonize and, ultimately, to disintegrate. A number of German economists (see J. Starbatty in Insight/Views) suggest a new strong euro limited to Germany, Austria, Holland, Finland and other possible small countries. But, evidently, it would simply be an expanded Deutschmark area. Without the Southern countries (and France), It would not be a new euro-zone, but the imprint of its failure. Nevertheless, the failure is not fatal, neither predetermined by any original sin. The euro project, Implemented at the turn of the century, has been jeopardized by short-sighted political choices, inspired by a dominant neo-liberal ideology, in plain contrast with the European economic and social traditions. The result was the failure of the proposals that had been placed behind the euro.
A frank, unbiased, analysis of the past decade should help to design a new future for the euro. The perseverance in the past mistakes makes no sense. Unfortunately, It would only confirm the old maxim that “God blinds those who want to lose”