Italy's uncertain future in the eurozone after the pandemic attack

Sottotitolo: 
Economic problems began in Italy at the dawn of the second decade of this century. But all Eurozone is in difficulties.. Germany, which is the largest economy in the Eurozone, has been swinging between stagnation and recession for the past two years

The coronavirus crisis hits Italy in a difficult phase with two years of substantial economic stagnation behind it. Its economic consequences will aggravate the situation, increasing the deficit and public debt destined to approach dangerously 150 percent of the national income.

However, it is not a problem concerning just a fragile country, All Eurozone is in difficulties. Germany, which is the largest economy in the Eurozone, has been swinging between stagnation and recession for the past two years. But for the neo-conservative Die Welt, the economic crisis in Italy has a specific cause in the presence of the mafia. The thesis would be ridiculous if it did not appear in an important German newspaper. The mafia has always existed and is a country problem. Nevertheless, during the first decade of the century, Italy, while growing slowly like the entire euro area, reduced the unemployment rate to just 6 percent, significantly lower than that of France and Germany. In addition, we can reassure Die Welt that the mafia existed even then.

Economic problems began in Italy at the dawn of the second decade of this century. The crisis that broke out in America hit the euro area and in 2008-2009. Italy recorded a reduction in GDP of about 5 percent, only a few tenths more than Germany. However, this phase did not last long. Already in 2010, the Eurozone showed signs of recovery and Italy ended the first decade with significant growth. When the crisis re-emerged in the summer of 2011, the financial markets attacked Spain and Italy.

By the end of May, Mario Draghi had been moderately optimistic in his latest report as governor of the Bank of Italy. He could not have foreseen that Jean-Claude Trichet, head of the European Central Bank, after having foolishly raised twice interest rates, would have decided a violent deflation policy, imposing a sharp reduction of the budget deficit in the midst of the crisis. Financial markets  find fertile ground to move their attack. Moreover, the government were constrained to raise interest rates to a level never before reached at the time of the euro. Italy as well as Spain and Greece were offered unarmed to speculation.

We know the continuation of the Eurozone self-destructive policy that was founded on a neoliberal ideology remembering the days of Margaret Thatcher and Ronald Reagan. Therefore, while America was heading towards the decade of greatest growth in its history, the joint action of the European Commission and the ECB began the longest period of substantial economic stagnation in European history after the Second World War.

In-depth economic theory studies are not necessary to understand that, with a substantial slowdown in growth, the payment of interest on past debt inexorably increases the fiscal problem. The Italian example is enlightening: At the beginning of the century, public debt had fallen to the lowest level, oscillating around 100 percent of GDP. Nevertheless, with the outbreak of the crisis, it strongly grew as it happened all over the world. A normal future growth rate would likely have brought it back to the pre-crisis level.

However, with the policy imposed in 2011 by Trichet and the European Commission, the Eurozone entered a new phase of crisis worse than that experienced between 2008 and 2009. The corrections of Draghi, appointed to lead the ECB, aimed to keep under control interest rates and then increase liquidity with the adoption of the Quantitative easing.
Meanwhile, with the support of Germany, the European Commission imposed a self-defeating austerity policy. With the compression of growth, public debt inevitably increased everywhere, not only in Italy. In fact, in Italy it has grown much less than in other Eurozone member states with a increase of 25 basis points since the beginning of the crisis, while in Spain it has grown by 60 percent, going from less than 40 to around 100 percent of GDP value

In the past two years, the modest recovery in growth has finally given way to stagnation, marked by repeated periods of recession not only in Italy but also in Germany. There could not have been a more evident demonstration of the failure of the Eurozone, considering that Germany, the second western economic power and the fourth globally, has fluctuated in the last two years, even before the appearance of the coronavirus, between economic stagnation and recession.

Due to the spread of the infection, China's economic growth will remain significantly below 6 percent, the lowest growth rate in recent years. The economic consequences of the crisis in the United States will be notably heavier. Trump's inability to catch his first signs has seriously aggravated his course. Indeed, his first reaction was to field a trillion dollars to curb the heavy fall of the economy, which is causing sudden mass unemployment to an extent previously unknown in America.

However, under pressure from the Democratic Party, public intervention has doubled drastically, reaching over two trillion dollars not only to deal with the immediate consequences of the pandemic, but also to sustain the recovery through government resources exceeding 10 percent of GDP. On the other hand, Japan has gone even further with an extraordinary budget investment corresponding to a trillion dollars in a country with a population of just over a third of the United States.

As for the euro area, the only certainty so far is the absence of a common European policy. In the euro area, public spending is in fact linked to arbitrary parameters that do not take into account the possible fall caused by unpredictable or external events. Global economy is faced with an event without precedents that can give way to more serious economic and social consequences than those experienced during the 2008-09 financial crisis.

The pandemic has in fact also touched the developing world that was immune of the old crisis. Then it was fundamentally a western capitalist crisis, while the developing world, as it was the case of Chine and India in Asia, Brazil and Argentina in South America, continued to keep a very strong growth. Now, all the continents are in different measures invested by the pandemic, from Asia to Latin America and Africa where the majority of countries is already hit extreme poverty.

In this framework, the consumption will fall everywhere starting with the developed western richer countries due to the huge growth of the unemployment and poverty.  The crisis will particularly hit the grand mass of workers that characterizes the most advanced countries. In the first phase, there will be a simultaneous drop in demand and supply of goods and services.

The impact will be particularly hard in the Eurozone already hit by a long phase of slow growth due to a decade of deflationary policies and high unemployment in the major countries, except Germany. In this context, just a massive collective intervention promoted at European level could be substantially immune from the financial market attack. However, in any case, to be effective the financial bulwark should be of the size put in place in the United States and Japan.

So far, there is no trace of this. The next meeting of European heads of state and government will be crucial. If it were to resolve itself with purely formal inadequate measures or with further postponements, the pandemic crisis will become the Eurozone crisis. According to the government current declarations, Italy will not accept to be subjected to the same ruinous therapy imposed on Greece in the past. In addition, the de facto crisis of the present majority of the government would pave the way for the right-wing opposition, which is electorally majority according to current polls.

The Eurozone is at a crossroads. Under the impact of the current serious crisis, a radical change can take place, reversing the policy that has placed the Eurozone on the edge of the developed world. On the contrary, if it insists on a path that has proved unsuccessful in the last decade, it can hardly escape a definitive fate of dissolution.

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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