Euro: what went wrong

The coming of the new European Commission, after the Parliament elections in may, represents an opportunity to evaluate the performance of the latter. The judgment is clearly negative. The Commission is the executive arm of a political right, led by Germany, which caused the longest recession in the countries of the south, with falls in production and income that have passed, especially in Greece, the great recession of the thirties.

It should be clear to anyone that the fall in GDP, occurred in 2009, was caused by the collapse of international finance, sitting on a mountain of derivatives from which managers were used to get tens of billions of dollars and euros. The increase in public debt was simply the consequence of the crisis. Instead, we have witnessed a rapid reversal of the causal relationship between crisis and debt: the increase in debt has become the fundamental problem to be treated, like a culpable illness,  by the severity of the fiscal compact .

Yet economists from all parts of the world, even in Germany itself, suggested immediately sensible therapy: stimulating investments through the issuance of euro-bonds, expansionary policies of the countries with the lowest levels of debt, risk-sharing forms of debt, and in some cases, like that of Greece, consolidation (and thus decrease) in the level of debt by reducing the burden, and a reasonable program, at least ten years, to rebalance the budget.

None of this has happened, for a clear reason: the objectives of the Council and the European Commission were aimed at the reduction of public spending, in particular the social, and the liberalization of the labour market, resulting in a change in the functional distribution of income in favour of profits. Hence the obsessive repetition of the two watchwords of austerity and reforms (i. e., elimination of regulations of labour protection).

All European countries, with the exception of the United Kingdom and the Czech Republic have agreed to fiscal compact, the goals of eliminating the structural deficit and the reduction in forced marches of the debt-GDP ratio. The refusal by the two countries' fiscal compact did not depend on a different economic vision, but by reasons of independence: we do not take orders from Brussels.

If the euro avoided the collapse, it was only because of the action of ECB, first with funding LTRO (long term refinancing operations) to the banks, so those in Italy and Spain had the opportunity to absorb the sales of government securities, made by international finance; then with the launch of the OMT (outright monetary transactions), heralded with the famous "whatever it takes".

Draghi has also recently announced a willingness to intervene with some form of quantitative easing, worried by the deflation that is going on, largely in the southern countries, and by the level of the euro exchange rate. Preparing for a confrontation with the Bundesbank, in response to a reporter's question, he wanted to break a lance in favour of budgetary rigor and respect for the rules. It has in fact repeated the story that the 2004 decision of the European Council not to punish the excessive deficit procedure all European countries with deficits above 3% (among them France, Germany and Italy), caused a relax in fiscal policy, and this in turn caused the explosion of public debt.

Perhaps the following tables can bring some elements in assessing the merit of this argument, so often repeated:

Table I

In the four years since 2003, the three countries fall below 3%, even Germany comes to a slight surplus (i. e. a negative deficit). With regard to the debt-GDP ratio here is the second table:

 Table II

As you can see debt levels have remained largely unchanged, and in the case of France and Germany are very close to 60% of Maastricht. To be precise, the Italian debt had risen during the Berlusconi government, to 106.3 (in 2006), because the deficit had remained relatively high (3.4 in 2006) and economic growth was low. But the Prodi government makes a tight budget policy, lowering the debt ratio in 2007 by three points.

The explosion of the financial crisis in 2009 determines a generalized fall in income and an increase in the deficit, as seen from the third and fourth table:

Table III

Table IV

From 2007 to 2010 the increases in the debt-GDP ratio ranging from 16 points in Italy to 18,5 in France (Germany 17.3) . What then caused the explosion of debt? The fiscal relaxation or the financial crisis?

As seen in Table IV, in the last three years the performances of France and Italy divided from that of Germany. The growth of the Italian debt is particularly high, due to the recession of 2012 and 2013. Notice how in ten years the difference between the French and German debt has reached 15 percentage points, starting from a situation of parity (even slightly more favourable to France). The austerity, the growth of risk for sovereign bonds, the fall in interest rates of the safer ones, have created an economic climate that German government finds to his liking.

If the eurozone will continue on this path, the end of the euro is more than a chance. As Amartya Sen recently said : " austerity contradicts 250 years of economic development." We must continue to criticize the orthodox economic dogmas; but this is not enough. The problem is to change the political domination of the European right. A different composition of the European Parliament is a necessary condition.