Reversing the Eurozone austerity *

In our usual language austerity, applied to individuals, suggests a positive trait, a reliable personality.  Applied to the economy in Europe, it definitively evokes economic stagnation, mass unemployment and growing inequality.

The metamorphosis came up with the crisis, when the European authorities faced to the Lehman Brothers collapse in the US, imposed to the smaller countries of the eurozone periphery - Ireland, Portugal and Greece – the bail out of the respective banks in trouble. The reason was that, without their rescue, the crisis would have heavily beat their lenders: that is, the major British, German and French banks.

The result was the explosion of the budget deficit of the debtors. In simple words, the banks of the dominant countries were saved by the taxpayers of the weaker ones. The rescue resulted in a disaster for the national budgets. It was no accident that the Ireland and Spain, even though getting the minor debt in the eurozone (less than 40 per cent of GDP) were suddenly confronted with a huge, awful  increase of the debt.

Austerity
The European Commission imposed a deflationary policy to shrink the fiscal deficit, bizarrely defined with the oxymoron "expansive austerity". Austerity was progressively generalized to all eurozone, including not only Greece and Portugal, hit by a banking crisis, but also the bigger member countries, Italy and France.

In a nutshell, austerity designed a policy of raising taxes and cutting public spending: essentially, a policy condemning each country to deflation and massive rise in unemployment. An incredibly stupid and self-defeating policy destined to increase the debt –to- GDP ratio in every country at the extent that the GDP decreased. The worst blueprint to face the crisis.

To make a comparison with the 1929 crisis, we can say that the eurozone policy could be compared to the crazy deflation stance adopted by Andrew Mellon, the US Treasury, in the early Thirties. With a crucial difference. In the US, after three years of crisis, Franklin D. Roosevelt got the presidency, reversing that foolish policy and launching the New Deal. Unfortunately in Europe, the crisis continued to be dealt with by Manuel Barroso, the UE president, supported in the shadow by Wolfgang Schäuble - a Mellon of our century.

We know the dismal outcome. In 2010, unemployment was at the same level in the US and in the eurozone, that is 10 percent of the labor force.  After five years unemployment has halved in the US, hitting  5 percent, while in the euro area it continued to rise to the average 11 per cent, reaching in Greece and Spain the shocking level of 25 and 22 percent respectively. At the same time, the debt increased in all countries: more than doubling, for example, in Ireland and Spain.

The eurozone austerity failure could not have been more appalling. Other European countries outside eurozone, such as Britain, Sweden and Poland have recovered, reaching a yearly GDP growth around 3 per cent. No one can deny the failure. Meanwhile, the austerity policy has assumed a different

Reforms
Once become undeniable the fiasco of austerity, the eurozone’s authorities began to spot the solution of the crisis in the “structural reform” policy. Austerity was no longer the main target; it rather became a functional means to push the implementation of the structural reforms.

This is a crucial shift, which is often overlooked by the critics of the European policy. There are many American and European economists who criticize austerity, but explicitly or implicitly endorse the structural reforms as a central means to fuel the recovery.

In its essence, the structural reforms can be summarized in three key targets: the privatizations, the radical cuts in social spending (such as, unemployment benefits, pensions and health care); and a wild deregulation of the labor market.  with freedom of dismissal and cutting wages.

To order along a virtual hierarchy the array of the claimed structural reforms, the reduction of wages and the dismissal freedom, along with the  substantial demolition of the workers’ collective bargaining power, are by far their chief targets. It is impressive to see as eurozone authorities dictate the condition for the collective bargaining, assessing the end of the national-sectoral bargaining in order to isolate the negotiation at the workplace level, where the unilateral company’s  power is tougher, especially in a framework plagued by the high unemployment and a dismissals threat.

Spain with the Rajoy labor reforms is a sheer example of the strengthened power of blackmail of the enterprises, once they were enabled to put the alternative between a cut of the contractual wages, till 20 per cent, and the firing of a number of workers.

Shortly, the goal of structural reforms was, and continues to be, the demolition of the European social model, considered an outdated legacy of the XX century. In other terms, the eurozone authorities, profiting of union’s weakness due to high unemployment and the hostile political framework, have extended to the continent a kind of neo-Thatcherism, based on a harsh neoliberal transformation, that not even the past national rightwing governments had been able to  fully accomplish.

To conclude on this point, the mix of austerity and structural reforms cannot be considered a sort of naive political mistake: indeed, it has become the channel of a modern undeclared class struggle, covered under the mantel of the unelected European technocracy.

Complicity
The policy of austerity and structural reforms could not be carried out without the compliance, even the complicity. It is not a coincidence that the historic characteristic of the European political regimes, that is, the alternation between leftwing and rightwing governments, has lost any true relevance.
Not only the fiscal but the whole economic policies are dictated by the Brussels technocracy, and subject to its prior approval.  At all, we witness the humiliation of what remained of the national sovereignty and of a normal functioning of democracy.

Yet, the eurozone policy has become untenable. The governments of a growing number of member States, based on the old mainstream parties, are in trouble, while their popular mandate is agonizing.

In France, François Hollande has got the lowest popular support in the history of the Fifth Republic. In Spain, according to the current forecasts, the government of Mariano Rajoy is going to be defeated in the elections of year-end. In Italy, Matteo Renzi had to seek the help of representatives coming from Forza Italia to implement his rightwing constitutional, electoral and labor reforms, that  could make the envy to past Berlusconi’s governments.

But the scenario is far from stable. The balance moves against the failing eurozone policies.

The recent results of the elections in Portugal are an significant signal. Not only has the center-right government of Passos Coelho lost the absolute majority after four years of subservient government; the major novelty lays in the chance that the whole left-wing array of forces, from Socialist to Left Bloc and Communist Party, is bound to join in a government based on the opposition to the austerity policy. This new leftist alliance, after decades of division, shows a path to a new and possibly winning approach that goes beyond the divide between the sorting out from the eurozone  strategy and the commitment to overthrow the austerity policy.

The exit strategy is, indeed, deeply divisive and allows the governing parties to frighten the public opinion stressing the risks of an abrupt abandon of the single currency. On the contrary, a clear anti-austerity policy can be carried out by a large array of different political forces.

The current eurozone policy is, in fact, based on the Fiscal Compact; that is, an intergovernmental agreement that should be incorporated in the legal European Treaties on 2018 on the basis of its assessment. It was approved in 2012 as a means to step up the solution of the crisis, based on a harsh fiscal policy. The facts have gone in the opposite direction; after three years the cure has proved to be poisonous.

Let us look closer to the Pact.

The Fiscal compact (formally, Treaty on stability, coordination and governance in the EMU), on the one hand, makes binding a balanced budget and imposes (what was new in relation to past treaties) an automatic correction mechanism for its overshooting; on the other hand, extending the provisions indicated by the Maastricht Treaty, sets the obligation to reduce by one-twentieth per year the amount of debt that exceeds 60 percent of GDP.  Clearly, unreachable and self-destructive objectives In a dark context of economic stagnation and mass unemployment.

Consider the Italian case. Over the next two years, at least a cumulative sum of 50 billion euro should be subtracted to the economy to get the budget parity; and, once achieved this target, around 50 billion euro should yearly be reserved to the debt reduction. In France, considering that the current budget deficit is almost double that of Italy, the financial drain would even be greater. In short, a reiterated European deflationary outlook. A foolish outlook, worsened by the slowdown in global growth and the deterioration of the geopolitical situation on the European borders.

The intergovernmental Pact is not only an economic source of disasters. In effect, it states the requisition of the democratic sovereignty of national parliaments in favor of a technocratic unelected body. The Fiscal pact was approved under the blackmail of the financial crisis without any effective debate, while the requests of a popular referendum advanced in some countries, were rejected by governments frightened by the experience of the last referendum, when in 2005 France and Holland rejected by large majorities the European constitutional proposal.

Changeover
Is there an alternative to the current self-defeating eurozone policy? Let us start with the monetary policy.

The quantitative easing endorsed by Mario Draghi, the president of ECB, has been an effective instrument to initially save the euro, but it is sterilized by the fiscal policy deflationary stance. The availability of monetary resources at or below zero interest rate is pointless if, in a stagnating economic framework, there are not companies eager willing to invest.

At this stage, the key of the growth is in a public investment policy. A significant amount of public resources must be devoted to investments in infrastructures, urban maintaining, green economy development, research and education. Briefly, public investments that stimulating the growth could, at the same time, restart the private initiative and boost the employment.

The financial resources aimed to stimulate the growth are also going to be magnified by the fiscal multiplier. And, in a context of interest rate close to zero and high unemployment, it is appropriate, according a number of economists, assume a reasonable estimate of the multiplier at around 2.

 It means that the increase of growth generated by the government spending leads to an extra tax revenue that compensate the deficit, while, at the same time, the debt-to-GDP ratio is reduced by the rise of the denominator**. In other words, it means a reverse of the austerity strategy that generate a perverse negative multiplier bound to reduce the growth and the tax revenues, at once perversely increasing unemployment and debt.

Is this reversal of austerity strategy feasible?
The problem doesn't lay in its feasibility, but in the political determination of the governments (or the current oppositions aspiring to the government): that is, the determination to put an end to the submission to the irrational dictates of the European technocracy, supported by the Schäuble acolytes.

Once acknowledged the failure of the austerity policy, the solution is in the suspension of the implementation of the Fiscal compact until when a meaningful growth rate (three per cent in real terms or nominal five per cent, for example) will be achieved by the countries which are in trouble.

The announced new Portuguese government, which should cover the whole spectrum of the left, from Socialist to the Left Bloc and Communist Party based on an anti-austerity program can be an example. And a possible alliance between the PSOE and Podemos in Spain, after the year-end general elections could give a major impulse to a decisive switch in the eurozone policy.

To conclude, a major alternative to the current European policy looks now possible and achievable. The eurozone austerity based on the Fiscal compact has failed. When a pact aimed to solve a crisis shows its counterproductive outcome, that pact must reasonably be halted. The ancient Romans, master of the law, were adamant that “Ad impossibilia nemo tenetur". That is that no one can be obliged to comply with a commitment become unworkable.

Forecasting the future is hazardous. Yet, this an incontrovertible a matter of fact that eurozone  policy mix of austerity and structural reforms has failed, and it is not destined to last.

We have witnessed the harsh European reaction to the attempt of the first Tsipras government to put an end to the devastating austerity policy of prior Greek governments. The difference vis à vis the majority of the other troubled euro countries is that Greece was blackmailed by the threat of an immediate default on the looming debts owed to IMF and ECB. That blackmail can hardly be repeated in regard to larger eurozone countries such as Spain, Italy or France, without triggering the disintegration of the eurozone.

Reversing the devastating policy implemented by eurozone authorities over the past seven years is perfectly reasonable and feasible. And it  even is the unique chance to save the eurozone from the fundamentalism of its abusive masters.

* Intervention in the conferece on "The Eurozone and the America$ -  Debt and democracy - The Challenge of austerity", at the University of Texas, Austin, November, 1-2, 2005 

 * See the paper of Brad DeLong and Larry Summers published in 2012 [1].