The Franco-German axis shakes the Eurozone's cage

The Franco-German couple, from the beginning at the head of the European Union and, in particular, of the euro area, or who, in any case, believes that he has a special right over them, has proposed the use of € 500 billion to support countries affected to varying degrees by the coronavirus. In order to appreciate its impact on the crisis affecting an important part of the Union, including Italy, but also Spain and France, to name only the major countries, it is better to broaden the picture to the general effects of the pandemic in the economy at large.

From an economic point of view, crises may have different origins but the intensity of the crisis can be measured, in fact, by taking the level of unemployment as an evaluation measure.

1.   In the United States, unemployment reached 15 percent of the workforce after the onset of coronavirus disease. It is the highest level in American history since the Great Depression of the early 1930s. And it is no coincidence that we see the government intervening with extraordinary measures. Trump proposed an intervention of a trillion dollars of additional public expenditure.  But the Democratic Party has initially imposed an intervention that exceeds two thousand billion, now aiming, according to the House of Representatives resolution, at three trillion dollars - an amount close to 15 percent of the national income.

On the other hand, the Japanese government has not been overcome by decreeing an extraordinary public expenditure of one trillion dollars, equal to 20 percent of the national income, to face the consequences of coronavirus disease. The equivalent in the euro area would amount to around 2,500 billion euro.

This is the scenario in which the Merkel-Macron proposal aims to distribute, through loans or grants, $ 500 billion - a proposal that entered the Union scene with a great political and media noise, while representing only crumbs compared to the great intervention from the United States and Japan.

But its political significance cannot be underestimated. In a few weeks, Germany will take over the presidency of the European Union for the second half of the year. Angela Merkel will find herself at the center of a Union of twenty-seven countries which for often contradictory reasons are more a testimony of disunity than of union. Moreover, it has internal difficulties in dealing with the powerful German Constitutional Court.

And for Macron who has chased since his arrival to the Elysée the return to a role of grandeur with a Gaullist stamp, the proposal is equally important. In this respect, reviving the Franco-German partnership is a prominent political anchor, regardless of the economic significance of the operation.
In any case, Dioscuri regain the scene. But it won't be easy.

2.   The Franco-German move was accelerated to the point of knocking out the European Commission of Ursula von der Leyen, which aimed to put Brussels at the center of the stage. In many respects the acceleration is due to the severe blow inflicted by the German Constitutional Court on the role of the European Central Bank so far a crossroads of Franco-German politics.

The Karlsruhe Court has in fact solemnly declared in recent weeks that the German government and Parliament must block, in the course of three months, the purchase of public securities that the European central bank (ECB) acquires, beyond the limits established by the principles of economic and fiscal policy of the Eurozone. Christine Lagarde, President of the European Central Bank, replied that the ECB is required to respect the rules of the EU Court of Justice and not the statements of the Constitutional Court of a member state.

In other words, the ECB does not have to respect the so-called "proportionality" criterion, according to which it should limit the purchase of public securities of member states. In essence, what the German Constitutional Court demands is the repudiation of the "quantitative easing" policy, followed by Mario Draghi after 2015, to keep the euro alive. A radical change since it falls into a phase of disruptive crisis.

In any case, it is difficult, if not impossible, for the ECB to operate in a framework of conflict with the Bundesbank led by Jans Weidmann, now a member of the ECB's governing body, after having been candidate for its Presidency, before the Merkel - Macron compromise with the appointment of Christine Lagarde. A compromise followed by the election of Ursula von der Leyen to the presidency of the European Commission, apparently reinforcing the Franco-German couple at the head of the two highest institutions of the eurozone.

All this has a sour taste of complicated technicalities, but in elementary terms, it is a rope around the neck of the Member States particularly affected by the crisis. It is a fact that the euro was saved by Mario Draghi with the adoption in 2015 of the quantitative easing policy. A measure considered by the majority of Germans to be unorthodox, almost abusive, but which was worth the funding of the member states in the amount of € 2.2 trillion in about five years. And the euro was, in fact, saved, albeit in the context of an unstoppable crisis in the eurozone which culminated with two years of alternation between stagnation and recession not only in Italy but even in Germany.

It is in this context that the 500 billion proposal should be seen as a barrier to the crisis. The gap with the commitments made in the United States and in Japan, where the respective governments, with public spending and the central bank’s intervention, engage thousands of billions to face the crisis, can give us an idea of ​​the fragility of the Franco- German proposal.

3.    In Italy, the coronavirus added salt to the wound. It has led to an unprecedented collapse of national income, the closure of medium and small businesses, many of which are unlikely to reopen, the disaster of the weaker regions, rising unemployment levels in the service sectors which had so far escaped the fall in demand in virtue of international tourism, which made it a privileged destination.

The Conte government has tried to remedy the most immediate damage with a deficit expenditure of fifty-five billion. But the comparison with the intervention matured outside the eurozone is embarrassing.

Compared to the United States or Japan, to return to the previous examples, Italy should develop and implement a program of direct public interventions and in support of private investments for around € 300 billion. The possible fields of intervention are innumerable: from school to transport, roads, bridges, urban suburbs, and specially the Southern regions (Mezzogiorno) already in difficulty before the crisis. These are just examples of interventions on infrastructures degraded after years of abandonment and which can become the stimulus for a general restart of the economy, promoting the growth of employment, incomes and consumption as an engine for economic recovery.

In the end, the freezing of public investment paralyzes growth. And the lack of growth increases the public debt due to the payment of interests

Where are the obstacles? In a normal country, the financial resources necessary to support economic growth and the reduction of unemployment are borne by the public budget. After the crisis of the thirties, this practice became normal. Suffice it to consider the interventions promoted in America between the end of 2008 and 2009 first to overcome the financial crisis, then to revive the economy and employment. Interventions followed by the longest period of economic growth in American history.

It is a model of public intervention independent of the color of governments. It is no coincidence that in the United States the first interventions aimed at blocking the catastrophic crisis were the task of the Bush administration at the end of the mandate and, in the immediately following months, of the new presidency of Barack Obama. In other words, when the crisis presses, the color of governments diminishes in importance and each one seems having studied and learned the lesson, albeit with different accents, from Franklin D. Roosevelt's New Deal.

But in the eurozone it cannot be done for two reasons. The first derives from the constraints imposed on public spending: regardless of the economic trends and the changing economic situation, the budget is tied to the zeroing of deficit as established by the Maastricht Treaty almost 30 years ago.

And public debt must always be falling until it reaches the abstract and arbitrary threshold of 60 percent of GDP - an objective, in any case, that is unattainable without having first achieved a strong growth of national income which can lead to the relative reduction of debt. In effect, the two parameters on deficit and debt imposed in the Maastricht Treaty almost thirty years ago by Germany, ideologically linked to rigorous parameters of public finance, because of the catastrophic collapse of the German Mark in 1923.

4.     In the end, neutralizing the ECB's role in financial support to member states contributes to the freezing of public investment as a lever for growth. And the absence or insufficiency of growth contributes to the increase in public debt, as has occurred in Italy in the last decade, due to the payment of the interests on the amount of the previous debt. One could say: a perfect vicious circle bitterly experienced in Italy in the last decade.

According to the current forecasts of the IMF, the three largest eurozone countries - Germany, France and Italy - will experience a fall in national income between 6 and 10 percent in the first year of the crisis respectively. This will increase the public debt as percent of the GDP, blocking any chance of its reduction, to not say reimbursement.

The Italian situation is made particularly difficult by the fact that the debt proceeds towards 160 percent of the national income, the highest in the European Union after Greece, and the third highest in the world, including Japan which, however, has the invaluable advantage of paying rates close to zero on the total amount of the debt.

In other words, public debt, regardless of its dimension, can be gradually repaid only by virtue of sustained and lasting growth promoted by a substantial public intervention aimed at recreating the conditions of growth. And this cannot be achieved without a public intervention aimed at recreating the conditions of growth, as happened during other historical crises of the 1930s and the first decade of this century.

 If, instead, growth is substantially blocked due to the lack or insufficiency of public investment, the way is opened to a sheer or masked default as has been the case in many eurozone’s member states after the 2008-09 worldwide financial crises.

The corona virus crisis has already caused disruptive economic effects, the consequences of which we can only roughly appreciate. A profound change in euro area policy is now necessary. And it would be possible. But for now there are no traces of it.

The future, according to the ancient Homeric maxim, rests on the knees of the gods. But the judgment on the past, although almost always historically controversial, in the case of the eurozone is unequivocal. The experience of the last decade can be called a failure. And the risk of disintegrating the eurozone remains a fact without a strong reversal of the bankruptcy policies carried out in the last decade.