After the North American subprime crisis, European countries suffered two simultaneous shocks: the customers of those “toxic” assets – mainly European assets – discovered that most of their assets were completely presumed, while the US economic crisis made the substantial EU exports to that market decrease significantly.
As usual, recession leads to an increase in public deficit, because tax revenue decreases while, in time of crisis, public expenditure for subsidies and welfare cannot but increase.
Hence the global recession of 2007, caused by the United States, led to the first real crisis of the Euro.
When adjustments of exchange rates are no longer possible, in the Eurozone the mitigation of imbalances is entrusted to the EU structural funds for low-income regions – funds scarcely suitable for specific needs and too complex to be used by local governments.
Hence the Euro was born as an intrinsically deflationary currency and the only nation winning the single currency battle was Germany which, shortly before the start of the European single currency phase, had depressed wages severely and had created the well-known “mini-jobs”.
With an inflation rate and a labor cost already lower than those of the other future Euro members, it immediately created an optimal and stable differential as against the ”South’s Euro”.
Currently the Euro conceals, but not solves this asymmetry.
Hence very low inflation in Germany and a related very low interest rate, which have further increased German competitiveness compared to the South’s Euro area.
Therefore the EU Member States which had not prepared themselves for the single currency recorded inflation rates much higher than the German ones but, thanks to the single currency, recorded lower interest rates, thus financing the cost of crisis with debt.
The Euro was a good currency for incurring debt, but a bad currency for exporting.
Furthermore, this was the reason why the public debt increased also in Italy but, unlike the lira time, the Italian debt securities were held in the Eurozone surplus countries and not by the Italian customers of public debt securities.
At that juncture, the crisis broke out in Greece which, with the then Prime Minister Papandreou, had overtly and naively “cooked the books”.
Instead of funding Greece immediately at a low cost, so that it could overcome the crisis, and then allowing it to redress its accounts, the Sarkozy-Merkel axis imposed very harsh “austerity measures” on Greece which had to pay very high rates on the market. Hence, for international markets, the Greek default became a very concrete possibility.
If Strauss-Kahn had not been unfairly defamed by a special relationship between Sarkozy and Obama – who was afraid of a brave EU showing guts – the low-interest loan to Greece would have been a reality and there would not have been the first “Euro-branded” default. A default which paves the way for others.
It will be the project in progress for other “weak” economies, the rush towards bankruptcy and default.
International markets have got so accustomed to gain money quickly and easily from a national default of the Eurozone that they are rubbing their hands in view of the next country falling into that spiral.
Hence the Euro is a currency which amplifies internal crises between high rates and rising national deficits. It also signals to financial markets that there exists a great chance of short-term high profits – almost usurious ones, if usury were not a criminal offense also on international financial markets.
Hence while the Euro, as conceived today, is a sign of the end for the weakest countries of the single currency area, it is not true that over-spending by the countries already weakened by the Euro has worsened the crisis, as the current economic theories make us believe.
Data shows that, after 2007, the countries called PIIGS (Portugal, Italy, Ireland, Greece and Spain) had a debt/GDP ratio fully comparable with the one preceding the Euro introduction.
Hence we do not accept explanations on “immoral” countries which “spend beyond their means.”
The crisis broke out and expanded because a currency created for the monetarily strongest countries, with remarkable trade surpluses, was not suitable for nations having different productive configurations and very little surpluses.
Therefore the crisis of the single currency and its economies does not result from the “non-restrictive” and profligate policies of some PIIGS governments.
A that juncture, the quite unusual idea emerged among European bureaucracies that deficit spending of the public sector – the only known driver to stimulate the economies under crisis – had the immediate effect of increasing taxes, thus leading to an increase in savings and a reduction in consumption.
This is the expansionary austerity school of thought, which is currently the best known one in contemporary economic analysis.
It is generally based on subjective (and psychologically questionable) assessments which are transposed into the macroeconomic environment, where everything is very different from the people’s spending or saving attitudes.
You cannot infer the behavior of an entire organism from one single cell, as it is well-known that all organisms are not simply clusters of similar cells.
Again according to the expansionary austerity school of thought, it is believed that deficit reduction will be interpreted by taxpayers as a reduction in taxes to pay.
It is a shaman-style reasoning – however, without avoiding media influencing citizens or without thinking they save or not for reasons other than the irrational bet on the reduction in State deficit, which anyway depends on a political choice.
Hence as long as the governments’ interest rates to refinance their debt are set by unspecified “markets,” which are interested in increasing interest rates to enhance their gains, there is no way out.
So, what can be done? If the Euro countries were funded directly by the ECB, at rates similar to those used by the private banking system, financial resources equal to 5% of GDP would be released.
Even a uniform tax system among the Euro countries would be essential for this purpose.
However, neither the first nor the second option is possible in the current Euro regulatory framework. Hence what can be done?
This is the reason why the exit of some countries from the Eurozone and their return to national currencies must be considered without making an issue of it and overdramatizing.
By calculating the loss of competitiveness of a post-Euro lira or peseta, we record a comparative loss of approximately 14% – hence nothing very severe.
Provided, however, that the Bank of Italy has well-designed plans already available for the possible exit from the Euro – something in which we do not believe at all.
Unfortunately Guido Carli passed away.
Hence, it is worth reiterating that Euro crisis was generated by excessive private and public debt held by non-European hands.
Therefore, as from 2010, all the countries hit by the Euro crisis had accumulated current account deficits while, coincidentally, those which had current account surpluses did not record financial crises.
In fact, the crisis materialized with a sudden stop of capital flows between the Eurozone countries.
A stop which took the form of a generalized increase in risk premiums.
The end of flows immediately raised doubts on the solvency of banks and governments which depended on foreign loans from abroad, for example those who were accumulating current account deficits.
Inevitably the crisis also increased the debt/GDP ratio.
The monetary union enabled global imbalances to expand rapidly without anyone noticing it, because the Euro “conceals” the differences between the countries using it.
Hence, also as a result of the inefficient European bureaucracy, the loss of trust vis-à-vis the countries recording deficits increased.
Hence, without a “lender of last resort”, each monetary shock tends to be amplified and the Euro is precisely a currency without a lender of last resort.
A currency in which no international investor believes, unless it represents the individual economies and the single public debt of the Eurozone countries.
Therefore the crisis is bound to get worse, considering that the increase in risk premiums and interest rates produces a budget deficit which, in turn, increases the risk premium and interest rates.
It is worth adding that the countries’ typical and natural response to this situation would be devaluation which, obviously, is not possible with the Euro.
Has a currency which cannot be devalued ever existed?
It is still the “Napoleonic myth” of the single currency for the whole Europe which, however, the French Emperor supported with bayonets, just as the US dollar is currently backed with the North American Armed Forces’ global rayonnement.
Therefore, the debt denominated in Euros is increasingly similar to a foreign currency debt, as in those sudden stop crises which often occurred in Third World countries.
Hence the link between banks and governments in the Eurozone has amplified the crisis.
The cost of financing the deficit increased and this made the deficit rise.
Only Mario Draghi’s “whatever it takes” at the end of July 2012 made the Euro a “safe haven currency”, because he made it clear that the “lender of last resort” existed and was the ECB Governor. In the meantime, however, the other major international currencies had been depreciated by 30%.
Furthermore, the proposals to solve the single currency crisis are often paradoxical.
They range from Joseph Stiglitz, who wants Germany to leave the Euro so as to enable the old remaining single currency to devalue.
With the same current rules? It is impossible.
Hence shall we wait for a courtesy by Germany, which would have no interest in leaving the single currency, which deprives it of European competition?
Naivety of the New World. Germany will never leave the Euro, which enables it to bring dangerous competitors for exports into line (such as Italy).
While President Ciampi – an extraordinary man who has recently passed away and whom I still regret – was visiting the Great Wall, the German Prime Minister, Schroeder, arrived in China to sign the agreements for the expansion of the German car-making industry in China.
Better and more autonomous intelligence would be needed to defend ourselves from competitors-allies.
According to Paolo Savona and Luigi Zingales, two Euros should be created, one for the “rich” North and the other for us poor countries of the South.
Furthermore, sometimes Zingales speaks of various Euros. Would they all have the same value?
Possibly becoming quasi-national currencies? Nevertheless also the countries in the South have significant budget and debt differences, as well as different production logics.
Certainly better than before, with the Euro, but not much better.
Conversely Basevi thinks of a European Debt Agency (EDA) purchasing – on the secondary market (where raiders have already made good profit) – up to 60% of debt in relation to each EU country’s GDP.
On the basis of these securities, it issues its own bonds, the blue bonds, while for the part exceeding their debt over the 60% acquired by EDA, the countries issue their red bonds autonomously.
The blue bonds would be “liquid” and safe (Why? Where is the EDA underlying fund?), while the red bonds would have a higher risk profile and thus would pay a higher interest rate.
However, the global market of financial securities is not made up of fools.
And it is not clear from where the premium for the blue bonds would come.
And where the red bonds would be sold, with such an interest as to rapidly recreate the old huge public debt.
Hence if we leave the Euro and a new lira is recreated, devaluation would be approximately 27% as against the European currency.
The price of raw materials could rise by the same rate, but we should consider the length of contracts and the specific role played by ENI for oil and energy.
Bank deposits could still be denominated in euros – the law permits to have bank deposits in foreign currencies – and the new lira could have legal tender as the old currency designed by Silvio Gesell which the more stood “still”, the greater value lost.
The drive towards exports would be important, but there would be enough euros available to buy technologies or other items abroad.
In short, we need to think rationally to an upcoming withdrawal from the Euro, without pro-European myths and with an accurate analysis of our national interest in the short and medium term.
GIANCARLO ELIA VALORI
Honorable de l’Académie des Sciences de l’Institut de France