The European leaders who form the EU ‘directoire’ may get together as many times as they like, but still appear incapable of solving the club’s existential problems. Last Monday the German Chancellor Angela Merkel, the French President Francois Hollande and the Italian Prime Minister Matteo Renzi met in Naples to relaunch Europe, after the Brexit. Unfortunately, not only did they not effectively tackle the burning issue of the North-South division of Eurozone, but at the insistence of the German Chancellor the issue wasn’t even discussed. Let us dig a bit into this question.
Last week the American Nobel laureate economist Joseph Stiglitz wrote a newsworthy article about the main problem of Eurozone, its North-South division. Sidestepping the usual clichés about the lazy Southerners and the overprotective labor laws, he concluded that it’s the euro that must be held responsible for the club’s problems. It’s very characteristic that the Italian economy stagnates or recedes since the introduction of the common currency, while Greece is by itself a proof that the cost to participate in the euro area may be irreparably destructive.
It’s not the 2008-2010 crisis
The 2008-2010 crisis has exacerbated the burden of the common currency on the south European economies, including, of course, Spain and Portugal. For all those countries there is now no light at the end of the tunnel of impoverishment. Their economic dead-ends have already deformed their social and political structures, in some cases irrevocably. The export killing strength of the euro and the straightjacket of fiscal and financial orthodoxy imposed by Germany are generally accepted today as the main causes of the predicaments of those euro area member states.
Stiglitz says “Deficit fetishism is, no doubt, part of Europe’s problems”. He then continues blaming mainly the common currency as the principal cause for all the euro area problems, by stating that “the euro is more to blame than the policies and structures of individual countries”. Is not the first time though, that he attacks the euro as the main source for Europe’s economic troubles.
Don’t blame the euro only
He has been doing that since the Eurozone was born and continued along the same lines even at the good times of the euro area. It’s highly possible that Stiglitz, being an American himself, tends to overestimate the negative effects of the euro on Southern Europe, and lessen the devastating repercussions of the New York born 2008-2010 financial Armageddon. However it is beyond the scope of this article to do an in depth socioeconomic review of causes and effects, so we will focus on his proposed cure.
Eventually, his proposals for a solution to the euro area member states divisions and troubles do not lead to the dismantling of the common currency. Quite the opposite, they are obviously meant to greatly strengthen it. His suggestions include:
•” Abandonment of the less the than 3% of GDP fiscal deficit obligation;
• Replacing austerity with a growth strategy, supported by a solidarity fund for stabilization;
• Changing the mandate of the European Central Bank, which focuses only on inflation, unlike the U.S. Federal Reserve, which takes into account employment, growth, and stability as well;
• Establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a ‘banking union'”.
The perfect and only solution
In short, Stiglitz tenders a platform on which Germany would agree to undersign and, if needed, use its huge reserves to finance and cover the fiscal and financial chasms of the South. This is a perfect solution for the Southerners and heavenly music to the ears of Renzi and of course the Greek PM Alexis Tsipras. Actually, Stiglitz theorizes on what the Europeans have been discussing for years now. Not only does he set up a growth strategy but also solves, in paper, the problems of the banks, Deutsche Bank included.
This brings us back to our initial observation about last Monday’s pointless meeting in Naples, where Merkel refused to discuss the question of the fiscal deficits limits with Renzi, let alone to shore up the ailing Italian banks. Yet, the time will come and it will be rather sooner than later, when Merkel will be obliged to counter the problems of Deutsche Bank. It will be difficult then for the Germans to respond only to their bank’s difficulties and ignore the ills of rest of the euro area banking system.
The Germans will learn
That’s why Stiglitz proposes a genuine common deposit insurance fund for the entire banking system of Eurozone. This is tantamount to Berlin undersigning the risks of the Italian and Greek banks also . Understandably, this eventuality will surely be politically spiky in Germany. It’s the well known and much discussed, but ostracized by the Germans, idea of the issue of Eurobonds, a euro area common government borrowing instrument, which will function as a common guarantee for the entire Eurozone’s debts.
This is exactly where the future of the euro hangs upon. If Germany continues denouncing the mutualisation of Eurozone’s risks, soon there will be no Eurozone. Brexit is just the beginning. Italy is also preparing a referendum. Renzi has announced a plebiscite to reform Italy’s legislative structure, and has interlocked his political future with the ‘yes’ outcome. If it’s ‘no’ he says he will quit. If nothing changes until the Italians go to the ballot box the ‘no’ is rather certain.
Regrettably, weeks only after the Italian PM’s announcement, Renzi acknowledged that he made a grave mistake proclaiming this referendum. He realized to his astonishment that the Italians will connect their votes to the questions that bother them, not the Prime Minister’s one. Currently, the wider discussion about this referendum touches everything else other than Renzi’s question.
Then, after a very probable ‘no’ to Italy’s constitutional changes, another referendum about an Italexit won’t seem impossible. If this is what Germany wants, Berlin can continue on the same path. Eurozone needs a groundbreaking reform and Germany has to undersign and pay for it or the EU will be eventually resolved.