Democracy or the Euro?

According to the German Constitutional Court it is not acceptable that “the most important decisions at European level be negotiated in anonymous corridors of the Brussels bureaucracy.” In Italy too, we should ask ourselves whether it is right that economic policy is torn from popular sovereignty and dictated by foreign countries and international financial oligarchies. By Enrico Grazzini

We hope that finally there is a judgement in Berlin so that the euro, led by Angela Merkel’s Germany and Mario Draghi’s European Central Bank, does not totally prevail over democracy. We hope that the German Constitutional Court decides on the de facto withdrawal of Germany from the euro: this is possible, although not very likely. The President of the German Federal Constitutional Court Andreas Vosskuhle has expressed his opposition to the idea ‘that the most important decisions at European level are negotiated in anonymous corridors of the Brussels bureaucracy, or at any meeting of the European Council, or somewhere else without adequate public discussion and without European citizens having the power to influence these decisions”.

According Vosskuhle  budget decisions must remain in the hands of the legitimate representatives elected by the people and Parliament: “It would be tragic if we lose democracy to solve the problems of the euro or to achieve greater European integration.” One cannot but agree with these words. Maybe in Italy I am the only one to support him, but I hope that finally the German Constitutional Court in September decrees a unilateral exit from the euro by Germany (as radical socialist Oskar Lafontaine has already demanded). The management of the euro is in the hands of the ECB, which has never been elected by anyone, the European Union which has strong democratic deficit, and especially Merkel’s centre-right government, which represents a section of the German people, but not the peoples of Europe.

In Italy, too, we need a Constitutional Court that can decide whether it is right that our economic policy is torn from popular sovereignty to be dictated by foreign countries and international financial oligarchies. My opinion is very different from that of nearly all economists on the Italian right and especially on the left. In Italy, the euro – the now bankrupt single European currency – unlike almost any other country in the world, is regarded as an article of faith, in the same way the market is for liberals and the Immaculate Conception is for Catholics. Maybe because it’s always been considered a “European conquest” by the centre-left under [prime minister Romano] Prodi. But now it is clear that the German euro is the main cause of European economic depression and it is pretty much beyond reform.

The Single European Currency, of which Germany is the main shareholder, rather than an engine for growth has become the primary cause of the recession, unemployment and de-industrialisation in the peripheral countries of Europe, the so-called PIIGS (Portugal, Ireland, Italy, Greece, Spain). European countries that have not adopted the single currency – such as Sweden, Denmark, Poland – are now recovering the crisis began in 2008, while the EU continues its remarkable free-fall into recession. The situation has become dramatic. The interest on Italian government bonds will grow because the US Federal Reserve has decided to end its policy of easy money and the other central banks will have to follow, regardless of the merit of such action. The day of reckoning is approaching. The euro, instead of bringing to Europe cooperation between peoples, has put the states against each other, the creditor states (Germany, Netherlands, Belgium, Finland) against those debtors (the PIIGS and France).

Italian capitalism melting down

Italy in particular continues its race to the bottom: data on production, unemployment, debt, the deterioration of public services and on the widening gap between northern and southern Italy are dramatic and will get worse. The government of Enrico Letta cannot solve any problem because it is just trying to get a few crumbs of concessions from Germany and the EU, but does not intend to oppose the constraints of the euro. Not only is the government weak, compared to the two parties that support him, the [centre-left] PD and [right-wing] PDL, which have opposing electoral interests; above all, Letta is attempting the impossible – combining austerity with the growth of which the country has dramatic need. But unfortunately everything is getting worse and is likely to come quickly to a breaking point: the recent decision of Italy’s financial giant Mediobanca to sell stakes in some of the biggest Italian companies tell us that the Italian capitalism is melting down and that its everyone for themselves face with international capital that wants to eat on the cheap the richest and most appetising parts of out indebted country. Telecom Italy, once a successful public company, then privatised to join the euro, is already prey to foreign buyers. Italian banks pile up bad debts and are getting weaker. And the labour market reforms initiated by Letta will worsen previous reforms by Monti’s labour minister Elsa Fornero as they seek to increase employment through an expansion in precarious and underpaid jobs.

It is possible, if not probable, that, despite the sacrifices and cuts, in a few months time we will be forced to seek the help of the ECB and the European Stability Mechanism, under the Outright Monetary Transactions programme, and be subject to controls by the infamous Troika (IMF, EU and ECB). This trio would require us to impose even more draconian conditions that will produce conflict and social unrest, and that will seriously threaten our democracy, which is already in disarray due to inconsistencies in our political class. However, even if we do not ask for the “help” of the ECB and the ESM, our destiny will inexorably get worse because of the eurozone fiscal compact (signed by PDL and PD, but opposed by Berlusconi) that will require an accelerated repayment of public debts with more, unsustainable public spending cuts. Faced with this sad fate, we need a bold, 180 degrees change in direction. And above all, a different policy on the euro. It is not enough to just complain about austerity: this is in fact very closely linked to the euro, which is a tight straitjacket that in times of crisis compresses public and private investment.

Italy’s Left naive and deluded

It is strange and paradoxical that in Italy that the Left (even the one that proclaims itself Marxist) does not understand the severity and depth of the crisis, the incompatibility of the euro with growth , and the need for a radical change. If it were less naive and less deluded the Left would certainly oppose this German-controlled euro. Never more than now do we need a Left able to defend with vigor and lucidity the impact of the crisis on the popular and middle classes, but the PD is frozen in its alliance with the PDL, and the radical left, with little popular support, considered only an appendage of the PD. What is needed is a Left capable of opposing the government’s policies and decisively indicating alternative roads and objectives. But this is sadly lacking. Millions of voters were even forced to rely on former comedian, autocrat Beppe Grillo who denounced the seriousness of the situation but that, as the demagogue that he is, failed to indicate political solutions that did not revolve around him. Certainly it is not enough to call for less austerity, or to buy fewer F35 fighter planes to try to get out of this ruinous crisis. It is necessary that the Left has no illusions: the soft opposition to the government and the German euro is pointless and counterproductive. Face with the euro we need a strong political and cultural change. In this sense, Berlusconi is much more realistic than the inconclusive Left.

So what are the possible costs and benefits of euro exit? First it is important to consider that all regimes of fixed exchange rates (and the euro is certainly comparable to a fixed exchange rate regime) have failed sooner or later, without exception, from the gold standard to a system based on the dollar, up to the euro. The breakup of the euro would mean, for countries emerging from it, and restructuring their debts, difficult access to international financial markets, rising domestic inflation and greater difficulties in paying for imports. But, Italy could gain from the recovery of its monetary sovereignty and the national currency. In fact, Italy has a high government debt, which falls into the category of debt subject to the national law of the issuing countries, and so in theory could repay most of its debts in the weaker currency that it would be able to print thanks to the recovery of monetary sovereignty. In addition, only a quarter of the total Italian debt falls under the foreign jurisdiction and would therefore have to be paid in hard currency abroad (as is in fact the euro).

Italy also has a lower deficit than other weak countries of the European Union and, thanks to its substantial primary surplus, after devaluation it would not have to rely too much on the foreign market to cover its debts. In addition, our country is very open to the international market and thus could gain from competitive devaluation boosting exports and the domestic industry. The higher costs of imports (and the consequent inflation) could be recovered thanks to the downward trend in oil prices and the possible reduction of the enormous tax burden levied on petroleum products. I should add that workers could be defended from inflation using schemes to protect incomes and an automatic adjustments to the cost of living (the scala mobile) made possible by the newfound monetary sovereignty.

Euro exit 

The exit from the euro would obviously and certainly be a traumatic event but the above considerations tell us that Italy would gain by recovering its national currency, renegotiating debts and abandoning the EU fiscal compact. On the contrary, Germany would have much to lose by breaking up the euro because its currency would revalue, and the new, stronger Mark would weaken its exports.

Many argue that the breakup of the euro would be shocking, and almost all economists and political scientists suggest that it would be far preferable to accelerate European political, economic and fiscal union. But this position appears to be more illusory and fantastic than the admittedly difficult and complex exit from the euro. The problem, in fact, is that Germany gained greatly from this single currency because it allowed the country to easily export its products without addressing the devaluation of the competing countries, while enjoying a large inflow of international capital: so its private and public debts have costs close to zero, while competitors have to pay ever more for their debts. Mrs. Merkel would very unlikely agree to give up German hegemony and to achieve a parity with other European countries by sharing the debts of weaker countries and transferring part of German resources to the PIIGS. The economic, fiscal and political union in Europe is in fact more and more distant because Germany will not accept a challenge to its supremacy and privileges linked to the euro. And financial speculation moves much faster than the political time necessary European political union.

Faced with this situation, there are three scenarios: either the breakup of the euro, or a constant and gradual bleeding of European states under German hegemony, or the rapid bloodletting by European states and in the end, still a break up of the euro. The last scenario is the most likely, but is also the worst.

It  is time for a radical change. It is not enough to beg Germany to be more generous and good with Italy. The Mediterranean countries, the debtor countries, including Italy and France, should make an ultimatum, threatening a united front, that is, euroexit if Germany will not give up immediately its imposition of recessionary policies. And if Germany, under the threat of a break up of the single currency, does not radically change its obtuse policy of austerity, then the debtor countries should exit from the eurozone so as to not go broke. As Lafontaine has suggested, Europe should give up the euro, return to national currencies and agree on a system of flexible exchange rates to boost the European economy.

Leaving the euro is not an easy choice, but will likely become obligatory. Indeed, it seems very unlikely that Germany will be deflected from its current policies, and in any case German decisions obviously do not depend on us. Perhaps the Constitutional Court of Vosskuhle could give us a hand by preventing Germany and the ECB from continuing on the path of this euro-bankruptcy. Or it may instead allow them to continue stifling the eurozone economies. Eventually, however, we will have to decide how to abandon the sinking Titanic, hopefully before asking for “help” from the Troika and so sink altogether. There’s no time to lose in preparing the lifeboats.

Micromega 27.6.2013

Translation/edit by Revolting Europe