What Is Italy Saying?

stiglitzThe outcome of the Italian elections should send a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.

The European project, as idealistic as it was, was always a top-down endeavor. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery.

While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s. Greece’s youth unemployment rate now exceeds 60%, and Spain’s is above 50%. With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy.

The economy’s doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease. Indeed, it will take a decade or more to recover the losses incurred in this austerity process.

In short, it is neither populism nor shortsightedness that has led citizens to reject the policies that have been imposed on them. It is an understanding that these policies are deeply misguided.

Europe’s talents and resources – its physical, human, and natural capital – are the same today as they were before the crisis began. The problem is that the prescriptions being imposed are leading to massive underutilization of these resources. Whatever Europe’s problem, a response that entails waste on this scale cannot be the solution.

The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.

An alternative set of well-discussed policies could work. Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates).

A banking union, too, is needed. But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision. There will also have to be Eurobonds, or an equivalent instrument.

European leaders recognize that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy. Yet years have gone by, and no growth strategy is on the table, though its components are well known: policies that address Europe’s internal imbalances and Germany’s huge external surplus, which now is on par with China’s (and more than twice as high relative to GDP). Concretely, that means wage increases in Germany and industrial policies that promote exports and productivity in Europe’s peripheral economies.

What will not work, at least for most eurozone countries, is internal devaluation – that is, forcing down wages and prices – as this would increase the debt burden for households, firms, and governments (which overwhelmingly hold euro-denominated debts). And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy.

If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. Internal devaluation, combined with austerity and the single-market principle (which facilitates capital flight and the hemorrhaging of banking systems) is a toxic combination.

The European project was, and is, a great political idea. It has the potential to promote both prosperity and peace. But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries.

Europe’s leaders repeatedly vow to do everything necessary to save the euro. European Central Bank President Mario Draghi’s promise to do “whatever it takes” has succeeded in providing a temporary calm. But Germany has consistently rejected every policy that would provide a long-term solution. The Germans, it seems, will do everything except what is needed.

Of course, the Germans have reluctantly come to accept the necessity of a banking union that includes common deposit insurance. But the pace with which they accede to such reforms is out of kilter with the markets. Banking systems in several countries are already on life support. How many more will be in intensive care before a banking union becomes a reality?

Yes, Europe needs structural reform, as austerity advocates insist. But it is structural reform of the eurozone’s institutional arrangements, not reforms within individual countries, that will have the greatest impact. Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.

The EU’s Economic and Monetary Union was a means to an end, not an end in itself. The European electorate seems to have recognized that, under current arrangements, the euro is undermining the very purposes for which it was supposedly created. That is the simple truth that Europe’s leaders have yet to grasp.

© Project Syndicate


  1. says

    It is the time for a European development plan. National states have to keep the balance sheet in order, Europe can promote the growth.
    Europe thanks to the stability of the Euro can provide a real return to foreign investors who tend to dis-invest from markets whose currencies are depreciating (USA, UK and Japan). It is possible therefore, for Europeans, to put in place a sustainable development plan for the Union because there are all the prerequisites: international capital available to redirect to Europe, the Euro stable and a European tax on financial transaction (known Tobin tax), which is able to ensure the fiscal resources to service and repay debt. In the coming months we might have a unique opportunity because the currency war we are experiencing at world level will affect in particular the German economy and Germany could be in favor of a European development plan. It would be destructive for Europe follow the path of devaluation and transform the ECB into a second Fed. In Europe we do not need more growth (more cars, TVs, food, clothes, etc..), we need more development (investment in education, research and innovation, new technologies, environment, heritage, energy, mobility). Development needs investments and only a European government can put in place such a plan in this moment. We need urgently to move forward in this direction.

    • TC says

      Massimo, you’re on the right path–development is key–and you also are right to acknowledge the undesirability of transforming the ECB into a second Fed. No point in continuing to bail out the hopelessly unsalvageable. That’s what the European banking system in its current state is–stuffed to the gills with worthless derivatives made in London and New York. Likewise, there is no “sovereign debt crisis.” There are only sovereigns being coerced to support continuing bailout of the hopelessly unsalvageable position the European banking system has been intentionally placed in. Where was the “due diligence”–this supposedly the art of so-called “talent” running today’s universal banks–when risk now requiring endless bailout was being taken on?

      Yet the ECB and the FED should be seen, too, as already having shown in the recent period a willingness to issue CREDIT, this even if only for the sake of propping up hopelessly insolvent entities, be they sovereigns in Europe or banks in the U.S. As such, they have painted themselves into a corner requiring–indeed, inspiring demand–they issue CREDIT for buying bonds exclusively dedicated to development projects, such as you wisely recommend, whose sole purpose provably will increase the productive power of labor and so have no inflationary effect. This effectively is the idea Alexander Hamilton brought to fruition in the U.S. through creation of the Bank of the United States (an enterprise the traitor Andrew Jackson destroyed).

      The same can be accomplished using the ECB and the Fed, much as I have just described. Turn them into credit banks dedicated to buying bonds exclusively issued to finance development. I wanted to point this out because it is a mistake to think government should or could finance necessary development projects on its own balance sheet.

  2. TC says

    Time is come to indict those interests whose undeniable intention is neo-feudalism in effect throughout the European continent and, indeed, the world. This is why a fascist like Grillo is being rammed down Italy’s throat and why fascists like Obama are tolerated in the U.S.

    What is this “banking union” Stiglitz promotes without a peep mentioned of cancerous derivatives stuffed into the euro-zone banking system, the likes of which require deep and endless bailout by lenders of last resort (national treasuries) and accompanying sacrifices imposed on increasing numbers of Europeans? Does anyone think that without addressing this speculative cancer made in London and New York and burdening the European banking system to the point of insolvency a “banking union” will make one whit of positive difference?

    Does anyone think ” common deposit insurance and common resolution procedures, as well as common supervision” will mean a thing when the fundamental condition underlying the entire trans-Atlantic banking system demands a universal banking model whose purpose is to infinitely leverage deposits using speculative securities whose absolute growth positively MUST continue on a parabolic path, lest the entire banking system collapse? THIS IS THE ISSUE: IT’S THE DERIVATIVES, STUPID.

    Unless, so-called “economists” become willing to concede today’s universal banking model is an imperialist plague whose mode of operation is centered on marginalizing physical assets and accelerating “creative destruction” (yet only for the sake of sustaining an illusion increasing leverage can be indefinitely sustained, while most certainly not for any endeavor increasing the productive power of labor–this latter consideration most certainly indicting Grillo as the fraud he in fact is), then nothing good will come from any policy thus far entertained since 2008, when Adam Smith’s Leveraged Ponzi Scheme first began its fateful descent into the abyss.

    The abyss: this is INTENDED. If Europeans want to turn their fate around, they had better start paying attention to Syriza and get behind it in a big way. There’s no time to waste. Stop playing an enemy’s game. Make the enemy pay: DEBT MORATORIUM. Where’s Stiglitz on that? A useless monetarist…