Marine and the euro (I told you so).

(...to the international reader: you will find below the translation of my article published on August 23, 2011, on the pseudo-leftist journal "Il Manifesto". Here the Italian version in the pseudo-leftist blog "Sbilanciamoci" - a "Manifesto" spin-off. This article, written in response to the nonsensical blabbering of Rossana Rossanda (an icon of the Italian left), after providing four years in advance what is nowadays considered the consensus view on the causes of the crisis, forecast in an extremely accurate way a number of events that were considered extremely unlikely at that time: the substitution of Berlusconi with a "technical" government, the failure of this technical government, the failure of the German model, and, of course, the extraordinary success of the right-wing parties all across Europe, starting from France. ISIS has nothing to do with it: it's the euro, stupid!

An economist is an expert who will know tomorrow why the things he predicted yesterday did not happen today.

I am definitely not an economist.

Enjoy!)

The soon-coming Euro exit

One year ago (in 2010, translator's note), I had been speaking with Aristide, a left-wing economist, when I asked a question similar to Ms. Rossanda's. Why do the Italian Left lay such a proud paternity claim over the Euro: couldn't they see how antagonistic it was to their constituency's interests?

Aristide’s answer made my blood run cold: "Dear Alberto, the costs of the Euro, as you imply, are well known. All textbooks clearly illustrate them. Our politicians have been well aware of them, but they could not reveal them to their supporters: for if their constituents had been able to weigh the costs and benefits, they would have never accepted the Euro. By keeping everyone in the dark they could act freely: they put all of us into a deadlock we would never be able to come out of, unless they did the right thing, that is, progress towards the complete fiscal and political union of Europe.” In short, they say: "The people don’t know what their interests are, however fortunately the Left does and will do what it sees just regardless of the people’s will". Or rather: I know that you can't swim and that, if I throw you in the water, you will drown. Therefore your only choice is to "freely decide" to do the right thing, namely, learn to swim. You can make this decision after a fair debate, based on the fact that I will take you unaware and push you in the water from behind.

Nice show of democracy for a liberal thinker!

Such chilling paternalism may seem more characteristic of Christian Democrats, but this isn’t so. "Worth is a kingdom, however acquired", says King Desiderius. I suppose the Catholic-bred Romano Prodi only read Manzoni's tragedy Adelchi up to here. Had he read any further, he would have found out that for the Catholic-bred Manzoni the Realpolitik has a tragic demise: the end does not justify the means after all.

The idea that "more Europe" is the solution to all evils is the real nemesis here. Yet, we cannot fully appreciate the futility of this claim without first analysing the true nature of the current crisis.

Public debt has nothing to do with it

The unanimity the Right and Left have shown in continuing to concentrate on public debt is quite disconcerting. Coming from the Right, this is no surprise: an ideological position opposing State intervention in the economy is at the core of their“counter-reformation”that followed the fall of the Berlin wall. This is clear to Ms. Rossanda. What she might have forgotten is that, before the Maastricht Treaty, no single economist had ever stated that the sustainability of a monetary union required compliance with public debt parameters (the 60% she mentioned). The “fiscal convergence” debate was born after Maastricht – reiterating that such parameters are nonsense. Maastricht is an ideological manifesto: less State (ergo, more market). But why even here (within the Left) does no one object to Maastricht? This conundrum is something Ms. Rossanda doesn't seem to notice nor question. If public debt had been the issue, from 2008 the crisis would have first hit Greece (with 110% debt/GNP ratio), then Italy (106%), Belgium (89%), France (67%) and Germany (66%) since other Eurozone countries had lower public debts. Instead, the crisis broke out first in Ireland (debt 44% of GNP), Spain (40%), Portugal (65%), and then only later in Greece and Italy. What did these countries have in common? Not public debt (it was lowest in the first affected countries and highest in the last ones), but inflation. The ECB had already warned in 2006 that inflation in Portugal, Ireland, Greece and Spain was not converging towards that of "virtuous" countries. The PIIGS were a different kind of club, apart from the Deutsche mark club (Germany, France, Belgium, etc.). And yes, here is the real problem: economists have known for a long time that different inflation rates in a monetary union will lead to a crisis of foreign debt (mostly private).

Inflation and foreign debt

If prices in country X rise faster than its partners’, X's exports will shrink and imports will soar – causing a balance of payments deficit. X's currency, required to buy X's goods, will be less in demand and its price will drop, that is, X devalues: its goods become affordable again, and the imbalance is relived. Countries in surplus are equally effected by this: their currency becomes scarce and revalues. However, if X is bound to its partners in a monetary union, currency prices cannot restore an external equilibrium, leaving only two options open: either X deflates, or its partners in surplus inflate. In Keynes' view both mechanisms are reciprocal: it is imperative to meet halfway, as surplus and deficit are two sides of the same coin (you can't be in surplus if nobody is in deficit). Cutbacks in deficit countries must be matched by the expansion of demand in surplus countries. The prevailing view is however asymmetrical: the only good inflation is zero inflation; surplus countries are "good" and it is the "bad" deficit countries that need to deflate in order to  converge towards the good ones. What if, like the PIIGS, they can't? Export revenues fall and imports must be financed with foreign debt. Countries with higher inflation rates have also been the ones that have accumulated the most foreign debt from 1999 to 2007: Greece (+78 GDP points), Portugal (+67), Ireland (+65) and Spain (+62). Along with debt, interest rates rise and the downward spiral begins: countries accumulate foreign debts to pay for foreign interests; imbalances swell and the crisis begins.

The spectre of 1992

So what about Italy? Ms. Rossanda says: "our debt is mostly domestic". That is no longer true. Do you really think markets care about who sleeps with Mr. Berlusconi? Do you think they worry if our public debt is too "high"? Our public debt has been over 100% for 20 years, and our public officials, though less colourful, have often been more unstable. These are not the markets' concerns: what is worrying is that today, like in 1992, our foreign debt is growing, and this growth, like in 1992, is driven by rising interest payments on foreign debt, which, for the most part, is private debt, incurred by families and enterprises (65% of foreign liabilities in Italy are from private sources).

Cui Prodest?

The political choice to remove exchange rate mechanisms, combinied with the asymmetrical ideologies of mercantilism ("good guys" should not co-operate) and monetarism (zero inflation), becomes a vehicle for class struggle. If the exchange rate is fixed, the burden of adjustment is dumped on the prices of goods, which can be lowered by either reducing costs (mainly labour costs, since that of raw materials is not up to us) or by increasing productivity. Job insecurity and wage reductions are just around the corner.

I pity any Leftist that supports the Euro but rejects Marchionne.

Those who fail to deflate the accumulation of foreign debt lead their country into crisis. Furthermore due to this external gap, the State will have to take on more debt (which is converted into public debt) in order to avoid the banks' collapse. Privatisation of profits is followed by the socialisation of losses, with the additional advantage of blaming the government's budget a posteriori. The choice is not whether to deflate, but how soon. It is a limited choice, but only because ideological idiocy focuses on the symptom (i.e. the public deficit – which can only be corrected by cutbacks), instead of the cause (external deficit – which could be corrected by co-operation). So the answer to Ms. Rossanda's question, "did we make a mistake?" is the one she gives herself: no, we didn't. The intended objective, namely "taming" the workforce, has been accomplished: it doesn’t sound very "left-wing", but if you are of the habit of labelling technocratic governments led by Christian Democrats as "left-wing", than go ahead. It's even stated in Acocella's manual: a "strong exchange rate" fosters discipline in workers' unions.

More Europe?

According to economic theory, a monetary union can stand without a wage crisis only if countries are fiscally integrated, as this facilitates the transfer of resources from those in expansion to those in recession. A downstream "solution" is to relieve the symptoms without curing the cause (external deficits). This is the notorious "more Europe" solution. For example: this year we celebrate the 150th anniversary of the monetary, fiscal and political union of Italy. We have had plenty of time to experience the "more Italy" approach, don't you think? Well, 150 years later, price convergence among the different regions is still incomplete, and the South holds a structural foreign debt 15% higher than its GDP, that is, it lives off of capital imports from the rest of the world (actually, from the rest of Italy). Fifty years of fiscal integration in a (monetarily) united Italy have brought us the green shirts in Padania. Give us ten years of fiscal integration in the Eurozone, maybe "Eurobonding" the whole way through, and we might see the brown shirts in Germany again. Fiscal integration is not politically sustainable because nobody likes paying for others, especially when the media, subordinate to the ideological asymmetry, keeps blasting the message that the others are lazy and unproductive and everything "is their fault". Whether they are Greeks, Turks or Jews, we know how it ends when it is somebody else's fault.

Deutschland über alles

If "downstream" solutions to external deficits are politically unsustainable, so are "upstream" ones. Cohabitation with the Euro would require abandoning the asymmetrical mercantilist ideology. Symmetrical incentives to realign should be envisaged for any country that deviates upwards or downwards from a given inflationary target. The co-ordination referred to by Ms. Rossanda should be built around this target. But the weight of "virtuous" countries won't allow it. Because the Euro is the result of two historical processes. Ms. Rossanda sees the first –capital's counter-attack to regain its slippage, caused by the postwar New Deal –but not the second: Germany's centuries-old struggle to secure a market for itself. Right and left, people are entranced by Germany's success, Europe's "driving force", which feeds its growth by intercepting demand from emerging countries. But what does the data say? From 1999 to 2007, Germany's surplus increased by 239 billion dollars, 156 billion in Europe alone, while its trade balance with China worsened by 20 billion (from a -4 deficit to a -24 one). Newspapers kept telling us that Germany’s exports to the East were sustaining our growth. Yet the data says otherwise. It was European demand, doped by a fixed exchange, which has been sustaining German growth. And Germany will not easily give up an asymmetry upon which it is fattening up. The question is, why were "peripheral" governments taken in by Germany? The answer is in Gandolfo's textbook: a single currency favours an "economic policy illusion", thus allowing public officials to pursue politically unacceptable objectives by saying they are imposed by superiors (how many times have we heard "Europe asks us...?). The end (class struggle in reverse) justified the means (becoming dependent on Germany).

Devaluation leads to blindness

It's a film we've already seen. Do you remember the "credible" EMS? From 1987 to 1991, European exchange rates were fixed. Inflation in Italy rose from 4.7% to 6.2%, while oil prices were dropping (wait, weren't fixed exchange rates supposed to restrain inflation?). Germany was cruising on at a 2% average. Italy's competitiveness was dwindling, foreign debt was growing, and, after the 1991 US recession, Italy was forced to devalue. Devaluation! Try saying this word to a left-wing intellectual. He will blush with outraged virginal modesty. It's not his fault. For decades he's been bombarded with the message that devaluation is one of those dirty things that cause a temporary, sterile relief, and horrible long-term damages. It's no wonder that a German-led system should stand on Goebbles' principle: repeat a lie often enough and it will become truth. What actually happened after 1992? Inflation dropped half a point in '93 and another half in '94. The foreign debt/GDP ratio halved in five years (from -12 to -6 GDP points). The energy bill improved (from -1.1 to -1.0 points). After an initial shock, Italy grew an average 2% from 1994 to 2001. The warnings against the use of devaluation (it generates inflation, it only causes temporary relief, we cannot afford it because we are oil importers…) are false.

Irreversible?

It is said that devaluation can’t be the solution and that no exit procedures are provided, so... So what? Who is so naive as not to see that the lack of exit procedures is just a rhetorical device whose purpose is to entrench in the public the idea that what is occurring is "natural" or "technical" while in fact, it is just a political choice made by humans (and therefore reversible by definition)? Sure, with devaluation foreign currency debts would be more burdensome. But we would also turn from being foreign debtors to being foreign creditors, thus generating sufficient resources to pay off debts – like what happened in 1992. And if this wasn't enough, we would still have the option to default. Mr. Prodi wants "major institutional investors" to foot part of the bill? Well, the most direct way to do it is not issuing Eurobonds or “socialising” losses to Germany's benefit (with the brown shirts looming in the background), but to declare, if necessary, default, as many countries have done before without being erased from the world economic map. It's already happened and it will happen again. "The markets will punish us, we will be crushed!" Nonsense. Italy has grown for decades without resorting to foreign savings. Only thanks to the Euro, which crushed families' incomes and therefore savings, has our country been forced to run up foreign debts. Gross national savings, stable around 21% from 1980 to 1999, have been constantly dropping since then, reaching 16% of income. In the same period, financial liabilities of households have doubled from 40% to 80%. Remove the Euro, and Italy will need outside markets less, while these same markets will continue to need 60 million Italian consumers.

Let not the Left-wing do what the Right-wing doeth

We will exit the Euro, because in the end Germany will saw off the branch on which it is sitting. It is up to the Left to realize and manage this process, lest it ends up getting crushed. I'm not talking about the next elections. Berlusconi will go: ten years in the Eurozone have created such tensions that now the social butcher shop must start working at full capacity. And this blood splatter will clash less with a red apron. The Realpolitik Left will once again be allowed to manage the situation, because according to another economic policy illusion, typical right-wing policies are more acceptable if done by professed lefties. But citizens are starting to realize that the social butcher shop can only be closed by exiting the Euro. Dear Ms. Rossanda, workers are not "upset", as you say: they are just discerning. "Sin, shame, evil — they cannot be hidden!", says the evil spirit to Gretchen. Thus, after twenty years of Realpolitik, left-wing politicians find themselves again treading water in the deep end, squeezed between the need to revere finance, and to justify to their constituency a fascist choice, not so much for its class consequences, but rather for the condescending way in which it was imposed. Furthermore, they expose themselves to the encroachments of the various Marine Le Pens coming forward in more mature democracies, and soon also in ours. Because, in the long run, right-wing policies only benefit the Right. That said, I am under the opinion our current politicians won’t have so much heartache, both right and left, in a country where serving just one legislative term is enough to win you a golden pension. That might explain the unanimity of views.

(...you've made your euro. Now you sleep with Marine...)