Gianpaolo Rossini - 09/ 2011

History will remember the Summer of 2011 for two events in particular. Developments in the war against Gaddafi's Libya leading to the colonel's defeat and the spiralling sovereign debt crisis in Euroland. Two sorry milestones on the path towards European integration which raise complex questions about the future. The war in Libya is a poor copy of the war in Iraq, which began ten years ago and caused the deaths of over one million people, upset the balance of power in the Persian Gulf and the Middle East and weakened the United States militarily and economically. Gaddafi's Libya constituted a privileged economic bridge with Italy and the governments of Prodi and Berlusconi, who took responsibility for the damage caused by Italian colonial rule by agreeing to pay substantial sums in compensation. This, perhaps, is the aspect of Italy's policy with regard to Libya that the old colonial powers find it most difficult to swallow, as they fear a knock-on effect in the many other former colonies which have felt the weight of French or British dominion. The campaign in Libya promoted by France and Britain has the double objective of eliminating the colonel, a charismatic figure in many central African countries, and regaining lost influence in key areas of North Africa. Motivations, in other words, which, driven by national interest, ignore the interests of the EU as a whole. It is therefore yet another episode which shines the spotlight on the European Union's fading foreign policy. The reconfiguration of Libya's economic interests in favour of France and Great Britain cancels out the role of the EU's High Representative of Foreign Affairs and Security Policy, instituted by the Lisbon Treaty in 2009 and embodied in the person of Catherine Ashton, herself a figure lacking any significant political experience who is practically unknown, even in her own country. The effects of the Libyan campaign go beyond matters of military and foreign policy to highlight Europe's lacks of cohesion, and the fact that, when faced with serious international events, whether economic, military or financial, our community institutions seem unable to withstand even the slightest ripple, something which makes the outlook for the continent's future very bleak indeed. If the war in Libya marks Europe's absence in international diplomatic and military relations, the manner in which the Greek crisis has been handled since the beginning of 2010, and the disastrous consequences this is having on the whole world's economy, constitutes and even more spectacular step backwards. The Greek impasse is the result of foreign and public debt, which in 2010 reached significant but not impossible levels. Public debt was not far off the actual debt of countries like the USA. It exceeded Italy's, but remained lower than Japan's. Foreign debt exceeded that of the US, but was less than that of Ireland and Spain. Greek's small size (2.2% of the Euroarea's GDP) meant that in May 2010 the cost of rescuing it would have been minor for the other countries of the Eurozone. All it required was timely action along the lines of the steps taken by the Fed and the Bank of England in 2008 to purchase government bonds on the open market (available on both the primary and secondary markets), albeit on a smaller scale. Such an operation, the cost of which would have been genuinely negligible, would have averted further pain for Greece and the crisis that subsequently affected the sovereign debt and banking system of most of the Eurozone. The ECB, however, did not follow the example of the Fed and the Bank of England, because, like other European institutions, it is subject to a short-sighted and rigid doctrine of fighting inflation, even when there is no inflation to speak of. The ECB eventually made its move. But it moved one year too late, with too much caution and too little determination. It did badly and without conviction what the two Anglo-Saxon central banks and the Bank of Japan have never hesitated to do over the past three years, namely purchase not only their own countries' government bonds, but also its ailing financial institutions. The Fed, the Bank of England and the Bank of Japan continue to operate with intelligence, foresight and pragmatism, overriding doctrinal rigidity and providing markets and governments with liquidity at close to zero interest (0.5%). The exact opposite of the ECB, in other words. It follows the other major central banks only when they, especially the Fed, force its hand by means of a powerful moral suasion. This happened towards the end of 2008, and in the second week of September 2011. As soon as the ECB is released from the clutches of the Fed, however, it reverts to its doctrinal lethargy and proceeds to commit glaring mistakes. As in the Spring and Summer of 2011 when, despite Greece's woes, it progressively raised interest rates (in April and July) to 1.5%, announcing a rise in rates and a lowering of liquidity with a view to preventing inflation. And this at a time when, on the other side of the Atlantic, easy-money policies are being implemented to prevent a meltdown. The ECB increasingly resembles a mad captain who in the middle of a storm which is sinking his ship expects the crew to polish the deck and the hatches. For over ten years, our central bank has been cracking the whip and issuing restrictive policies designed to prevent inflation. This pushes exchange rates to intolerable levels (before the Greek crisis, we touched 1.6 dollars to the euro), which in turn deindustrialises the economic fabric of Euroland. Now, this policy is aggravating the problem of the competitiveness and public accounts of Euroland members involved in costly stimulus and rescue plans, which were agreed upon with the United States following the Lehman crash in 2008. The drama being played out in Greece is like a chronoscope of serial mistakes committed by Euroland institutions and the top two countries, France and Germany, who together run the continent. Ruling out the simplest and cheapest route, namely the purchase of government bonds by the ECB, has meant that months have been wasted in long-winded negotiations resulting in a safety net which, alas, was born anaemic. Meanwhile, the time that is wasted forces Greece to deal with sky-rocketing interest rates, which makes its bailout every day more expensive and the political sustainability of the crisis increasingly doubtful. When a first financial plan did eventually emerge, resources were requested also from countries like Italy and Spain, whose financial situation was far from rosy. For this reason, Italy was forced to add to the burden of the first austerity plan in 2011 in order to collect cash from the tax-payer. And this because the ECB, in its complacency, likes to be seen as “different”. The delay and the timidity of the measures ensure that they will never be adequate. The markets are light cavalry shooting at Greece with heavy weapons. Europe marches with light infantry and rifles, and fails to see that Greece is the weak link in a chain of fragile European structures which could explode one after the other leaving only piles of rubble. Many Europeans surf this wave of irresponsibility meting out merciless analyses of national vices which often have precious little to do with financial issues. Unfortunately, they forget that, in this end-of-2011 crisis, only a cohesive Europe will live to see the light of day. The campaign of denigration which has targeted Greece and other countries of Southern Europe is widespread. Finland, for instance, has demanded guarantees from Greece that are reminiscent of war reparations at a tragic time in our history. Amid the delays in aid and the threats to Greece's public assets, which clearly haven't been ransacked enough by the British, French and Germans over the past two centuries, in September 2011 interest rates on Greek bonds topped 50% on the secondary market and well over 20% on the primary market. It is worse than Argentina in 2001, and four times worse than Italy's anti-usury laws allow. Such interest rates would make the public debt of cold, virtuous Finland unsustainable. Misguidedly restrictive policies alongside the delays and timidity of the measures implemented by the ECB, led to contagion, as Spain, Portugal and Ireland were hit in 2010, to be followed in the Summer of 2011 by Italy and France's major banks. Meanwhile, Germany, the Netherlands and Finland enjoy interest rates that are lower than they would be if their other partners were not in trouble, for the reason that as safe havens they receive more capital than would be the case under normal circumstances. The Autumn is filled with uncertainty regarding the future of the euro, which for many countries has become a suffocating straitjacket. Financial adjustment policies in various Eurozone countries are looking increasingly unsustainable for democratically elected ruling majorities. How can Greece be expected to lay off 150,000 public employees in the same way as Germany does? Nothing short of a military dictatorship could take such steps. The paradox is that all this happens because the ECB refuses to take the courageous step of implementing an easy-money policy out of fear that inflation would grow from 2% to 4%, which is what happens without fuss in Great Britain and the United States. Why is this? Perhaps someone in Brussels or Frankfurt in 2010 thought that sacrificing Greece to the markets would reinforce discipline within the “euro herd”. Sadly, however, leaving the descendants of the Achaeans at the mercy of speculation has served to show the markets that Europe not only does not have a common fiscal policy, but neither does it have a monetary policy capable of handling emergencies, and, worse still, that it lacks the solidarity and forbearance that China has displayed towards the USA, as it continues to purchase huge quantities of government bonds. The greatest achievement of the ECB and the pressure exerted by the Germans is to have forced Italy, Spain and Portugal to adopt budget balancing regulations in their national legislation. As regulations go, it is unsustainable and nonsensical, worthy of the American Tea Party, in that it cements economic policy and deprives a country of the possibility of taking action in a time of crisis. We knew that with the euro we would be yielding monetary sovereignty, but now we find that we have lost fiscal sovereignty too. This may be one step too far. What is more, today's crisis is the result of excessive levels of private debt, of individuals taking ill-conceived risks on the markets only to be saved by the public budgets. Setting extremely rigid limitations on debt, ruling it out completely not for those who behaved recklessly, but for those who saved those who are responsible for the abuse is reminiscent of certain rape trials of some years ago. It often happened that the ones who ended up being prosecuted were not the perpetrators of the violence, but the women who were its victims, because its was thought that they had provoked the bestial instincts of the rapist.

Gianpaolo Rossini
(Università di Bologna)