Italiako krisi organikoa

Thomas Fazi-ren Italy’s Organic Crisis

(https://americanaffairsjournal.org/2018/05/italys-organic-crisis/#.WwsT_-1scz0.twitter)

(i) Antonio Gramsci 1910eko hamarkadan1

(ii) Gaurko krisia2

(iii) Austeritatearen fruituak3

(iv) Langabezia, pobrezia, eskariaren suntsitzea, gehi emigrazioa4

(v) Italiako Ezkerra: ekonomia ultra liberalaren ondorioak5

(vi) Subiranotasun nazionala, Maastricht, Europar Batasuna, euroa6

(vii) Italiako kapitalismo mota: Europako botere hierarkia, EBZ, austeritatea, euroa (atzerritar moneta)7

(viii) Italiako etorkizuna8


Ingelesez: “The Italian Marxist Antonio Gramsci coined the term “organic crisis” to describe a crisis that differs from ”ordinary” financial, economic, or political crises. An organic crisis is a “comprehensive crisis,” encompassing the totality of a system or order that, for whatever reason, is no longer able to generate societal consensus (in material or ideological terms). Such a crisis lays bare fundamental contradictions in the system that the ruling classes are unable to resolve. Organic crises are at once economic, political, social, and ideological—in Gramscian terms, they are crises of hegemony—and they usually lead to a rejection of established political parties, economic policies, and value systems. However, they don’t necessarily lead to the swift collapse of the dominant order. Gramsci described these situations as interregna in which “the old is dying and the new cannot yet be born” and during which time “a great variety of morbid symptoms” can appear. “

Ingelesez: “Gramsci was talking about Italy in the 1910s. A century later, the country is facing another organic crisis. More specifically, it is a crisis of the post-Maastricht model of Italian capitalism, inaugurated in the early 1990s. This model, I argue, can be described as a peculiar kind of comprador capitalism—a term generally used in the context of the old colonial system to describe a regime in which a country’s ruling classes ally with foreign interests in exchange for a subordinated role within the dominant hierarchy of power. Though the crisis has been brewing beneath the surface for some time, it became apparent in the latest general election, which was held on March 4, 2018.

The results of the election are well known. The political establishment that has ruled Italy for the last quarter century, embodied by the Democratic Party (PD) and Forza Italia, suffered an unprecedented collapse, securing, respectively, 18.7 and 14 percent of the vote. Meanwhile, the two major “anti-establishment” parties—the Five Star Movement (M5S) and the Northern League (Lega)—experienced a spectacular surge, winning, respectively, 32.7 and 17.4 percent of the vote. Overall, the center-right coalition—which includes, alongside the Northern League (now the coalition’s dominant party), Silvio Berlusconi’s Forza Italia, and the small post-fascist party Brothers of Italy (Fratelli d’Italia)—won 37 percent of the vote. Every other party—from the über-liberal, pro-European More Europe (+Europa), in coalition with the PD, to the center-left Free and Equal (Liberi e Uguali), an offshoot of the PD running against it, to the radical Left Power to the People (Potere al Popolo)—failed miserably. Of these, only Free and Equal barely surpassed the 3 percent minimum threshold for parliamentary representation.

Although there were obvious losers, the election did not yield a clear winner. The country’s new electoral law—approved in 2017 by the PD, Forza Italia, and the Northern League with the clear aim of containing the Five Star Movement—requires any party or coalition of parties to obtain at least 40 percent of the vote (in the ballot box or through a post-electoral alliance) in order to claim a majority and thus form a government. For the past two and a half months, M5S and Lega—the two most obvious candidates to form a workable coalition structure—have been engaged in tense negotiations. At the time of writing, it would appear that an agreement between the two parties has been reached, though details have yet to be made public. Thus the shape of Italy’s next government remains unclear. We also cannot rule out the possibility that the two parties fail to overcome the current gridlock, leading to the president appointing a temporary “technocratic” government or even to new elections. Nevertheless, regardless of the outcome of the negotiations, one thing is clear: this election has changed the Italian political landscape forever.

Ingelesez: “The Fruits of Austerity

The downfall of the political establishment—and the rise of the “populist” parties—can only be understood against the backdrop of the “the longest and deepest recession in Italy’s history,” as the governor of the Italian central bank, Ignazio Visco, described itSince the financial crisis of 2007–9, Italy’s GDP has shrunk by a massive 10 percent, regressing to levels last seen over a decade ago. In terms of per capita GDP, the situation is even more shocking: according to this measure, Italy has regressed back to levels of twenty years ago, before the country became a founding member of the single currency. Italy and Greece are the only industrialized countries that have yet to see economic activity surpass pre–financial crisis levels. As a result, around 20 percent of Italy’s industrial capacity has been destroyed, and 30 percent of the country’s firms have defaulted. Such wealth destruction has, in turn, sent shockwaves throughout the country’s banking system, which was (and still is) heavily exposed to small and medium-sized enterprises (SMEs).

Ingelesez: Italy’s unemployment crisis continues to be one of the worst in all of Europe. Italy has an official unemployment rate of 11 percent (12 percent in southern Italy) and a youth unemployment rate of 35 percent (with peaks of 60 percent in some southern regions). And this is not even considering underemployed and discouraged workers (people who have given up looking for a job and therefore don’t even figure in official statistics). If we take these categories into consideration, we arrive at a staggering effective unemployment rate of 30 percent, which is the highest in all of Europe. Poverty has also risen dramatically in recent years, with 23 percent of the population, about one in four Italians, now at risk of poverty—the highest level since 1989.

These abysmal numbers are the result of both conjunctural and systemic causes, though the two are, of course, interrelated. From a conjunctural point of view, they are largely the of result of the severe austerity policies instituted by Mario Monti’s “technocratic” government in 2011–13. Monti himself admitted in an interview with CNN that the aim of the austerity policies was “to destroy domestic demand through fiscal consolidation.” These policies were continued by all successive governments, including the Renzi government (2014–16) and the outgoing government, led by Paolo Gentiloni.

Indeed, the “success” of Monti’s demand destruction has now been confirmed by a study buried deep within an annex to the latest Italian budgetary plan, which concludes that the measures of fiscal consolidation (budget cuts and tax hikes) pursued over the 2012–15 period reduced Italian GPD by almost 5 percent (about €75 billion a year, for a staggering total of around €300 billion), consumption by 4 percent, and investment by 10 percent, “due to their recessionary effects on GDP and on the major components of demand (consumption and investment).”

Though the study in question only examines the period up to 2015, the government’s contractionary fiscal stance has remained largely unchanged in recent years. Indeed, Italy is one of the few countries to have maintained a significant primary budget surplus—today equal to around 1.5 percent of GDP—throughout the entire post-crisis recession, contrary to economic common sense.1 The consequence has been a drastic erosion of the welfare state (particularly the healthcare system). At the same time, an ever-expanding array of new taxes has alienated small and medium-sized business owners as well.

The Democratic Party (PD) has led the government since 2013 and has overseen EU-dictated austerity and “structural reforms” for over half a decade. Given the disastrous effects of these policies, it is hardly surprising that voters laughed off the outgoing government’s “economic recovery” narrative. The much-publicized “million new jobs” created over the past four years are largely temporary, poorly paying jobs—courtesy of Matteo Renzi’s neoliberal labor market reform, the so-called Jobs Act, which loosened dismissal procedures and repealed the famous Article 18 of the 1970 Workers’ Statute that previously protected workers from unfair dismissal. Even the outgoing prime minister, Paolo Gentiloni, admitted that “Economic growth is not reducing inequalities, but in many countries including Italy they are still widening, even if economic growth is there. They are reaching even more intolerable levels.”

This social powder keg was further complicated by the explosion of the so-called migration crisis. More than 600,000 migrants and asylum seekers have entered Italy illegally since 2014. This influx has fueled resentment among many Italians, who feel migrants receive more support from the state than they do. It has also led to a growing sense of insecurity. According to an international Ipsos poll conducted in July 2017, 66 percent of Italians thought that there were too many immigrants in their country, the second highest percentage of the 25 countries surveyed. The Democratic Party, in the words of Francesco Ronchi, “overlooked these anxieties and tried to cover up the gravity of the problem.” In September 2016—at the peak of the migration crisis, with thousands of foreigners entering Italy from Libya—then prime minister Renzi declared, “There is no emergency. There are some people.””

Note (1): A government that runs a primary surplus is spending less into the real economy than it is taking out of it through taxation and is, therefore, draining wealth out of the economy, usually to redistribute it to foreign and domestic holders of government securities (usually banks and wealthy individuals). Economic common sense counsels that governments in a recession should do the exact opposite: run budget deficits to stimulate economic activity.

Ingelesez: “The Transformation of the Italian Left

Fear, loathing, unemployment, precariousness, and poverty: these are the causes of the watershed vote of March 4. The Five Star Movement and the Lega capitalized on the widespread dissatisfaction with the statu quo, by focusing on social protection (especially M5S), lower taxes (especially the Lega), and greater migration control (both). At the same time, voters explicitly punished the party considered largely responsible for the situation: the PD. The party is without the doubt the election’s biggest loser, having seen its vote total plummet by more than half in just a few years (in the 2014 European election it garnered 41 percent of the vote). This abysmal performance is yet another example of “pasokification,” whereby nominally center-left, social-democratic parties, like many of their center-right counterparts, are punished by voters due to their embrace of neoliberalism and austerity. (The term pasokification refers to the Greek social-democratic party PASOK, which was virtually wiped out of existence in 2014 as a consequence of its inane handling of the Greek debt crisis, after dominating the Greek political scene for more than three decades.) Other center-left parties suffering the same fate in recent years include the French Socialist Party and the Dutch Labor Party (PvdA)—and, now, the PD.

Pasokification might be too soft a term for the PD, however. Where PASOK and other similar formations started out as genuine social-democratic parties, only to be subsequently corrupted by neoliberal ideology, the Democratic Party was born in 2007 as an avowedly neoliberal-centrist “third way” party, in contrast to the historic (communist and socialist) tradition of the Italian Left. The PD was to be a party finally cleansed of the dead weight of twentieth-century leftwing mass politics and ready to embrace the brave new world of post-ideological politics. Out were heavyweight theories, class conflict, state interventionism, and economic redistribution; in were economic liberalism, market rule, individual (rather than social) rights, innovation, governance, and responsiveness. The creation of the PD should be seen as the end point of the Italian post-communist Left’s decades-long shift to the right. This process began in 1991 with the transformation of the Italian Communist Party (PCI) into the Party of the Democratic Left (PDS), already purged of any reference to socialism in its name. This was subsequently renamed Democrats of the Left, and, finally, having dropped any reference even to the “Left,” PD. At every turn, the party grew further apart from its original support base, the working classes, while refashioning itself as a party of the (shrinking) urban progressive middle and upper classes.

The PD fully embodies that perverse political alignment, common to other center-left parties, between political correctness (feminism, anti-racism, multiculturalism, LGBTQ rights, etc.), on the one side, and ultra-liberal economics (anti-statism, fiscal austerity, deregulation, deindustrialization, financialization, etc.), on the other, which Nancy Fraser has aptly termed “progressive neoliberalism”2—an ideology which has nothing to offer to the growing masses of unemployed and overexploited workers. A striking fact in this respect, as Nicola Melloni notes, is the fact that today the PD is  

. . . the only true class-based party, whose electorate is mostly composed of affluent people with higher degrees. Only 8 percent of the unemployed and 12 percent of the working class voted for the PD. More interestingly yet, according to a SWG survey, less than one third of the voters who had chosen PCI in 1988 voted PD in 2018.

In short, the PD’s defeat can only be understood in the context of the decades-long metamorphosis of the Italian Left. This, in turn, can only be understood in the context of the tectonic shifts that have occurred in the Italian political economy over the past thirty years. In this respect, the country’s economic crisis is but an epiphenomenon of a much deeper “structural” crisis of Italian capitalism (albeit dramatically accelerated by the postcrisis policies).

In economic terms, Italy has been in a de facto crisis since well before the 2008 financial crash. Up until the late 1980s, the country enjoyed three decades of relatively robust growth; then, beginning in the early to mid-1990s, all its main economic indicators—productivity, industrial production, per capita growth, etc.—began to steadily decline, and have stagnated ever since. This is, to a large degree, the result of Italy’s adoption of an economic superstructure—established by the Maastricht Treaty of 1992, which paved the way for the establishment of the European Monetary Union (EMU) in 1999—that was (is) fundamentally incompatible with the country’s political economy.

As insightfully argued by Fritz W. Scharpf, former director of the Max Planck Institute for the Study of Societies (MPIfG), the euro regime can be understood as a process of “enforced structural convergence,” aimed at imposing the northern export- and profit-led economic model (well represented by countries such as Germany and the Netherlands) upon the very different political economies of southern countries, such as Italy, which tend to be much more internal demand– and wage-driven. Scharpf notes that “the economic impact of the present euro regime is fundamentally asymmetric. It fits the structural preconditions and economic interests of northern economies, and it conflicts with the structural conditions of southern political economies—which it condemns to long periods of economic decline, stagnation, or low growth.”

Given the especially disastrous effects of the euro regime in Italy, the country’s decision to enter the monetary union—and its establishment’s continued defense of that regime—might appear largely self-defeating. However, as Bill Mitchell and I argue in our recent book, Reclaiming the Statethe EMU should be understood as a political project as much as an economic one. Throughout the 1970s and 1980s, growing wage pressure, rising costs, and increased international competition caused a squeeze on profits, provoking the ire of large capital holders. On a more fundamental level, the full employment regime “threatened to provide the foundations for transcending capitalism” itself, as an increasingly militant working class began to link up with new countercultural movements to demand a radical democratization of society and the economy. As the Polish economist Michał Kalecki had anticipated thirty years earlier, full employment hadn’t become simply an economic threat to the ruling classes but a political one as well. Understandably, this issue preoccupied elites, a fact illustrated by various documents published at the time.”

Note (2): See also, Nancy Fraser, “From Progressive Neoliberalism to Trump—and Beyond,” American Affairs 1, no. 2 (Winter 2017): 46–64.

Ingelesez: “National Sovereignty and the Paradox of Weakness

The Trilateral Commission’s oft-cited Crisis of Democracy report of 1975 argued, from the establishment’s perspective, that a multilevel response was required. It argued not only for reducing the bargaining power of labor, but also for promoting “a greater degree of moderation in democracy” and a greater disengagement (or “non-involvement”) of civil society from the operations of the political system, to be achieved by spreading “apathy.” In this context, we can better appreciate why European elites welcomed the “external constraint” of the EMU as a way of depoliticizing economic policy, that is, of removing macroeconomic policies from democratic and parliamentary control through a self-imposed reduction of national sovereignty. Their aim was not simply to insulate economic policies from popular-democratic challenges, but also to reduce the political costs of the neoliberal transition, which clearly involved unpopular policies, by displacing the responsibility for such measures upon external institutions and factors. This can be said to embody what Edgar Grande calls the “paradox of weakness,” whereby national elites transfer some power to a supranational policymaker (thereby appearing weaker) in order to allow themselves to better withstand pressure from societal actors by testifying that “this is Europe’s will” (thereby becoming stronger). As Kevin Featherstone put it: “Binding EU commitments enable governments to implement unpopular reforms at home whilst engaging in ‘blameshift’ towards the ‘EU,’ even if they themselves had desired such policies” (emphasis added).

Nowhere is this clearer than in the Italian case. And that is probably because Italy’s state-centric postwar mixed economy was viewed by the country’s ruling elites as being particularly incompatible with the neoliberal paradigm that emerged in the 1980s. Italy was seen as requiring far-reaching “reforms,” even though no popular consensus supported such policies. Maastricht thus came to be seen by a large section of the Italian establishment as the means by which to achieve a radical transformation—or neoliberalization—of the country’s political economy. Guido Carli, Italy’s highly influential economic minister from 1989 to 1992, made no secret of this. In his memoirs Carli wrote

The European Union implies . . . the abandonment of the mixed economy, the abandonment of economic planning, the redefinition of the modalities of composition of public expenditure, the restriction of the powers of parliamentary assemblies in favor of government . . . the repudiation of the concept of free social provisions (and the subsequent reform of healthcare and social security systems) . . . the reduction of the presence of the state in the financial and industrial systems . . . the abandonment of price controls and tariffs.

It is clear that Carli understood the European Union first and foremost as a way to spearhead nothing less than the wholesale transformation of Italy’s economy—a transformation that would not have been possible, or would have been extremely difficult, without the self-imposed external constraints (vincolo esterno) created first by Maastricht and then by the euro. So, for example, the Amato government succeeded in 1992 in persuading the Italian General Confederation of Labor (CGIL) to end the so-called scala mobile, the indexation of wages to inflation, not by confronting labor directly but by essentially appealing to the external constraint of the European Monetary System (EMS), the system of semi-fixed exchange rates that paved the way for the euro. Carli himself recognized that “the European Union represented an alternative path for the solution of problems which we were not managing to handle through the normal channels of government and parliament.” Therefore, Italy’s decision to join the EMS and then the EMU cannot be understood solely in terms of nationally framed interests. Rather, as James Heartfield pointed out, it should be viewed as the way in which one part of the “national community” (the economic and political elite) was able to constrain another part (labor).

Ingelesez: “Comprador Capitalism in Italy

From the establishment’s perspective, the fact that EMU also entailed the deindustrialization and “mezzogiornification” of the country—to the benefit of German and French firms, which have taken over a great number of businesses (or acquired significant stakes in them) in Italy and other periphery countries—and its demotion to a subordinated role within the European hierarchy of power, was a small price to pay for winning the war against labor at home. In this sense, Italy’s post-Maastricht economic regime can be likened to a form of comprador capitalism—a semi-colonial regime in which the country’s ruling classes essentially allied with foreign interests in exchange for more favorable domestic class relations. Ironically, the post-communist Left played a crucial role in legitimizing the narrative of the vincolo esterno; by the early 1990s, its ideological subordination to neoliberalism was so profound that its major representatives had come to believe that the European Union truly was an unmissable opportunity for Italy to finally join the family of “modern” and “virtuous” countries. It is no coincidence that the “economic shock treatment” of the 1990s (particularly the dismantling and privatization of Italy’s once-vast array of state-owned industries) was promoted by and large by center-left governments.

We see the same logic of the external constraint being applied today. It is now becoming increasingly clear, for example, that the so-called sovereign debt crisis of 2010–11 was not a “natural” response of markets to Italy’s “excessive” public debt, but was largely “engineered” by the European Central Bank (ECB) to force countries to implement austerity. As Luigi Zingales, finance professor at the University of Chicago, recently noted, the ECB eventually intervened in the Italian bond market, but only after a long delay: “This delay was not due to incompetence, but to the explicit desire to impose ‘market discipline’—that is, to put pressure on the government to improve its fiscal situation. It was a form of economic waterboarding that has left the Italian economy devastated and Italian voters legitimately angry at the European institutions.”

The debt crisis, combined with the ECB’s delayed reaction, led to apoplectic calls from the media to rein in the deficit through emergency austerity measures and ushered in Mario Monti’s “technocratic” government. But the only reason Italy experienced a “sovereign debt crisis” in the first place is that, like all eurozone countries, it effectively uses a foreign currency. Much like a state government in, say, the United States or Australia, eurozone countries borrow in a currency which they don’t control (they can’t set interest rates nor can they roll over the debt with newly issued money and thus, unlike countries that issue debt in their own currency, they are subject to risk of default). As a recent ECB report reads “although the euro is a fiat currency, the fiscal authorities of the member states of the euro have given up the ability to issue non-defaultable debt.”

This gives an enormous amount of power to the unelected and unaccountable ECB, which can (and does) use its currency-issuing powers to impose its own policies on recalcitrant governments (as it did in Greece in 2015, when it cut off its emergency liquidity to Greek banks in order to bring the Syriza government to heel and force it to accept the third bailout memorandum) or even to force governments to resign, as it did in Italy in 2011. As the Financial Times recently acknowledged, the ECB effectively “forced Silvio Berlusconi to leave office in favor of unelected Mario Monti,” by making his ouster the precondition for further support by the ECB for Italian bonds and banks. This exemplifies what the late, great British economist Wynne Godley meant when he wrote, back in 1992, that “[i]f a country gives up or loses [the power to issue its own money], it acquires the status of a local authority or colony.”

That experience was a telling reminder for the Italian political establishment of the Faustian pact they had signed by entering the eurozone. By giving up their country’s economic sovereignty, they also made their political survival dependent on the good will of unelected technocrats. It is a lesson the PD also learned at its own expense, after years of endless (and ultimately fruitless) negotiations with the European Commission to obtain a small degree of “fiscal flexibility.” We may call this the revenge of depoliticization: that strategy proved beneficial for local elites in attaining domestic objectives insofar as the euro regime was able to guarantee a modicum of growth to periphery countries. But now that the fundamental contradictions of the European system have to come to the fore, the Italian political elites have found themselves lacking the economic tools necessary to maintain societal consensus. As Scharpf writes, in countries such as Italy monetary union hasn’t simply entailed huge socioeconomic costs, but it has also had “the effect of destroying the democratic legitimacy of government.”

One corollary of this loss of democratic legitimacy is that appeals to the logic of the external constraint no longer carry the same weight that they used to. Citizens—not just in Italy—are less and less willing to justify the statu quo on the basis of arbitrary and punitive rules and external diktats, the political (i.e., non-neutral) nature of which is becoming increasingly apparent. This is demonstrated by the fact that the attempts of the Italian and European establishment to discredit “populist” proposals on the basis of their alleged fiscal unsustainability, threat to financial stability, or incompatibility with the European framework blatantly failed to achieve the desired effect. Quite the contrary, in fact. Equally counter-productive, from the establishment’s perspective, are the claims of top EU representatives that the new government (whatever that may be) must abide by the decisions taken by previous governments. As more and more people start to acknowledge the anti-democratic and neocolonial nature of the European Union, such scare tactics no longer work. In this sense, the March 4 vote wasn’t so much a vote “against Europe”—even though traditional pro-European parties were severely punished—as it was a vote against depoliticization, and for a repoliticization of the national decision-making process. That is, for a greater degree of collective control over politics and society, which necessarily can only be exercised at the national level.

Ingeleez: “Italy’s Future

Can the “anti-establishment” parties that gave voice to this demand for repoliticization—Five Star Movement and Lega—live up to expectations? It’s unlikely. Ultimately, neither party offers a viable alternative to the statu quo, at least in terms of political economy. Lega’s economic agenda is still very much neoliberal: the party’s main economic proposal is a flat tax rate in place of the current (more or less) progressive tax rates, which is clearly regressive in nature, with a bit of social protection thrown in (abolition of the Fornero law, which increased the retirement age). Likewise, the Five Star agenda, “is a far cry from one of a progressive force,” as Nicola Melloni writes. Even though its narrative, like that of left-wing populist movements, such as Podemos and Occupy, is built around the counterposing of people and oligarchy, the M5S simply reduces this oligarchy “to a corrupt political ‘caste,’” argues Melloni. “Economic issues such as labor and capital relations, inequality, or capitalism itself, are absent. Rather, they are a populist but centrist political force—opportunistic enough to ride any battle that can bring consensus, but without any ambition to change, or even reform, the system.” In this sense, they are a perfect example of the “morbid symptoms” Gramsci spoke about.

More importantly, even if M5S and Lega truly did want to change the system, to do so they would have to challenge the euro regime, which neither of them is willing to do. Even though the two parties are commonly described as euroskeptic, or even anti-European, they were both quick to pledge their allegiance to the European Union before and after the election. Yet as long as they maintain this position, they are doomed to fail. As noted above, European institutions have a wide array of tools “to constrain and, if necessary, disable the democratic responsiveness of southern governments,” according to Scharpf. “While Italy has more bargaining power than Greece, it can be equally choked financially,” Zingales writes, just as Greece was in 2015, if it is perceived as a threat to the European neocolonial regime.

To conclude, regardless of the outcome of the negotiations or even in the eventuality of a new election, Italy’s organic crisis is here to stay. And it won’t be resolved until its underlying cause is grappled with: the fundamental incompatibility between Italy’s political economy and the single currency.”

Iruzkinak (3)

  • joseba

    Sacrificing at the Altar of the Euro

    By Thomas Fazi and Giacomo Bracci

    (https://www.jacobinmag.com/2018/05/eurozone-single-currency-eu-austerity-italy-argentina)

    Breaking up the eurozone would be no simple task. But maintaining the single currency dooms progressive politics across the continent.

    For the defenders of eurozone orthodoxy, today’s crisis in the Argentinian peso offers a cautionary tale for countries tempted to abandon the single currency. Faced with the threat of the peso collapsing relative to the dollar, Argentinian president Mauricio Macri has had to appeal to the International Monetary Fund (IMF) for an emergency loan.
    For one columnist in the Italian daily Corriere della Sera, the lesson was clear: whereas a country like Argentina is exposed to debt crisis, eurozone members are sheltered from it. Outside the single currency, a country like Italy would have a hard time refinancing its huge debt. The lively academic and political debate on the euro’s prospects, however, suggests that there is much more to the issue than meets the eye.
    It’s worth examining the viability of the euro, from the qualms raised at its origin to its real effect on Europe’s economies. Here, we look at the prospects of reforming the eurozone in a progressive direction and the viability of leaving, and the objections often raised to euro exit.
    (…)
    The Costs and Benefits of Euro Exit
    In this context, given the impossibility of deepening the monetary union in a way which is consistent with the maintenance in all member states of acceptable levels of employment, a strong welfare state, growth-friendly policies, and strategic public investments, we can no longer simply refuse to consider the potential benefits of euro exit.
    Most important is that countries that were to leave the euro could make free use of fiscal policy to both address cyclical downturns and mount the structural investment plans that are needed to support employment and productivity. Since the beginning of the crisis, a country like Italy has lost 20 percent of its industrial production. Ten years on from 2008, the official unemployment rate stands at 11.4 percent. And this is not even considering underemployed and discouraged workers (people who have given up looking for a job and therefore don’t even figure in official statistics). If we take these categories into consideration, we arrive at a staggering effective unemployment rate of 30 percent, which is the highest in all of Europe.
    The dire situation of the European labor market, characterized by high levels of long-term unemployment (mostly overlooked by official statistics), was also certified by the ECB and the EU Commission in 2017. Given these numbers, the potential costs of exiting the euro should be compared with the costs of remaining in the currency union in the absence of meaningful reform.
    But are the costs of exiting the euro too high to make this option attractive at all? The mainstream viewpoint commonly predicts that a unilateral exit will bring devastation, catastrophe, hyperinflation, financial market lockout, etc. But is that really the case?
    One possible cost is that the exiting government might not find enough investors standing ready to buy its public debt, and thereby risk default or monetization (direct central bank purchases of government debt) as a last resort for funding public spending. However, a government that issues its own currency and does not promise any kind of convertibility (in gold or other currencies through a fixed exchange rate mechanism) can never be forced to default, because it can always repay its obligations without breaking foreign parities.
    Even the ECB acknowledged in a recent report that “[w]ith a national fiat currency, the monetary authority and the fiscal authority can coordinate to ensure that public debt denominated in that currency will not default, i.e., maturing government bonds will be convertible into currency at par.” Under a gold standard, the government literally needs to print banknotes to purchase gold (or gold certificates) in order to spend in excess of taxation.
    With a fixed exchange rate, deposits denominated in local currency compete with deposits and assets denominated in the foreign currency which the government pegs its currency to; therefore, the central bank needs to give up its control of interest rates in order to maintain parity with the foreign currency by purchasing or selling foreign currency in sufficient quantities. However, the credibility of this promise crucially depends on the country’s foreign currency reserves: if the country runs out of reserves, the only option is default and devaluation, as we saw in Italy and the UK in 1992, and Argentina in 2001.
    With a flexible exchange rate, however, the government no longer has to constrain its expenditure to meet the central bank’s requirements for sustaining a fixed parity against a foreign currency: it can spend simply by crediting the accounts of the recipients of public spending and debiting the government’s account at the central bank. Thus governments that issue their own currencies and float their exchange rate no longer have to “fund” their spending: technically, they can simply create the necessary money “out of thin air.” They never need to “finance” their spending through taxes or selling debt to the private sector, since the level of liquidity in the system is not limited by gold stocks, or anything else (which of course doesn’t mean that taxes don’t serve other important purposes).
    A crucial advantage of leaving the euro would therefore be to regain the capacity to spend irrespective of revenues. In this context, the issuance of government securities is merely a monetary policy decision needed to support a positive interest rate in the interbank market (which is crucial for the central bank’s transmission mechanism), by providing investors with an interest-bearing asset that drains the excess reserves in the banking system that result from deficit spending. From a fiscal standpoint, however, a monetarily sovereign government can run fiscal deficits without issuing debt at all. This means that the government does not depend on private bond markets to support its deficit spending.
    This does not imply that a currency-issuing government should spend or incur deficits without limits, or that fiscal deficits are desirable per se. Fiscal deficits in themselves are neither good nor bad. Any assessment of a nation’s fiscal position must be taken in the light of the usefulness of the government’s spending program in achieving its national socioeconomic goals.
    This is what the economist Abba Lerner called the “functional finance” approach. Rather than adopting some desired fiscal outcome (such as achieving fiscal surpluses at all costs), governments ought to spend and tax with a view to achieving “functionally” defined outcomes, such as full employment. Fiscal policy positions thus can only be reasonably assessed in the context of these macroeconomic policy goals. Attempting to assess the fiscal outcome strictly in terms of some prior fiscal rule (such as a deficit of 3 percent of GDP) independent of the actual economic context is likely to lead to flawed policy choices.
    Thus, from a progressive standpoint — that is, one that assumes the government’s objective to be the pursuit of full employment and increased levels of well-being for its citizens — there might indeed be circumstances in which it is sound for a government to run a fiscal surplus, though more often than not ongoing fiscal deficits will be required to compensate for the private sector’s saving desires.
    It is commonly believed that financing government spending through a fiscal deficit rather than through taxes is inherently inflationary — even more so if the deficit is financed directly by the central bank rather than by the private sector. In reality, fiscal deficits do not carry any intrinsic inflationary risk. Instead, it is government spending itself that carries such a risk, regardless of how such spending is financed — by raising taxes, issuing debt to the private sector, or issuing debt to the central bank.
    Indeed, all spending (private or public) is inflationary if it drives nominal aggregate spending faster than the real capacity of the economy to absorb it. In other words, the government taking money sitting idle under someone’s mattress and spending it in the economy carries exactly the same inflationary risk as the central bank creating that money out of thin air and giving it to the government to spend. What matters, from an inflationary perspective, is the government’s capacity to spend without overheating the economy.
    Though it is impossible to predict the behavior of the price index, economic theory and central bank research has acknowledged that there is no direct relationship between the monetary base and inflation, and therefore between debt monetization and inflation. Banks are not intermediaries of funds that they already have; in fact, they create new deposits whenever they issue a loan, with the central bank accommodating any reserve requirement the banks need to ensure banknotes are always available to the final customer and payments to other banks are possible.
    Therefore, there is no reason to believe that an increase in bank reserves would lead to increased bank lending. In the words of Claudio Borio and Piti Disyatat of the Bank of International Settlements, “[i]f bank reserves do not contribute to additional lending and are close substitutes for short-term government debt, it is hard to see what the origin of the additional inflationary effects could be. The impact on aggregate demand, and hence inflation, would be very similar regardless of how the central bank chooses to fund balance sheet policy.”
    These findings suggest that the impact of government spending on inflation in a country that left the eurozone would depend largely on factors of supply and demand. If the deficit level run by the government outstrips the productive capacity of the economy or is directed towards unproductive sectors, it could generate inflation, as producers would continuously adjust prices upwards to defend profit margins in the face of a growing demand for goods and services.
    However, countries like Italy, Spain, and Portugal still face a high unemployment rate and excess capacity of their industries, thereby making it difficult for demand pressures to affect prices significantly: as a result, core inflation is stuck at around 1 percent for most eurozone members. Ultimately, there is a very low risk of demand-pull inflation as long as the total growth spending in the economy does not exceed the productive capacity of the economy.
    In the context of the legitimate goals of a currency-issuing government, fiscal deficits should be aimed at allowing the economy to sustain full employment, which means that it would be irrational for such a government to push spending beyond that productive limit deliberately.
    Cost-push factors, however, might come into the picture. An increase in employment could trigger an increase in the average wages demanded by workers, thereby leading employers to prop up prices in order to defend the profit share of national income, like in the 1970s. Furthermore, self-fulfilling expectations of a sharp depreciation of national currencies vis-à-vis the euro and/or the dollar might cause an increase in import prices for fundamental inputs such as oil, gas, etc.
    However, it must be noted that in most advanced countries we are seeing a flattening of the inverse relationship between inflation and cyclical unemployment (generally known as Phillips curve): different levels of unemployment are consistent with similar rates of inflation, thereby weakening the impact of labor market conditions on the growth of the price level. This implies that wage pressures on prices are less likely unless unemployment is reduced to very low levels, revealing the presence of high slack in the euro area, which has also been recognized by ECB officials as the main driver of the central bank’s inability to meet its statutory obligation to raise inflation to a level “below, but close to, 2 percent.”
    Depreciation of the new national currency could, however, be a problem, as this would raise the cost of productive inputs and imported consumption and investment goods. Nonetheless, various studies have called into question the widely held belief that exiting the euro would inevitably cause a massive depreciation of the new currency.
    In Italy’s case, for example, most studies foresee a 10 to 30 percent depreciation of the new lira relative to the euro or what would become the new German mark. There is no reason to believe that this would cause severe inflationary pressures in the exiting country. In fact, empirical evidence shows that “the correlation between changes in consumer prices and changes in the nominal exchange rate has been quite low and declining over the past two decades for a broad group of countries.”
    The single currency is a good case in point. Over the 2008–2016 period, the euro has lost around 30 percent of its value against the dollar. This has not been accompanied by runaway inflation in Europe; on the contrary, the continent continues to be mired in “lowflation” if not outright stagnation. Ultimately, however, a bit of inflation would be welcome, as it would reduce the real burden of debt for private and public debtors. Additionally, if wages are indexed to inflation, families would not suffer from a problematic increase in the ratio between interest payments and current income, thereby smoothing the transition to the new currency.
    A serious inquiry into the drivers of inflation also provides a solid background for understanding why the recent devaluation of the Argentinian peso should not be regarded as a warning sign barring an exit from the euro. A recent study by Pablo Bortz and Nicolás Zeolla shows that the recent crisis of the peso is largely the byproduct of a policy aiming to attract international investments while downsizing the public deficit, lifting all exchange rate controls, adopting an inflation-targeting regime, and increasing dollar-denominated borrowing.
    Since 2016, the Argentinian government, provinces, and private companies have issued $88 billion (roughly 13 percent of GDP) and the Argentinian central bank has offered large financial gains to short-term foreign investors by allowing them to engage in carry trade operations. Foreign investors could enter the country with dollars, buy peso-denominated debt instruments issued by the Argentinian central bank, which had to offer high yields to be attractive (up to 38 percent), and finally convert these bonds plus financial gains to dollars. These operations have totalled around $14 billion (2 percent of GDP) since 2016.
    It should not come as a surprise that this process caused a large depreciation of the peso, whereas previously implemented controls forced exporters to sell their foreign currencies in the foreign exchange market; as a consequence, the over-reliance on foreign borrowing made the sudden stop and reversal of capital flows more painful. Moreover, the large devaluation of the peso fueled a sharp increase in inflation (from 24 percent in 2015 to 41 percent in 2016) without managing to boost exports significantly.
    Therefore, we can restate the real lesson to be drawn from Argentina: reducing government deficits while luring the “confidence fairy” of private capital inflows — much like the pre-crisis private debt boom in peripheral countries within the euro area — is a dangerous economic strategy. A “functional finance” approach aiming to maximize employment by mobilizing all available domestic resources would provide a stable and equitable growth strategy, thereby reinforcing the case for monetary sovereignty even more for euro area countries.
    We Won’t Die on the Altar of the Euro
    As we have seen, one of the main advantages of exiting the euro for a country like Italy would be to regain control of its public debt by redenominating the existing euro-denominated debt into the new national currency. This would not be particularly problematic from a legal standpoint. According to the legal principle of lex monetae, the currency of a debt is determined by the law of the country in whose currency the obligation is expressed. Only about 2.5 percent of Italy’s public debt was issued under foreign law and would have to remain in euros. The rest of the debt was issued under domestic law and could thus be redenominated into the new currency.
    Nonetheless, a secret and sudden redenomination of all euro-denominated bonds into the new national currency would likely trigger a massive sell-off of government debt, generating a large depreciation of the new currency and inflationary pressures within Italy. For this reason, several economists have suggested ways of mitigating the adverse impact of redenomination.
    For instance, Giovanni Siciliano, head of research at the Italian securities market regulator CONSOB, writes in his recent book Vivere e morire di euro (Living and Dying by the Euro) that a clear and well designed negotiation with bond investors can ensure that no foreign bondholder loses in real terms, even faced with the depreciation of the new currency. Siciliano suggests the anticipated introduction of a changeover period in which both the euro and the new national currency are allowed to circulate; as a consequence, a market exchange rate can emerge and businesses can start quoting prices and paying wages in the new currency.
    According to Siciliano, the redenomination of existing euro-denominated government debt could be made less painful by negotiating with investors a gradual increase in bond yields to offset the losses expected due to the depreciation of the new currency. Siciliano argues that the redenomination would not be impaired by the Collective Action Clauses (CACs) included in post-2013 issues of Italian government bonds as a condition to be included in the European Stability Mechanism’s platform, as Italy’s exit from euro would automatically exclude the country from the ESM.
    As a matter of fact, Siciliano proves that markets correctly anticipated the irrelevance of CACs for redenomination risks, as yields and credit ratings on all the durations of Italian government bonds issued after 2013 did not significantly differ from pre-2013 issues. The impact of redenomination on private debt is yet another issue. In the case of Italy, the country’s private sector has a net surplus vis-à-vis the rest of the world (due to the big sums of money that Italians invest abroad), so for the private sector as a whole redenomination would likely not be a massive problem (though of course it could and would be for individual firms).
    The notion that leaving the euro would inevitably entail catastrophic consequences is simple scaremongering.
    Another hotly debated issue is whether bank deposits should be redenominated. This would of course entail a loss for depositors, due to the depreciation of the currency. The economist and former financial professional Warren Mosler has proposed another route. His plan entails keeping all euro-denominated debts in euros, with the government announcing it would start to spend and tax exclusively in the new currency, which would be free-floating, with exchange between willing buyers and sellers at market prices. Mosler’s plan would also keep bank deposits and loans denominated in euros, with a powerful incentive to convert deposits into the new currency: the newly converted deposits would be fully guaranteed by the government, whereas euro-denominated deposits would not. According to Mosler, the no-redenomination strategy would counteract the tendency towards depreciation engendered by a massive conversion from national currency to euros that would be likely after the transition.
    In fact, the government would be the sole issuer of the new national currency, but it would also be imposing taxes denominated in the new national currency: the need to pay taxes would support a notional demand for national currency which would keep the value of the new lira stable vis-à-vis the euro. In this scenario, the exiting country’s citizens would have to sell euros and buy lira from the new government without any legally binding conversion: banks would act as intermediaries and the government would swap euro-denominated deposits at its national banks with deposits denominated in the new currency.
    The “excess demand” for the new national currency would prevent a massive depreciation vis-à-vis the euro as the national central bank would buy euros and sell lira at an administered price, maybe at a small premium (sellers would also include customers and banks willing to convert mortgages and loans from euros to lira). According to Mosler, banks should also be regulated in such a way as to avoid proprietary trading and be solely limited to lending; these measures would be impossible to undertake within the European Union’s current banking union framework.
    The Devil is in the Details
    There are a variety of solutions for managing and minimizing the impact of a transition from the euro to a new national currency. The transition is likely to present serious economic and technical challenges and involve significant costs, especially in the short term, but the notion that leaving the euro would inevitably entail catastrophic consequences is simple scaremongering.
    The overall consequences depend on the economic framework that underpins the exit. If the exiting government refuses to free itself of the various self-imposed external constraints characteristic of neoliberal regimes and continues on the path of austerity, privatization, and wage restraint, then the exit is likely to be even more costly than continued euro membership. But combined with a decision to reject the current flawed neoliberal approach in favor of a fiscally active policy stance that seeks to maximize citizens’ well-being, the benefits of exit would very likely outweigh the costs.
    If the government chooses to use its regained currency and fiscal sovereignty to bring idle resources (including the unemployed) back into productive use — while at the same time re-establishing a degree of control over capital, trade, and labor flows as well as over the national financial sector and other key sectors of the economy — full employment and economic growth could be achieved relatively swiftly, without necessarily running into disastrous balance-of-payments or inflationary problems. As always, the devil is in the details.

  • joseba

    Randall Wray-k Mosler-en Big Fat Greek MMT Exit Strategy delakoari buruz

    2011ko lanaz ari gara…

    Warren Mosler’s Big Fat Greek MMT Exit Strategy
    (https://pro.creditwritedowns.com/2011/11/big-fat-greek-exit-strategy.html)

    It is beginning to look like a Greek exit is ever more likely, which means that the end of the EMU could be near.
    Even if exits and a break-up are not inevitable, countries should have a plan on the shelf. It is clear that Germany is going to insist on the maximum austerity it can squeeze from nations facing a run on their debt. Hence, if nothing else, an exit strategy is required for negotiations. The best strategy would be for all the so-called PIIGS to band together with a believable threat to exit together. That could finally break the logjam.
    I’m not optimistic about that. In any event, it is time to examine proposals for dissolution. Warren Mosler has formulated what looks like a nice, clean exit strategy that EMU members can adopt. I am reprinting here with his permission.
    By L. Randall Wray
    This post first appeared at “Great Leap Forward”, my EconoMonitor blog.
    It is beginning to look like a Greek exit is ever more likely, which means that the end of the EMU could be near.

    Even if exits and a break-up are not inevitable, countries should have a plan on the shelf. It is clear that Germany is going to insist on the maximum austerity it can squeeze from nations facing a run on their debt. Hence, if nothing else, an exit strategy is required for negotiations. The best strategy would be for all the so-called PIIGS to band together with a believable threat to exit together. That could finally break the logjam.
    I’m not optimistic about that. In any event, it is time to examine proposals for dissolution. Warren Mosler has formulated what looks like a nice, clean exit strategy that EMU members can adopt. I am reprinting here with his permission.
    Enjoy!

    Warren Mosler:
    1. The Greek government would announce that it will begin taxing exclusively in the new currency.
    2. The Greek government would announce that it will make all payments in the new currency.
    That’s it, deed done! The government can now provision itself and continue to function on a sustainable basis.
    Now some Q and A:
    Q. How will the new currency exchange for euro?
    A. The new currency will be freely floating, with exchange between willing buyers and sellers at market prices.
    Q. What about the existing euro-denominated government debt?
    A. Announce that government will consider it on a ‘when and if’ basis with no specific payment plans.
    Q. What about existing government contracts for goods and services?
    A. They will be redenominated in the new currency.
    Q. What about euro bank deposits and euro bank loans?
    A. They remain in place.
    Q. What about foreign trade?
    A. Market forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency.
    To maintain full employment and internal price stability, I would further recommend the following:
    1. The government would fund a minimum wage job for anyone willing and able to work.
    2. For any given size government, taxes should be adjusted to ensure the labor force that works for that minimum wage be kept to a minimum.
    3. I would recommend the govt. levy only a tax on real estate for the following reasons:
    a. Compliance is maximized and compliance costs and related issues are minimized- if the tax isn’t paid the property can be simply sold at auction.
    b. Everyone contributes as either an owner of the property or as a renter as the owner’s costs are ultimately passed through to renters.
    c. Transactions taxes are eliminated, thereby removing those restrictions on transactions. Freedom to transact is the source of substantial contribution to real wealth.
    4. A zero overnight interest rate policy where government deficit spending remains as non interest bearing balances held by counter parties at the Bank of Greece, and no government securities are permitted.
    5. All bank deposits in the new currency will be fully insured by the government.
    6. Banks will be government regulated and supervised, which will include a 15% capital requirement, government guaranteed liquidity, and a prohibition from any secondary market activity.

    Gogoratu bi lan hauek:

    Eurogunetik irteteko estrategia
    (https://www.unibertsitatea.net/blogak/heterodoxia/2011/12/21/eurogunetik-irteteko-estrategia/)

    W. Mosler: Grexit (2011)
    https://www.unibertsitatea.net/blogak/heterodoxia/2015/07/07/w-mosler-grexit-2011/

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