Bill Mitchell-en Either the Eurozone as we know it is dead or Italy goes out – latest research
(http://bilbo.economicoutlook.net/blog/?p=47261)
(i) Sarrera gisa: euroarekiko jarrera eta austeritatea
… today, I summarise some research that has just been released which seeks to assess the sensitivity of the commitment by the Italian population to the euro to tolerating further austerity. The research finds that if the technocrats start forcing Italy into austerity measures via a return to the Excessive Deficit Mechanism (and enforcement of the Stability and Growth Pact fiscal rules) then the majority will prefer to leave the Economic and Monetary Union. The majority are happy to retain the euro but only if there is no austerity and structural reforms imposed on the nation. This is a big swing in public sentiment and will give the neoliberals in Brussels one huge headache. Either their neoliberal monetary union is done, or they will face instability from one of the largest euro economies.
So Brussels is being warned
I read an interesting academic study over the last weekend – Till austerity do us part? A survey experiment on support for the euro in Italy – which was published in the journal, European Union Politics.
The study by Lucio Baccaro, Björn Bremer and Erik Neimanns, who are associated with the Max Planck Institute for the Study of Societies, in Cologne, Germany investigated the sensitivity of Italians to the decision to remain in the Eurozone or not.
Specifically, the research asked:
… how Italian voters would evaluate the trade-off between remaining in the euro and implementing austerity in case of a fiscal crisis. To what extent would they accept the costs of austerity for the promise of a bailout and continued membership in the common currency?
They note that when a Member State can no longer “fund itself” (remembering the 19 states use a foreign currency – the euro) then they can access the European Stability Mechanism (ESM) but only if they accept the requirement to impose “austerity measures and structural reforms as a condition for assistance”, which are deeply unpopular.
They used survey data where they posed “six different hypothetical scenarios to elicit preferences for the trade-off between austerity and euro membership”.
You can read the paper yourself to dive more deeply into their methodology.
Their conclusions:
1. “in the control group, a majority of respondents favours remaining in the euro”. No surprise.
2. But, “informing participants about the conditionality associated with a bailout package changes the majority for remaining in the euro into a majority for ‘Italexit’.”
That result has been brewing for some time.
Remember that Italy had a much lower support tolerance for remaining in the euro than other Member States before the pandemic.
3. “Overall, our results suggest that opposition to further austerity trumps support for the euro in Italy.”
4. While they used a number of other variables to condition the analysis, the “dominant effect of austerity” stood out.
5. While citizens in the Southern European states are “cross-pressured: “on the one hand, they are opposed to austerity; on the other hand, they are attached to the euro” and the latter attachment has been dominant, this study found that the situation is now very different.
A majority of Italians now are no longer prepared to endure the costs of austerity just to remain in the Eurozone.
If remaining requires austerity, then the respondents preferred to exit and take their chances.
So if this research is reliable then it presents the technocrats and neoliberals in Brussels with a major headache.
Essentially, it spells the end of the Eurozone as they have constructed it.
Effectively, the stability of Italy within the EMU, if these survey results are indicative, depends on the continued relaxation of the Stability and Growth Pact rules, which were relaxed under the extreme circumstances allowances within the Treaty annexe.
As soon as the Commission starts reasserting the Excessive Deficits mechanism, which will require massive austerity to bring the nations back within the fiscal outcomes dictated by the fiscal rules, then the instability will intensify.
In other words, the fiscal rules are dead or Italy will be pressured by its citizens to leave.
Further, implicit in all of this is the fact that the ECB continues to fund the Member State deficits through its various government bond buying programs.
If you reflect on that reality then you see how nonsensical the whole arrangement has become.
It set out in the Maastricht process to be the exemplar of mainstream macroeconomic thinking – tight fiscal rules imposed on Member States, no bailouts from the central bank, and all the rest of it.
But in 2021 it has become the exact opposite of that surplus-biased mentality.
It is now ‘allowing’ Member States to run whatever deficits they like, even though none of them have any currency sovereignty, and to make that work, the system is allowing the central bank to fund these deficits and keep funding costs around zero or better.
Think about that for a moment.
An amazing state. And expect the technocrats and mouthpieces to continue denying all this as they try to work out how they can get their neoliberal show back on the road.
While people die in droves because they cannot even organise a vaccination process effectively.
Comments
“has anyone done any serious work on exactly how you leave the euro.”
It depends entirely upon whether you run the computer systems that underlie the TARGET2 system. The Italians do. The Greeks didn’t.
The Eurozone is a three tier system. The local banks clear with the National Central Bank (Banca d’Italia in this case) and the central banks clear with the ECB. The ECB is essentially the central bank’s central bank.
The way you leave the Euro is then straightforward. You stop doing TARGET2 transfers between Banca D’Italie and the ECB system at par and start doing normal currency swaps at the prevailing swap rate. The result is that the Italian Euro starts to float against the other Euros rather than being pegged via TARGET2.
You can only do that if you physically control the computer systems on which the central bank runs. The Italians do have part of the Eurosystem under their control, whereas the Greeks are entirely outsourced which is why the Hellenic Central Bank was held hostage by the Eurosystem when the Greeks elected a government that didn’t want to impose austerity.
@Neil Wilson, that’s very interesting.
Do you have any references where I can learn more? About the system in general and about the Greek outsourced thing also, it sounds weird to me.
Thanks!
Look up “Eurosystem – Single Shared Platform (SSP)”.
“The infrastructure that Banca d’Italia, Banque de France, and Deutsche Bundesbank have developed for TARGET2. The three banks operate the system on behalf of the Euro system.”
Each NCB in the Eurosystem has a tenancy on the SSP, so you have Target2-GR, Target2-Malta, etc.
What that means is that the central banks are users of the SSP and can effectively be held hostage by them.
Oharra: Ikus TARGET2 – Wikipedia
