The legacy of the the Ventotene Manifesto

Tomorrow, the Italian PM Renzi will meet French president Hollande and German Chancellor Merkel in Ventotene to discuss  the path of future European integration. The location is highly symbolic: Ventotene is where Altiero Spinelli, a founder of the federalist movement elaborated (along with Ernesto Rossi and Eugenio Colorni) a manifesto for the United States of Europe (called the Ventotene manifesto) while imprisoned during the second world war.

In his historical speech at the university of Zurich in 1946, Winston Churchill advocated for the United States of Europe. He pronounced words which may seem today those of a convinced European federalist like Altiero Spinelli who wrote a few years before   his manifesto of Ventotene. He said: The structure of the United States of Europe, if well and truly built, will be such as to make the material strength of a single state less important. Small nations will count as much as large ones and gain their honour by their contribution to the common cause. (...) If we are to form the United States of Europe or whatever name or form it may take, we must begin now.

The seed was sown and was actually picked up by three personalities that even for this became part of European history: Schuman, Adenauer, De Gasperi, from France, Germany and Italy, who adhered to the Ventotene Manifesto and founded as a first concrete step the coal and steel Community, which was followed soon after by a common  authority in Rome and the signing in 1957 of the European Treaties. Starting with a European Parliament with relevant institutions that culminated in a real confederation of states: Italy, Germany, France, Benelux (Netherlands, Belgium, Luxembourg). Then Spain, Portugal, Austria and so on. The result is known in both the positive phase as   in the negative, until the acceding States became 28 and among them 19 joined the single currency called the euro, created and put into circulation between 1999 and 2002

Today Europe is very different from what the manifesto called for more than 70 years ago. It is confronted to unprecedented problems : waves of migrants from South Africa  and the South East Europe; secular economic stagnation ; emergence of populist movements and xenophobic parties, populist, against the common currency; Great Britain withdrew from the Union; wide spread Islamic terrorism led by Isis  leverages social peripheries of the whole world and finally on the visible decline of the European sentiment that is spreading across the continent and casts doubt even the current supra-national institutions thereby making distant and doubtful the transition to the Federation which was at the heart of Spinelli's Manifesto.

Tomorrow Italy, France and Germany will meet precisely in Ventotene to curb this situation nothing short of desperate. What will come out of this meeting between the three powers which now represent a kind of triumvirate born to indicate (certainly not to impose) the future of European path without the United Kingdom?

It is expected that the informal talks will serve as a springboard for action when leaders of the 27 meet in Bratislava in September. If it delivers a 'credible response' , the summit could lead to a new 'political pact' (as Gozi, the EU secretary for Eu affairs called it in an interview to the FT on 18 August) to be launched on the 60th anniversary of the Treaty of Rome, which founded the European Community in 1957.  As Philippe Aigrain put it, the call for further EU integration that Italy  supports with more pooling of sovereignty , especially on issues of economic policy, migration and security may be opposed by France and Germany. Italy's narrower objectives for further integration include boosting the Juncker plan, with more funds for infrastructure and support to businesses. It also  envisages more funds for youth unemployment, cultural exchanges as well as for the integration of migrants and deportation of those not eligible for asylum with readmission agreements with countries of origin.

While the federalist project is still regarded as old fashioned, Europe inarguably needs change to respond to its many crises. Either Europe finds the strength and determination to respond to the threats that are endangering its existence or it will vanish. None of the urgent problems can wait: we need  to govern the migration flows and combat terrorism with the unification of intelligence services, legal provisions and the creation of common defense systems.  How long can Europe last with unsustainable inequalities within and between countries.

Guy Verhofstadt's book (Le Mal Européen) precisely addresses these issues and makes concrete proposals in a federalist perspective. More than ever, what was regarded as a utopian project becomes the only realistic solution for the salvation of our continent.

An EU migration compact

Europe is disintegrating rapidly as attempts to seek solutions fail on national egoisms .  Re-nationalization of Europe becomes more evident, with the return to national confines abolished by the Schengen Treaty.

Austria has accomplished the last violation of this pact , which for many is difficult to understand for a country far from the sea and being not a main destination for mass immigration to Europe.  The paradox is that this country is governed by a socialist party which is  adopting the same policy as the far right party. But this happens in other countries such as Hungary, Poland and Slovakia.

Italy has still an European agenda - it supports the creation of an EU Treasury minister and now calls for a  'migration compact' to transfer powers to the European Union to handle the crisis. The proposal foresees a set of actions and  special forces both in origin and transit countries of the migrants with refugee camps  in the southern Mediterranean coasts for migrants .

Such policy deserves wide consensus among EU countries but its effective application would require the creation of  special police forces  to protect the external borders and on the political level a much stronger coordination between the Interior ministries , and eventually the creation of an EU Interior minister. This would mean, in practice coordinating intelligence services and fight against terrorism.

The main issue of contention lies with the necessary funding to support the migration plan. The Italian proposal includes the issuance of eurobonds which is vigorously opposed by Germany which prefers an oil tax paid by citizens to the European coffers.

This plan will not be implemented readily and will require an agreement at the next European Council. But it is a positive step forward toward greater unity to halt the return of nationalism which is currently putting Europe in grave danger.    

Europe's dilemma

Over the last 30 years, globalization has shaped our societies for good or bad. We may be discontent about it and try to limit its adverse effects on wages and social protection. Technology has also shaped globalization; the emergence of new economic powers has conferred a new political structure. Those countries which will not have a continental dimension will become politically irrelevant. Like in a chess game, the pawns can move one step at a time, in one direction, but against them the knights, the towers, the Queen move in all directions .Imagine if Europe transforms into the United States, it would become a tower.

Europe is the richest continent of the world, technologically advanced, more populated than the United States, Russia or Brazil, but lacks political power. The paradox is that it does not seek for more powersmainly due to its internal divisions. Yet it cannot by itself provide economic stability,  resolve migration issues, bring legality and peace in our Mediterranean confines and to turn into a federal governance in order to address the problems increasingly posed by globalization. 

Those who want and fight for the United States of Europe know that there is no other way in the global economy if it wants to bring much needed stability and security to its citizens. Last June, an open   letter signed by more than 200 academics was forwarded to Heads of State and government. It indicated some of the necessary reforms to make Europe work better, in particular the completion of the eurozone governance and called for a " clear roadmap and timetable to complete the banking union and to reach the fiscal, economic and political unions by the end of the European legislature .

Citizens need a vision and a way forward to a Europe based on democracy, solidarity and subsidiarity. Nothing else can win back their trust towards the Union. The alternative is the spread of the social perception of an inevitable and irreversible decline, which fosters the rise of populism, nationalism and xenophobia. Leadership implies responsibility towards the citizens of today and tomorrow"

To be or not to be, that is the question. Hamlet chose not to be and had the end that Shakespeare has told us. We, Europeans are making the wrong choice and if we do not remake our Europe we'll have the same end.  Yet, Europe has the potential to shape its economic and political future as it did in the aftermath of WWII. 

Is Europe disintegrating?

In this end of year, economic optimism can bring some reason for hope. Most economists and international organizations urged Germany to increase its public investment to offset a dramatic contraction of demand in the rest of Europe.  This is finally going to happen: public expenditure is set to increase  - albeit modestly and too late - not just for boosting European growth but due to the massive arrival of refugees.  

Europe is facing two big crises - the eurozone and the migration crisis that are intertwined . As the president of the Commission Juncker reckoned,  without free movement of people, the single currency that the same people can spend in any part of the euro area does not make sense. The Schengen agreement has been put into question by the massive wave of refugees going from one country to another and by the terrorist threat beyond borders. This argument has also been used by populist parties to call for closing borders to the refugees.

These crises did not just occur in sequence. The long crisis of the eurozone has actually deprived governments of the will and capacity to act as well as their capital of trust and credibility which would be needed today to address the borders crisis. AS Germany plays a key role in both crises, Greece is  again seen as a scapegoat.

But, as P. De Grauwe points out,  the euro and migration crises have common features and flaws . In both cases, Europe's response has been partial. In the first case, the single currency was introduced but national budgets remained separated. During recessions, debt and deficit soar in vulnerable countries and capital flows  move toward stronger countries creating more divergence within the eurozone.   In the case of Schengen, borders were abolished but police and intelligence bodies remained separated and today there are no common coastguards  and border controls  The consequence is that with the euro, governments confronted to uncontrolled capital movements  cannot guarantee economic stability. While regarding Schengen, without a real integration of police forces, the same governments cannot guarantee security to their citizens. Furthermore, the concentration of powers on national governments rather than on the European Commission made decision processes more cumbersome and ineffective. 

Europe's founding fathers assumed that building a process of cooperation among States to resolve common challenges would inevitably lead to a closer integration in the absence of any alternative. But this is what happens today : if these common tasks remained unfulfilled , it does not mean that they will be brought to completion in a near future; it might go into  reverse and  even lead to the disintegration of Europe. 

As Ph. Legrain put it, " .EU leaders are weak, divided, and seemingly incapable of setting out a credible vision of the future benefits that European integration could provide, without which they cannot rally popular support and convince recalcitrant governments to bear their fair share of current costs. In the absence of an effective, common response, Europe’s crises fester, feed on each other, and foment unilateralism". Common solutions require at least four criteria: "a correct shared understanding of the problem, agreement on an effective way forward, willingness to pool more sovereignty, and political leaders able to drive change forward."

As these criteria are now missing, Europe has to reinvent itself . It has no fixed identity and is always remaking itself and will move over time. But the question is whether it will continue deepen its integration process on the road to a federation or alike or go backwards to the predominance of sovereign States. 

The endless crisis

The Economist re-examines the Greek crisis since 2009 and highlights the mistakes made by the creditors. I quote : "As rising bond yields threatened to push Greece to default, creditors botched the first bail-out in 2010 (see chart 1) by imposing too much austerity too quickly. For all of their railing against austerity, Greek leaders mostly cut deficits instead of promoting growth. For too long, the ECB resisted any notion of imposing losses on private bondholders even when it was obvious that Greece was bust. When haircuts for bondholders, known as “private sector involvement”, were agreed on in 2011 they were too late to do the trick'.

In 2012, the issue of debt sustainability was not addressed and debt now stands at 177% of GDP. This inaction led to the brink on which Greece is now without much hope of recovery. The referendum will not be decisive on the future of Greece, because there is not much choice between accepting another bailout and probable chaos. 

The Greek crisis is the expression of  Europe's crisis and this is not solved yet . None of the bailed out countries returned to their pre-crisis levels.  But the crisis hit Greece harshly with Greek GDP shrinking by 25% over 4 years, unemployment rising to 27% and youth unemployment to more than 50% . 

Here is a graph published by the Economist which describes the evolution of the crisis :

 
If we look at the evolution of domestic demand, it has started growing in the US and Japan after the collapse resulting from the 2008 crisis, while in the euro area it has strongly declined since 2011.     

 Do we need more evidence that austerity is not a cure for the crisis? Just the ideologues of the euro zone want us to believe it.  

Quid prodest? 

The European common good

There are diverging views about Mario Draghi, the man and his action. Some would regard him as an 'homo economicus" acting rationally as explained in economic text books. Others would see him as a man with a vision, driven by politics  in the sense that he puts the economy at the service of the common good. This may sound a bit idealistic, but this judgement is not completely wrong.  

 Political economy originated in moral philosophy with Adam Smith as a precursor. But in its current approach, after the advent of economics in the 19° century with Marshall, it explains how the political institutions, the political environment and the economic system influence each other. thus becoming intrinsically interrelated. In the classical meaning, economics' main rationale is the pursuit of self interest while ethics is about caring for the others. In its original significance, Politics is about linking economics and ethics and avoiding that one prevails over the other. 

M. Draghi has used all instruments at his disposal to stimulate growth but also as development of EU institutions towards the goal of a federal State. In other words he puts economic means at the service of political goals. 

As planned, the European Central Bank (ECB) will launch on 2 March a massive intervention  to buy public bonds. The effects on the market are already evident  with a further rise of asset prices and a narrowing of spread relative to the Bunds and an almost parity of the exchange rate of the euro relative to the dollar bringing immediate benefits in terms of increased exports. 

There is one important point to mention: the bulk of the operations (80%) will be made by national central banks and the remaining part (20%) directly by the ECB. As a result, part of these bonds will be owned by the European Union because there will be in the balance sheets of the ECB, as an European institution whose capital is held by all member States of the European Union. This means that one fifth of national debt becomes European debt. 

In this regard, there is some resemblance between Draghi'  and Alexander  Hamilton, the Treasury secretary of the United States under George Washington. What he did is bit similar, making the debt of each State of the Union as federal debt.  Draghi's plan is a step in that direction.

The political consequences of this operation is that this 20% of mutualized debt leads inevitably, in particular with the Banking Union, to the partial  transformation national debt into European sovereign debt with the common guarantee of bank deposits, European supervision of banks, and therefore a significant step toward the transfer of fiscal sovereignty and a genuine budget of the monetary and political Union. Some of these measures are already launched and others will be necessary for the constitution of a federal State. This will be a long and difficult process, but is there an alternative to it? 

Europe's turning point

The European Central Bank's grand plan to purchase massively government bonds - around a trillion at the pace of 60 billion a month until September 2016- will certainly help prevent deflation. But Draghi's manoeuvre will not be enough - it needs to be accompanied by reforms and a realistic investment plan to revive the European economies. In the meantime, the euro has reached almost parity with the dollar, boosting exports especially in the southern economies. 

It is a turning point.because it raises the issue of eurobonds and a common fiscal policy. The EU treaty explicitly says that the EU should have a political configuration by means of transfers of sovereignty of the single states.

Germany should take the initiative and if it does not, the other States should force it to do so or go ahead without it. The only problem is that national leaders are reluctant to adopt such decisions. This does not look good for the future: in a global economy, continents are competing, not single States, most of which are irrelevant without an integrated space. But for the time being, the European Central Bank is leading the recovery process in Europe, clashing with Germany's interests. . 

P.S: The querelle  between Greece and Germany has led, temporarily to a satisfactory outcome. Greece has obtained 7 more billion euros of loans but in turn will have to commit to reforms. The issue is which reforms: those of the Troika"s memorandum or Tsipras's electoral promises? 

Hope for Europe

There are tangible signs of change concerning the future of Europe. Let's take here three important facts.   

In his address to the European parliament on November 25,  Pope Francis called for a united Europe. His main argument was human dignity as a central value for the rebuilding of Europe. This is an extract from his speech: 

Promoting the dignity of the person means recognizing that he or she possesses inalienable rights which no one may take away arbitrarily, much less for the sake of economic interests.

At the same time, however, care must be taken not to fall into certain errors which can arise from a misunderstanding of the concept of human rights and from its misuse. Today there is a tendency to claim ever broader individual rights – I am tempted to say individualistic; underlying this is a conception of the human person as detached from all social and anthropological contexts, as if the person were a “monad” (μονάς), increasingly unconcerned with other surrounding “monads”. The equally essential and complementary concept of duty no longer seems to be linked to such a concept of rights. As a result, the rights of the individual are upheld, without regard for the fact that each human being is part of a social context wherein his or her rights and duties are bound up with those of others and with the common good of society itself.

The second message is delivered by Mario Draghi in a speech at the University of Helsinki. He said (perhaps more openly than before) that Europe has to guarantee the sovereign debt of all States. The reference is clearly for Greece in case of victory of Szyriza at the forthcoming elections. The danger of a unilateral decision of withdrawal from the euro area would put at risk the whole monetary union. But Greece could stay if Europe holds  responsibility for the Greek debt for 50 years (as asked by Tsipras), which  is relatively small compared to Italy or Spain. This explains why Draghi has urged for further economic and fiscal integration while continuing his plan of massive purchase of private bonds. 

Last but not least, the president of the European Commission, Jean Claude Juncker has proposed the European Parliament a 3 year investment plan of € 315 billion starting from Autumn 2015. However, this amount is allocated to a specific Fund which includes so far €21 billion. But this initiative is different from previous ones as regards the modalities through which it will be made up. The Fund will be topped up by contributions from member States (including from non-EU States and other international funds) with a larger participation from richer EU States. In fact this is a step toward a genuine EU budget to issue guarantees for sovereign debts (to which Draghi referred to in recent declarations). 

Member States will contribute - up to at least € 200 billion in exchange of the possibility of making investments - outside the parameters of the Stability Pact- which should create new jobs and income in order to stimulate global demand, and generate new tax revenues and therefore save some financial resources for further investment.

As the economic scenario deteriorates in Europe, it would be difficult for member States to reject the Juncker Plan. There is no alternative than an EU wide plan for growth and jobs. 

The combination of these three messages provides some hopes for the future of Europe. In times of crisis and rise of populism, we need to mobilize all  our forces to act for the common good. 

Europe's real problem is unemployment

Post war Europe has been hardly hit by the global crisis. It has affected the heart of its system: the European monetary system. The US financial crisis - which was essentially a banking crisis - has spread its effects all over the world and the European economies were not immune to it. This has resulted in massive wealth and job losses. Now there are worrying signs of deflation and no country is immune from winds of recession. even germany saw a drop of its GDP. 

 However, the eurozone crisis lasts  too because of inherent mistakes in fiscal and monetary policies. For the so-called 'peripheral' countries, the fiscal compact means a perpetual stagnation of their economies. They are all highly indebted, with a ratio debt to GDP close or above 100%, which means that they will have to cut massively their debt ratio putting these countries in an unsustainable situation both economically and socially.

Draghi's speech at Jackson Hole is a promising start. Everyone should read the beginning :

"No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income. For those in work, it raises job insecurity and undermines social cohesion. For governments, it weighs on public finances and harms election prospects. And unemployment is at the heart of the macro dynamics that shape short- and medium-term inflation, meaning it also affects central banks. Indeed, even when there are no risks to price stability, but unemployment is high and social cohesion at threat, pressure on the central bank to respond invariably increases".

Look at the diverging trends in Europe and the US, leaving aside the different characteristics of labour markets in both geographical areas.

As he explained how the crisis rolled on, he stressed the relationship between financial instability and unemployment. Since 2011, the sovereign debt crisis induces diverging trends within the euro area, with the bulk of job losses in countries most affected.  

Hence, austerity policies brought more unemployed but did not restore confidence. The ECB did it with the famous ' whatever it takes speech' : without disbursing a single euro, ten year bonds soared alleviating the stress on bond market and easing access to finance on international markets. 

In conclusion, " the way back to higher employment, in other words, is a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level. (...) The long-term cohesion of the euro area depends on each country in the union achieving a sustainably high level of employment. And given the very high costs if the cohesion of the union is threatened, all countries should have an interest in achieving this".

Now Europe will enter a new phase. The ECB has cut its interest rate at a level close to zero. This will be followed by an asset back securities (ABS) purchase plan on a large scale to revive lending to the real economy. As expected, this will face strong resistance from the German government and the Bundesbank which will appeal to the Court of Karlsruhe.

Beyond the rhetoric on compliance with fiscal rules, there is now growing awareness about the need to bring an end to eurozone orthodoxy. However, expansionary monetary policies are just a palliative to reduce deflation risks. As L.Summers put it, the excess of savings is responsible for a situation of 'secular stagnation' which justifies negative (real) interest rates and an increase of public spending. 

In his speech at the European parliament, the incoming European Commission President, Jean-Claude Juncker, has proposed a €300 billion public-private investment programme to help incentivise private investment in the EU economy. But this will require bold action from member States to support this EU wide initiative.

It is the time for unconventional policies, not  business as usual ones. The debate on flexibility on fiscal rules may result in sterile discussions while the true question is to  launch a  New  Deal based on an ambitious investment plan and less taxes on labour, especially the low income groups to promote economic recovery and job creation in all European economies. .

Austerity and children poverty

Does austerity lead to worsen children poverty ? The findings, among others, are detailed in a 357-page World Social Protection report out Tuesday (3 June) by the Geneva-based UN agency, the International Labour Organization (ILO). The report notes that “The achievements of the European social model, which dramatically reduced poverty and promoted prosperity in the period following the Second World War, have been eroded by short-term adjustment reforms”. It also argues that fiscal consolidation meant to reduce debt has failed to stimulate the kind of economic growth needed to create jobs.

The report says that families in austerity-driven nations like Ireland, Cyprus, Greece, and Portugal have seen their disposable incomes plummet, leading to lower consumption. In Greece, salaries dropped 35 percent since 2008 while unemployment increased by 28 percent. At the same time, social security reforms are being replaced with a system that limits the responsibility of the Greek state.

For comparison, the ILO estimates poverty rates in Finland in 2010 would have been over 30 percent, as opposed to around 7 percent, had the government slashed social protection transfers to those in need. The ILO notes some structural reforms imposed on governments are designed to streamline administration.But the emphasis, it says, has been disproportionally placed on the fiscal objective of balancing public budgets “without due consideration to the objective of adequate benefits to all people”.

Europe’s solution to the crisis for the past five years has instead given rise to persistent unemployment, lower wages and higher taxes. All three have boosted poverty and social exclusion rates, which now affects some 123 million people or 24 percent of the EU population. Before the start of the crisis in 2008, the figure was 116 million. Today, around 800,000 more children now live in poverty compared to five years ago. However, "some estimates foresee an additional 15-25 million people facing the prospect of living in poverty by 2025 if fiscal consolidation continues,”

The Ilo report concludes that maintaining social protection not only reduces poverty but also stimulates growth by boosting the health of the vulnerable, increasing their productivity, and by extension props up domestic demand. 

The other Europe

Today, millions of Europeans will vote to designate their representatives of the European Parliament and indirectly the president of the European Commission. These elections are of paramount importance for the future of Europe. However, during the national campaigns, there was little debate about Europe as if the main issues were of a different nature as the populist parties claim 

In fact, national problems are inseparable from the destiny of Europe. Today, no nation-State could survive alone in a globalizing world without belonging to a wider entity which ensures fair competition, cooperation and solidarity among its members. This was the project put forward by J.Delors and those who supported it in perfect continuity with the original vision of the 'founding fathers'.

The European problem is not only about relaxing austerity and allowing more freedom to finance investments, decide on the level of employment, tackling insufficient purchasing power and the weakness of demand. These are all important questions but they are not the only ones. The objective that we must propose is that of the building of a European federal State, with powers at least in a number of highly sensitive areas, such as a genuine fiscal policy, a common defense, an immigration policy, a common energy policy where a transfer of sovereignty would be desirable.

 The promotion of an European culture, science and technology, social cohesion and the reduction of inequalities in wealth distribution should be pursued not only by each national government but by the European authorities.

Europe is already but not completely the guardian of human rights and citizenship, but this ownership must be preserved and extended. The European Parliament should become the legislative seat of democracy and control of an executive power entrusted to the European Commission. It should appoint the members of the Commission and also the president of the European Union or to entrust it to the direct election by the European citizens. The United States of Europe is the ultimate goal to be achieved, gradually but persistently.

These are the goals of a renewed European project. In this regard, the European parliament should become a fundamental institution along with a reinforced role of the European Commission and the European Central Bank whose powers should be extended.

Responsible citizens should vote to pursue these objectives. Unfortunately, irresponsibility is gaining ground in all European countries. Our only hope is that it will not prevail as an outcome of these elections.

Fiscal Colonialism

Philippe Legrain (former head of analysis at BEPA, the Advisors Council of the European Commission's President)  has published a book explaining why the Eurozone is still in a mess. He developed these ideas in a recent article published in NYT  (April 21) where he denounces the 'eurozone fiscal colonialism". 

"The primary cause of the crisis was the reckless lending of German and French banks (both directly and through local banks) to Spanish and Irish homeowners, Portuguese consumers and the Greek government. But by insisting that Greek, Irish, Portuguese and Spanish taxpayers pay in full for those banks’ mistakes, Chancellor Angela Merkel’s government and its handmaidens in Brussels have systematically privileged the interests of German and French banks over those of euro zone citizens.”

How to get out of the mess?  Legrain proposes a change of policies and institutions for the eurozone.  

"Banks need to be restructured and unbearable debts written down. More investment is needed, along with bold reforms to boost productivity.The “no bailout” rule should also be restored. Elected national governments must have much greater flexibility to tax and spend as they please, constrained by markets’ willingness to lend to them and ultimately by the possibility of default. A mechanism for the orderly restructuring of sovereign debt should be established for that purpose.To avoid future panics, the European Central Bank’s role as a lender of last resort to solvent governments should be enshrined. The mechanism for restructuring failed banks also needs to be properly independent. In the long term, a euro zone treasury accountable to both European and national legislators should be created, with limited tax-raising and borrowing powers, including an accountable  eurozone treasury, an enhanced role of the ECB, restructuring of the banking sector"  

A blueprint for change. Just one question: why not a fiscal Union based on a much bigger EU budget with real fiscal powers and a system of permanent transfers like in any federation. But this would require a political Union? This should be the final aim, isn't it?

P.S: As Robert Frost said,  "The strongest and most effective force in guaranteeing the long-term maintenance of power is not violence in all the forms deployed by the dominant to control the dominated, but consent in all the forms in which the dominated acquiesce in their own domination" 

A New Deal for Europe

Europe is at a crossroads. Its model of economic integration has become unsustainable since the 80s but the situation has worsened with the crisis.  Have we learned the lessons from the crisis?

In the past 25 years, the EU has accomplished significant progress in terms of economic integration with the institution of the internal market in 1993, the creation of the EMU in 1999 and the enlargement to 28 member States. However, despite macroeconomic stability, the economic performance of the EU has been poor with low growth and productivity.

Five years after the bust of the global financial crisis , the outlook is still negative:   low potential growth, high unemployment, loss of income, high levels of public debt, loss of competitiveness and slow reduction of unit labour costs (not helped by a strong euro), tight credit rationing due to bank's de-leveraging. Meanwhile progress toward the banking Union is slow and no steps are taken toward a genuine fiscal Union, despite austerity fatigue and growing risks in the eurozone periphery.

Europe is losing ground with the other parts of the world as shown by the graph below (2007= 100, in current USD ).

Since 2010, European governments have undertaken wrong economic policies which have aggravated the crisis in terms of growth and cohesion. Economic governance still needs to be fixed but this cannot be a means to an end. The only way forward is to combine a sound reform of European governance with a  true strategy for growth and employment based on long term investments.

A  European Citizen's Initiative for a special Plan for sustainable development and employment 

Bauman and the case for a social Europe

Zygmunt Bauman, the Polish sociologist who is Emeritus Professor at the University of  Leeds made his fortune with his original thinking on modern societies. His concept of 'liquid modernity" describes the shift from the rock solid industrial society - whose basic foundation is mass production and the social relations which it created-to the fragile and unstable societies of today.  

In a recent book, he develops the idea of "liquid fear" that is the fear of natural disasters, environmental catastrophes or indiscriminate terrorist attacks, all things that we cannot prevent. For Bauman, the main source of fear is the decline and decomposition of the social organisation which prevailed, sometimes called fordism as the industrial substratum which underpinned the entire edifice. That basis gave security and solidity to the entire society through redistribution of wealth and the ability of the State to cover a wide range of needs.  But the strength of the system was the "propelling and operating force of the society". 

The State and the western society of the Fordist era - which initiated their decline in the 70s and suffered the impact of globalization and deregulation - had a stabilizing role for the individuals and created a context of solidarity for the working class. The Fordist factory was the best example of the 'solid modernity" in which most individuals without capital stood out, the place of a conflict between capital and labour in a hostile but long term relationship. But this allowed those individuals to "think and make plans for the future". Conflict was a sort of investment into the future as well a sacrifice which would bear fruit  while the current condition of  global volatility makes it meaningless. This phase being exhausted, due to the pressure of global forces, and independent of the policies of individual States, has transformed our lives, created an  'open society', -not in the sense of Popper's free society-  but rather in the sense of society 'exposed to the blows of fate". 

The paradox is that the sense of insecurity is widespread in developed societies, which in fact are better off relative to the rest of the world. Insecurity is when individuals are dependent on strong protections," which become fragile and are afraid of losing them" . In recent decades, the whole phenomenology of fear has appeared again in the various segments of society : terrorism, urban crime,  environmental and health risks a and then the influx of the Others and the Diverse, which become the main target of  populist parties  which see in the immigrants the most profitable scapegoat. Even the political capital becomes liquid seeking profits (in terms of votes!) from increasing fear and insecurity. 

Z. Bauman summarized his thinking in this sentence : "Modernity was supposed to be the period in human history when the fears that pervaded social life in the past could be left behind and human beings could at last take control of their lives and tame the uncontrolled forces of the social and natural worlds. And yet, at the dawn of the twenty-first century, we live again in a time of fear. Whether its the fear of natural disasters, the fear of environmental catastrophes or the fear of indiscriminate terrorist attacks, we live today in a state of constant anxiety about the dangers that could strike" 

 As Europeans , we are trapped between the horrors of the past and the risks of a distant future. Fear undermines social cohesiveness and  creates tensions between social groups and individuals. To combat the insidious fear that pervades our continent , the solution is to be found outside the national confines in the reinforcement of supra-national institutions. A social Europe is our only hope.

A great European

In his speech at the European Parliament five days ago, President Napolitano made a passionate plea for Europe as well as for his country, Italy. In times of growing euroscepticism, he said, citing Altiero Spinelli, that " nothing can make us turn back from Europe". Yet he addressed the current problems of Europe and the need to reinvent Europe. 

The crisis of the European Union lies in the "deterioration of the living conditions" which is currently affecting a wide share of the population and the most striking factor is the rise in unemployment and the sharp increase in youth unemployment". It is therefore impossible to rely solely on restoring public finances and that more flexibility is needed. He also said that "austerity policy at any cost no longer will work". “Sustained, qualified growth clearly requires reform, but besides simply referring to clear parameters, we also need a great attention to be paid to the effective conditions of debt sustainability in each country and, connected there too, we need to be flexible enough in terms of the ways and the timing for bringing about further financial re-balance.” This was a clear message for Italy (and thus other 'peripheral' countries) to get a margin of  flexibility in their budgets to allow for investments programmes for boosting their economy (the so-called 'investment clause'). 

President Napolitano dedicated large part of his address to defending Europe, against populism and anti-European movements.. While the President was condemning “the destructive agitation against the euro and the European Union,” the Italian Northern League MEPs stood up wearing their green scarf, whistling and showing “No Euro” signs. According to Napolitano, “there is empty propaganda and little credibility from those who have spoken out” against the history of European integration. 

“How can people talk about the end of the European dream claiming that the end could involve the abandonment of euro to save the Union? The traumatic consequences and the feasibility of doing that are seen with terrifying simplicity by some people, and really, that would be such an improbable change,” added President Napolitano. “This moment of truth must be lived the fullest, with all its implications,” said President Napolitano, referring to the forthcoming European Parliament elections. 

A great European in the line of Adenauer, De Gasperi, Spinelli or Delors.  

Reinventing Europe

What went wrong? This was the basic question that was discussed in a three day conference  in Brussels at the initiative of the French Magazine 'Nouvel Observateur' and the 'Notre Europe' Institute. The conference gathered more than 100 policy makers and experts with one message - let's reinvent Europe'

Europe is not popular nowadays. In most countries, less than one national citizen supports the European project. There is a serious risk that an anti-European coalition could win the next European elections. Only in Germany there is political stability; elsewhere, the turnout of political elections was unpredictable like in Italy with the surprising victory of the M5S or resulted in the defeat of the governmental party.

When governance fails, can Europe re-invent itself ? J. Delors, the most admired European Commission president  expressed his disappointment and distress by the EU's failure to restore leadership by creating a job creating growth model instead of an austerity minded policy. France’s former president Valery Giscard d’Estaing, and author of the constitutional Treaty said that Europe has worked  but it " has no more objectives.”

The rise of populism is today the main European social and political issue. Recently, we have experienced the absence of Europe in the tragedy of Lampedusa where earlier this month hundreds of migrants boarded in Tunisia died after their boat capsized. But instead of agreeing on common policy to arrest growing, uncontrolled immigration of Africans seeking refuge in most EU member States , EU leaders prefer national solutions. The result is an increasing appeal of  Europe’s extreme-right political parties, ever-stronger notably in Italy, France, Greece, Hungary, Belgium and most Nordic countries,  hostile to their governments while using as scapegoats growing income inequality, foreigners, the euro or EU institutions. 

The solution to these complex economic, social and political issues is not less Europe. Some prefer the 'federalist' approach, but may underestimate the fact that Europe is not the United States, since its is fundamentally polycentric, with a huge diversity of traditions, cultures, languages. But at the same time they share values, social norms and a 'State of Law'. J.Habermas is right to put at the heart of a renewed European project the issue of democracy and citizens' participation.

We need a vision and concrete action to mobilize Europeans.  A true political Union... Our only hope is audacity. But discussing ideas about Europe and its future is already a good start.

P.S: Last week has been quite rich in debates in Italy with the excellent initiative of the newspaper 'La Repubblica' in Venice. A journalist and writer, Barbara Spinelli, (Spinelli's daughter) presented an interesting paper on the Europe we need.  An intense debate on European democracy also took place with Massimo Cacciari,  the Italian philosopher and former mayor of Venice and Eugenio Scalfari, writer and founder of the newspaper 'la Repubblica'.   

German model ought to change

After the German elections , the big issue is whether Germany will change its economic model, and more importantly its plans for Europe. Until now, the country had a relatively confortable situation in terms of growth and employment compared to other EU countries. But even so, the economy has not returned to its pre-crisis levels. How can we say that this model has been successful?

Germany has pursued "beggar my neighbour policies" like in the 30s whereby it has imposed austerity policies to the rest of Europe. Export oriented policies have yielded a  large current account surplus (about 6% of its GDP) to the detriment of internal demand. Countries like Spain and Italy  have already narrowed their external deficits, but GDP has dropped, and the best case scenario will be a prolonged stagnation (which some economists reckon as the exit from the 'Great Recession' ). The truth is that the combination of increased productivity (due to wage cuts) and depressing demand has driven those countries to an external balance so that they can  repay their  short term debt to the international creditors.

  

As Martin Wolf (FT 25/09) put it,  "a large country with a huge structural current account surplus does not just export products. It also exports bankruptcy and unemployment, particularly if the counterpart capital consists of short term debt". The main problem is that vulnerable countries must improve their competitiveness, not only in terms of unit labour costs (which means achieving more or the same quantity of output  with less labour)  but also in structural terms, that is the accumulation of human and physical capital which is conducive to long term productivity gains. However, this cannot be achieved with current German policies, which on the contrary tend to increase the divergence between northern economies - anchored to the German economy- and the others which have difficulties to stay in the eurozone with low levels of competitiveness.

The solution is a European wide keynesian stimulus plan which is justified on economic and moral grounds. This has worked quite successfully during the last two great crises. During the great Depression, F. Roosevelt's New Deal, which  injected massive government spending and introduced several reforms between 1933 and 1936 (including for the financial sector) reactived the US economy and restored the level of confidence among US citizens which was then necessary for the economic recovery which came after the II World war. A similar mechanism happened after the failure of Lehman Brothers in September 2008:  a goverment stimulus plan worth 800 bn $, combined with the Federal Reserve's availability of liquidity for banks in trouble brought a certain amount of confidence to the marketplace. A policy of quantitative easing together with a low interest rate environment  further stimulated economic activities in the US. But all this happened when the private sector does not have the capacity or is reluctant to spend and in these two big crises government spending has rescued the world economy from two of its greatest disasters.

Yet government alone was not sufficient to eradicate the crisis, but has Germany learned anything from these two large scale experiments?  Europe has the means due to its economic size (more or less similar to the US)to launch a large scale programme of investments which could exploit the full potential of the internal market. It has the moral obligation to do so due to the intolerable mass of unemployment and distress that the austerity policies have generated with job losses, wage cuts and less services to the most vulnerable. Is this what we want?

 

Europe should aim at unity and solidarity

The economic crisis does not only bring negative changes that have to be addressed with vigour. It is also a moment to look at new opportunities. In ancient Greek, krisis means decision or judgment to bring about (positive) changes. This is the dilemma that Europe has to face not only for its own cohesion but also in the global scene. 

Globalization has produced a multipolar world with new economic powers, the so-called Brics - China, India, Russia, Brazil- which have experienced high rates of economic growth. The rise of these countries has shifted the balance of power with the relative decline of  rich western economies characterized by an ageing population and lower growth potential than the emerging economies. In this scenario, Europe appears as disunited and afflicted by internal divisions - Northern countries, led by Germany are  reluctant to support southern economies in recession with the imposition of austerity policies, thereby aggravating the crisis in those countries and Europe as a whole. 

Yet, we need a more united and cohesive Europe, not only for improving living conditions of the weaker social groups, but also to play a driving role in the global arena.  Africa represents  a great opportunity for Europe both for its vicinity and its enormous potential for economic and social development. One of its main challenges is the scarcity of water which puts entire populations on the edge of survival because they cannot develop their agriculture and are thus forced to live in precarious health conditions. But to produce water, African communities need energy ; for this solar technologies can satisfy the energy needs in the poorest villages of which only a small fraction has access to electricity. The availability of affordable energy can allow a more efficient use of water resources and can thus support the development of agriculture and the production of food. Energy, water and agriculture are therefore, the three pillars on which  Europe could devise a large scale plan, not only of financial aid, but more importantly through targeted interventions for the provision and the installation of new energy technologies as well as technologies for the extraction and supply of water. These are medium to long term investments - between 10 to 20 years, which will generate substantial economic returns through the mechanisms of  endogenous development that they will bring about. 

Over the last 30 years, most African countries were forced to implement  'structural adjustment programs' through measures of liberalization and privatization of the agricultural sector. The paradox is that this sector, which is essential for the survival of entire communities was considered as a market activity like any other economic activity which did not need any regulation or public intervention. This has created an adverse context for developing agricultural and food activities and therefore a substantial damage for the economies of many African countries Now the World Bank has changed its position and recognizes the need for the State intervention in this sector - which is also based on the fact that all large economies provide subsidies to their agricultural sector. In this regard, the intervention of Europe on a larger scale can create the basic conditions to allow  local populations to exploit more efficiently their natural resources. In such strategy, the supply of energy and water play a crucial role. 

Europe has enormous opportunities to promote economic development both internally and in other parts of the world. But this will happen only if it will rid from selfish attitudes that lead to stagnation and impoverishment and put at risk the future of entire generations.  A Europe which promotes the well being of populations (not only of European ones) is also the only route to avert  the rise of  populism and nationalism. As Pope Francis said recently in Lampedusa, Europe should not tolerate the 'globalization of indifference' toward refugees and desperate people which have no other possibility than migrate to survive and escape from poverty often risking their lives. 

We need an independent rating agency

It's urgent to reform the current rating system with an independent agency to ensure more transparency and objectivity in the functioning of financial markets. But some still think that the existing system is a "necessary evil" in the absence of a better one.

The issue is that there is a gigantic conflict of interest. Like any private business, the rating agencies are traded in Wall Street; Moody's has Warren Buffett (the American richest man) as main shareholder and S&P is part of a diversified  conglomerate like McGraw Hill. We assume that they orient their judgments according to their investment needs or their client interests. The worrying thing is that they are accountable to their shareholders , not to the general public.

Their credibility was put in question when they just ignored the subprime bubble or gave a favourable rating to Lehman Brothers just before it was forcedinto bankruptcy in September 2008. In fact, they have a direct responsibility in the financial crisis, by giving wrong signals to the market and downgrading sovereign debts, without being totally objective in their assessments . The US government has denounced S&P for 5 billion $ after it downgraded the US debt in 2011. In Europe, several countries have been downgraded or bailed out with their debt rating being close to junk bonds and a higher probability of default in coming years. When  S&P downgraded the Italian debt to triple "B", the Italian Finance minister contested the logic of the US agency on the grounds that the   'unsolicited' rating helped the agency to increase its own influence and  financial gains.  

All this reinforces the conviction that we need a 'popular' agency, a body where the shareholders are the citizens and where the financial analysts are just civil servants, like the FED or SEC. This idea will, however meet strong political resistance. There are other options which are being explored, such as a system run by supranational bodies such as the OECD, the BIS (Bank of International Settlements) or the IMF (which is a lender of last resort for developing countries and therefore exposed to conflicts).

This issue will be on the agenda of the forthcoming G-20 summit in St Petersburg. Unsurprisingly, the proposal will be put forward by Italy - which leads the club of the 'southern periphery', the most affected area by the financial crisis. The rationale is to free these countries from the 'diktat' of financial markets and avoid in the short term a potential collapse of the eurozone system, with further defaults in Italy and Spain. This calls for more structural measures, such as a strong and rapidly operational Banking Union along with appropriate governance mechanisms. What is now certain is that we cannot leave the delicate task of rating the sovereign debt of the eurozone in the hands of private interests.

The Cypriot Mess

The recent Cypriot crisis shows that the eurozone debt crisis is far from over. We have a situation which is to some extent similar to Iceland. The Cypriot parliament has rejected the bailout plan put forward by the ECB to protest against to the proposed levy on bank deposits.  If this were to happen, big depositors may lose up to 40% of their money which has caused anger from Russia. 

But Cyprus chose to tax small deposits to limit losses of Russian oligarchs. 

The crisis has a clear geopolitical dimension due to the large presence of Russians in Cyprus banks. As the country is heavily reliant on financial services, this could trigger a massive capital outflow, which would worsen the current account balance, already high due to an overevaluation of prices and costs. 

Cyprus'economy is small in economic terms, around 0,2 % of the eurozone GDP. But it has a large  financial sector whose development is driven by  offshore capital due to high rates on savings and opportunities for tax evasion.  Cypriot banks have invested in Greece and in the real estate sector which has caused a financial bubble like in Ireland or Spain. This means more financial losses for the Cypriot banks which are not able to pay off their debts, hence the levy on deposits.  The combination of these two additional elements - financial bubble and loss of competitiveness due to high costs - may leave Cyprus in a Greek type situation with high sovereign debt and may be pushed to leave the euro.   

What lessons can  we draw from this crisis? 

The first one is that the Cypriot mess has caused a crisis of confidence in the eurozone system. In the middle of the financial crisis, the EU established a system of deposit guarantee to €100.000 to prevent bank runs. Now this rule may be breached if Cyprus were to inflict a taxation to savings under that threshold. Under a properly functioning banking union, heavier losses would have been imposed on large deposits but small depositers would have been saved; in addition, banks would have been recapitalised by the eurozone. The ECB remains the ultimate guarantee of the survuival of the euro, and most probably will defend Cyprus as it did for Greece from getting out of the euro. 

Second, the protection of small depositors is an essential element of a modern banking system. Institutions are therefore a critical factor for maintaining financial stability. Especially in the globalization context, where weak countries are more vulnerable to external shocks, the demand for clear rules and norms has increased, in particular to avoid any further increase in inequality while social safety nets are needed.

Third, Cyprus may still have the illusion that it would keep its 'business model' but the crisis makes it clear that it has  rebuild its economy on a more sustainable basis. This means it has  to downsize much of its financial sector with stricter rules on foreign savings and diversify its economy on other sectors such as tourism and culture.

W.Munchau, the FT editor, believes that that there is no"moral or economic reason to protect foreignerswho have decided to park large sums in a Cypriot bank account for whatever reason".  This means, on the contrary, that moral and economic considerations exist for small domestic depositors.