Brainstorm on Politics and Economics of the EU

Today Giovanni Sartori, the most renowned italian political scientist alive, published some interesting reflections about the original sins of the European project. The article “Governicchi and governacci. Economia e politica, le ragioni della crisi” (literally: Pitiful governments and bad governments. Economics and politics, the reasons for the crisis ) appeared on the Corriere della Sera, it is in Italian and I translated it into English.

Sartori opens with a comment of the president of the Italian Employers Association (Confindustria) about the political impasse in Italy.

While the situation leading to the new government is increasingly tangled, the president of Confindustria, Squinzi, declares that “we are at the end, there is no time or oxygen left.” I agree. To support this remark, I would like to begin by recalling some background of the problems that are besetting us.

Here Sartori discusses the mismatch between the political and the economic integration, pointing out that the “monetary union” project is colliding with the more robust “political” project. The latter is more modest and less demanding than the first and the monetary union is not necessarily a precondition to have a working political European Union.

EUROPE AND COMMITMENTS – Perhaps many people do not know that the European Union (EU) does not require the adoption of a common currency (the euro). Only 17 EU countries have adopted the euro, whereas the other 10 countries are not part of the Euro. Apart from England, which keeps the pound and that is the most important case,Denmark, Sweden, Poland, Hungary, Romania and other small states are as well out of the Euro. The European Union was born when “globalization” started to be fashionable (so to speak). With it came the financial globalization, made not only possible but inevitable by new technologies. Economic globalization is a completely different matter and having in mind, for Europe, the United States model.

A common language. Important point! As I tried to explain here.

US MODEL – The problem is that a federal system requires a common language. People in United States speak English, German in Germany, India has inherited the English, Mexico the Spanish and Brazil the Portuguese. In Europe about 22 languages are spoken, which certainly can not foster a federal aggregation. Instead, Europe can become an economic community, which today is the community of the Euro. But unfortunately the implementation of this union was hastly and poorly thought out. All countries in the world control their own money and can defend themselves, economically, with duties, customs, and also devaluing or revaluing their currency. So United States push the dollar “down” to facilitate their exports. Instead, the European Union is economically defenseless. Individual member states can not print money or protect their industries with trade barriers or to prevent the migration of the poorest Europeans to countries where the welfare state pays better. In fact, four countries (Germany, Great Britain, Austria and the Netherlands) want to refuse to provide welfare services to EU immigrants.

OUR SINS – In this story everybody has to be blamed. But mostly, Mediterranean countries have to be blamed, including Italy, who enjoyed good life by borrowing more than it was sustainable. The moment of truth has come, alas, too late for those countries that have managed to accumulate a debt (T-bills) that exceeds the GDP, the Gross Domestic Product. How can they get out of this situation? In Italy now the tax burden is very high, at levels that inhibit growth. And tax evasion remains largely unpunished.

Given this situation, Sartori sees a way out through restoring good expectations on growth. He is not the first one to point it out, everybody understood it, but he seems quite pessimistic about it:

OUR DEAR EURO – We should export more. But there is an obstacle: as I have already mentioned, our currency, the Euro, is overvalued against the dollar. In the past (in 1972) we came up with the “monetary snake”, a system that allowed European currency fluctuations within a range of 2.25 per cent. The experiment was successful, but it was replaced in 1979 by the European Monetary System (EMS), which was in turn recently replaced by the European Central Bank in Frankfurt.

ZERO GROWTH – Would it be worthwhile to raise a new “snake” under the control – of course – of Frankfurt? I do not know. But it is worth considering this option. Because for 14 years the growth in Italy is close to zero. Moreover, our country is particularly at risk for reasons which I will quickly list. First, according to international rankings, Italy is one of the most corrupt countries in the world. Among other things, we are also the inventors of the “respectable society”, commonly known as mafia, and Italy is probably more taxed by pizzo (Mafia’s racket) than by the government. Add on top a highly bureaucratic and ineffective administration. So much so that the suppliers to the State are paid nine to twelve months late. A great scandal. All in all, I do not see how foreign investors are, in these conditions, tempted to invest in Italy.

The European Union is a unique case of a political union that left plenty of autonomy to its own member states in order to cope with economic and social unbalances. Somehow the introduction of the Euro broke the previous comfortable path and is forcing to turn 17 countries into another way more ambitious destination: the full integration. It looks like there is only desert before arriving to the final destination.

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  1. Back to ‘zero’. Why should taxpayers inthree countries continue to subsidize and guarantee any longer practices as describesd hereabove?

  2. I do not think that, at this stage, setting up a new monetary snake would improve the situation. As national politics leans towards ‘un’rulyness’ I am bound to believe that a new snake would worsen the monetary aspect of the Union; besides, the different interest rates charged today to Euro-Countries tells the story. The only way forward at this point would be an ECB common bond issuance and quell interest rates in weak countries.

    The belated payment to medium-small industries by the It. public administration is chronic and indeed, scandalous. The mafia problem can be assimilated to a tumour that has released matastases and can only be tacled at EU level.

  3. @King Billy, I understand that such news may be annoying for taxpayers of these “three countries” but if we are still in (I live in Germany) it is because it is convenient. The “three countries” are highly benefiting from the undervalued currency. German late 90s labour reforms would not have been so successful without the euro.

    @Elio Pennisi, I agree that the “monetary snake” would not be helpful. Italy has now a stronger currency, bad for export, but has lower inflation, good for export. Somehow, Sartori is looking only at one side of the story. However, ECB common bond wont be politically feasible unless we have a very federal european state.

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