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August 12, 2022

Mario Draghi and the fate of the Euro

On July 26, 2012 European Central Bank (ECB) President Mario Draghi stated that the institution he leads will do “whatever it takes” in order to save the euro. Known for his blunt style and enjoying credibility on international markets, his statement generated overall confidence and many observers saw the European nightmare near end. I call “European nightmare” the series of events that started in 2009-2010, back when the issue of the mountain of sovereign debts of EU member states was raised for the first time, and which continued with the successive bailouts worth hundreds of billions of dollars of several countries.

Countries such as Greece (twice), Ireland, Portugal, other countries such as Cyprus, Spain, Italy and Slovenia being now on the horizon, sophisticated financial intervention mechanisms placed at the disposal of the European Council in cases of force majeure being set up during this period. A “fiscal pact” that stipulates harsh terms for its signatories, EU members be they within or still without the Euro Area, terms that concern financial discipline and the restructuring of the economies of southern European states, crowns this list of events. Because this uninterrupted series of financial-political events revealed that there are at least two Europes – the first being that of Germany and of a few other states around it, states with competitive economies, and the second represented by the more or less southern PIIGS (acronym that stands for Portugal, Italy, Ireland, Greece and Spain) periphery accustomed to consuming more than their economies can afford and asked to implement a harsh austerity programme for the sake of continental cohesion.In order to cut a long story short, we have to point out that the austerity programmes implemented have generated massive social tensions in the aforementioned countries – especially in Greece – and a massive public opinion trend, that is not so much against financial discipline as against the failure to associate austerity with economic growth stimulus programmes so that a balance between social sacrifices – salary and pension cuts, massive taxation – would be maintained, developed at European level. Basically the sudden abandonment of the “welfare state” and the vitality and consistency of the European integration project. The partisans of the thesis that austerity will restore the competitiveness of peripheral economies and will thus hasten continental integration, including political integration, are opposed by those who state that austerity is not politically sustainable and will end up putting an end to this ambitious project, sending Europe back in the past. Namely the past of division based on axes, this time a north-south axis, poor states – rich states, with everything that entails from the point of view of this fault line’s international stability. The dispute has taken ideological connotations, the neo-liberals (partisans of austerity) being opposed by “neo-Keynesians,” the adepts of promoting economic growth by resorting to massive financial injections in the economy. Draghi’s July 26 statement, followed by another according to which the ECB “may undertake outright open market operations of a size adequate to reach its objective,” induced optimism among the ranks of one of the aforementioned camps by giving the signal that Italy’s and Spain’s costs of borrowing will be lowered by buying their bonds. Namely among the camp that tends to couple austerity programmes with an European cohesion policy in the face of sovereign debt problems, by pooling them, namely by an ECB intervention along the aforementioned lines. In this way, the ECB, hence the bank of the whole Euro Area community, shows that it is ready to stand behind the debts of each member state with the full financial force of the others – including that of “Germanic Europe.” The German press criticized Draghi’s statements, either arguing that neither non-elected nor appointed technocrats can give a solution to the crisis, or blaming Draghi of seeking to implement the decades-old solution from Italy, where inflation is not considered the biggest evil. Here is what ‘Financial Times Deutschland’ wrote: “It would be nice if (everyone could agree on the course communicated by Draghi on Thursday- July 26) so as not to limit the psychological effect of the announcement. But there was opposition from Germany, once again from Bundesbank head Jens Weidmann, who apparently was the only one on the Governing Council to vote against Draghi’s plan. Draghi isn’t the only one who is disgruntled. It is indeed inadvisable to sacrifice ECB unanimity. The Bundesbank head is fostering distrust where the opposite is needed….”Thus, just a day or two after Draghi’s statements, rumors that the ECB will not act like Draghi had hinted started to circulate and the Spanish and Italian bonds that had recovered on financial markets once again showed signs of weakness. The comments posted by the readers of international dailies or posted on the blogs of famous economists grew in number once again. It was stated that Draghi is not a “neo-Keynesian” considering his career so far, quite the contrary, or that in order to attain his goal – namely to make the ECB act in the sense of pooling European sovereign debts irrespective of their country of origin – he should first persuade Germany of the need to do so. Here is one of the comments posted on Paul Krugman’s blog on August 3: “The question is why? Why is the ECB unwilling to help the “weaker” European countries out? We all know the answer, because the German Bundesbankers are against Keynesian economics. They think printing money leads to inflation and the reluctance to safe’ money. Safe money means implementing austerity programs which weaken the economies, let the people suffer and increase the debt. In fact half of Europe is suffering from austerity without even seeing an end in this mess. Thus the question should be, why don’t the Bundesbankers and the German government see their impact on Europe? What must happen that Germany changes its policy? Sadly I have no answer to this question and I am afraid of the future in Europe!”We cannot share the pessimism of the anonymous commentator. The arguments against it are numerous and we will just mention one. On one of the special blogs set up to comment the European Union developments (Coulisses de Bruxelles) one can read about the existence of a plan devised by Michel Barnier, EU Commissioner for Internal Market and Services. This plan – we were told on August 4 – is based on the supposition that the ECB cannot calm the markets by itself and a currency cannot survive in the absence of a state, so that there is the need to accelerate the European Union’s financial and political integration. According to the plan, a “banking union” will be created at first, the Euro Area set to have a “single banking supervisory body” starting on January 2013, namely the ECB. Then, several months later, an instrument – a European bank deposit guarantee – will be created with funds earmarked for solving banking crises. According to this plan, the EU should transform into a federation by 2016, with all that entails from a political point of view.It’s the alternative that European politicians cannot avoid if they want Europe to transform into a global actor in the 21st Century, a “century of giants.”

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