Chapter 14 The Global Financial Crisis

1. An Interpretation of the Global Financial Crisis

There are several exhaustive accounts of the 2008 global financial crisis and the related economic stagnation. Although agreeing on the sequence of triggering events – from the real estate bubble to the Lehman Brothers default, to the generalized crisis in confidence of banks, firms, and families – the main interpretations of the crisis differ on such questions as its structural or conjunctural nature, the role of endogenous versus exogenous factors, the responsibility of various actors, and the type of domestic and international political strategies that should be implemented in order to manage the crisis and restart growth. Let us just mention the comprehensive Final Report on the Financial Crisis written by the National Investigation Commission of the US Congress (2011) that was established by the Fraud Enforcement and Recovery Act signed by President Obama in May 2009. The Report concludes that the crisis could have been avoided and lists a series of key causal factors: the excess of liquidity favoured by monetary authorities, the shortcomings of regulation and supervision of financial activities by government institutions, the lack of corporate governance, transparency and proper risk management in financial operations, the practice of easy credit and risky investments through such new financial products as derivative securities, the obstruction by rating agencies, and the general lowering of ethical standards. My interpretation of the crisis (in Magara, 2014) is similar to that of the Report. I will not reproduce it here, but instead will point out a few basic features.

Unlike the Asian, Mexican, and Russian crises in the 1990s, this was the first major crisis of contemporary globalization: it had structural roots; it exploded at the core of global capitalism and propagated very fast throughout the world. The interpretation of the crisis must be framed in a broader context and in a longer time perspective than is usually done, since it highlights key aspects of a 30-year phase of world capitalism (structural interdependence, unregulated growth of financial markets, inequalities and disequilibria at world level). The immediate cause was the real estate/sub-prime bubble in the United States (USA), which provoked a chain reaction affecting the widely extended and highly complex system of related financial products (mortgage back securities, collateralized debt obligations, credit default swaps, and other types of hedge fund). But the crisis developed in a context of great expansion of wealth and liquidity, and a growing financial interdependence at world level that had more distant causes: the new economic policies of privatization and deregulation starting in the early 1980s in the USA and United Kingdom and then propagating to other developed economies; the expansive monetary policy of the Federal Reserve and other central banks; excessive financial expansion (the leverage buy-out boom and the explosion in hedge funds mostly active in the derivatives sector).

The continuous expansion of credit, the unchallenged rise of shadow finance, the less and less cautious attitude of investors towards risk, the retreat of regulatory agencies, the maximization of share prices, and the windfall gains of chief executives and financial speculators were all phenomena contributing to a series of financial crises that monetary authorities seemed at first able to manage. But the 2008 crisis could not be managed – as the previous ‘new economy bubble’ was – through traditional monetary policy measures, and required massive injections of public money to save large financial firms from default, both in the USA and in Europe.

The crisis was the traumatic expression of the key contradiction of globalization, between increasing economic, financial, and technological interdependence, on the one hand, and continuing political fragmentation, on the other, with the consequent lack of effective global governance (Martinelli, 2005). In this sense, we can define this crisis as systemic, specifying that this term does not imply the collapse of global capitalism, since systemic crises are actually the way in which capitalism continuously transforms itself. The classics of social sciences, from Adam Smith(1776) to Karl Marx(1867), from Max Weber (1922) to John Maynard Keynes (1936), from Joseph Schumpeter (1942) to to Karl Polanyi(1944), have all argued, although in different ways, that capitalism is inherently contradictory and transforms itself periodically through processes of ‘creative destruction’. Contrary to both the theorists of the market as a spontaneous order, on one side, and the theorists of the inevitable collapse of capitalism, on the other, crises are endemic in capitalist development, but do not destroy it. The crisis has not meant the end of globalized capitalism, but marked the advent of a new phase, after the previous two 30-year phases (first, ‘les trente glorieuses’ from the Second World War to the early 1970s, then global capitalism from the late 1970s to 2008). The crisis does not imply a negative evaluation of the whole process of globalization either. Globalization per se can have both positive and negative consequences, in a varying mix for different countries and different social groups; but, what is needed is a better coordination of states’ economic and social policies and regulation at global level in order to increase benefits and reduce costs for a large part of the world population.

The crisis was the expression of the gap between the unprecedented rate of growth of unregulated global finance and the erosion of national sovereignty that made governments’ controls ineffective (with no new system of international regulation and global governance superseding them). Major disequilibria have arisen between creditor countries with fast-growing, export-led economies, high rates of savings, huge balances of trade surpluses, and reserves in dollars, such as China, as opposed to debtor countries with finance-dominated, mass consumption economies, high levels of public and private indebtedness, and a huge balance of trade deficit, such as the USA. The growth of global wealth dramatically reduced poverty in large countries such as China and India, but fostered new economic and social inequalities within national societies, both developed and developing, between privileged or protected social groups and

marginalized social groups. Moreover, other tensions constantly arise from high fluctuations in energy and raw materials prices, which are stirred by the growth of demand in fast developing economies. The monetary crisis has developed in such a context.

In fact, the crisis was actually a sequence of interrelated crises (similar to the trans- species jumps of a Sars virus) that did not affect the various developed and emerging economies with the same intensity or for the same length of time. The 2008 global financial crisis provoked a strong decline in gross domestic product (GDP) in the following year, aggravating the difficulties of public finances in developed economies of the USA, the European Union, and Japan; then, starting in 2010, a series of sovereign debt crises exploded in Ireland, Portugal, Spain, Italy, and Greece, which put strong pressure on the euro; and finally, in the following years, there were negative implications for sustainable development and democracy, both social (growth of unemployment and underemployment, decline of disposable income, social uneasiness) and political (government instability, erosion of citizens’ confidence in the political class and government effectiveness, growth of national/populist movements).

2. The Financial-Economic Crisis in the EU and the Predominance of the Intergovernmental Regime of Decision-Making

The financial-economic crisis has been longer and harder in the EU, the more so in Southern European countries, as Figure 14.1 shows (Eurostat,2019). Southern EU economies have not yet regained their pre-crisis real GDP level). Their difficulties are responsible for the lower GDP growth rates of the eurozone with respect to the EU as a whole: 1.9 per cent versus 2.36 per cent in 2015, 1.73 per cent versus 1.95 per cent in 2016, 2.5 per cent versus 2.6 per cent in 2017, 1.9 per cent versus 2.1 per cent in 2018, as well as for eurozone inflation rates that are at some remove from the desired 2 per cent for the EU.

The main causes of the euro crisis were not only the huge sovereign debt of countries such as Portugal and Greece, but also the current account and capital flows imbalances within the eurozone, largely due to higher competitiveness in labour cost productivity of the German economy in comparison with other member countries, and to the negative implications of the private banking sector’s disequilibria (Viesti, 2015).

The financial/economic crisis, as any crisis, presented risks and opportunities: it risked the breaking up of the monetary union, and even the whole EU, but it also prompted many EU citizens and leaders to attempt to move forward with the process of political integration. These attempts – based on the argument that crisis governance would be easier in a more integrated union, where fiscal and macro-economic policies complemented the monetary union – have run into serious obstacles. On the whole, the implementation of exit strategies has been less effective and timely than it could have been, because of the EU’s slow and complex intergovernmental negotiations and

decision-making. But the worst has been avoided through a sequence of measures for both managing and preventing the crisis, based on the current Stability and Growth Pact (SGP) and European Central Bank (ECB) monetary policy.

Figure 14.1. Real economic growth since Q3 2006

Source: Eurostat, 2019.

Fiscal austerity was at the core of EU economic governance during the crisis, and still is in 2019, even at the cost of obstructing growth, reducing employment, and making the reduction of the public debt/GDP ratio more difficult (by depressing the denominator) for the most indebted member states. But awareness of these risks is growing, as well as support for a more flexible enforcement (and even a possible revision) of EU financial rules being favoured, resulting from a compromise between member states such as France and Italy that demand more effective employment and

growth policies and member states such as Germany and the Netherlands that uphold a rigorous interpretation of fiscal austerity.

A clear consequence of the crisis and exit strategies has been a consolidation of the predominance of the intergovernmental method, which started with the Maastricht Treaty. The current Lisbon Treaty confirms the combination of the supranational and intergovernmental decision-making regimes decided in Maastricht. With the extension of the integration process to policies of the so-called second and third pillar – foreign and security policy, domestic affairs and justice – that are key aspects of sovereignty and that member states are very reluctant to transfer to the supranational level (as well as other sensitive economic and monetary, welfare and employment policies), the Maastricht Treaty intended to integrate the supranational method adopted for the single market with the intergovernmental method, based on the assumption that integration should proceed through voluntary and consensual coordination among the governments of member states; but actually laid the ground for the predominance of the latter. The sequence of measures aiming at managing the crisis, which we discuss below, implied a reduction in national sovereignty in financial and fiscal policy to the advantage not of community institutions such as the European Parliament (EP) and the Commission, but of intergovernmental institutions such as the Council and Ecofin.

Some scholars consider this predominance the only possible way to take decisions in common in a union that is marked by strongly different views of integration, cleavages between old and new member states, conflicts between supporters of the single market versus supporters of a social Europe, and sovereignists versus federalists, which have become more acute during the crisis. Others argue that the predominance of the intergovernmental method is the outcome of a compromise between the two main member states, with France accepting the German economic paradigm of fiscal austerity (inscribed in the Fiscal Compact and related measures) and Germany accepting the French political paradigm (that favours the placing of most EU decisional power in the Council and Ecofin (Fabbrini, 2015). Actually, the key reason was the shift from the European Economic Community to the European Union; somewhat paradoxically, advocates of a greater union such as Jacques Delors could achieve this goal only by granting more power to nation states in the Council.

In Maastricht, a compromise was reached that allowed the creation of the Economic and Monetary Union (EMU) through the euro and ECB, guaranteeing opting out for those member states who did not agree, a structure of variable geometry, in which supranational institutions formed by representatives of all EU member states cannot play a relevant role in decisions affecting only the eurozone. The Maastricht Treaty combined the centralization of monetary policy (which was to be exclusively controlled by the ECB) with the decentralization of economic, fiscal, and budgetary policies connected to common currencies (which remained under the control of each national government). However, this combination had to take place within legally predefined parameters (the Protocol of the excessive deficit procedure), controlled by

intergovernmental institutions (European Council and Council of Ministers), whereas the role of the Commission, the Parliament, and the European Court of Justice (ECJ) was downplayed. The coordination and control of domestic budgets was later institutionalized by the Stability and Growth Pact, which entered into force between July 1998 and January 1999 and was reformed in 2005. SGP rules were finalized by the Lisbon Treaty: the Treaty on the Functioning of the European Union (TFEU), art. 126.1 and 2, protocol 12, establishes that member states “shall avoid excessive government deficits and sets out the excessive deficit procedure to that effect”, abiding by the Maastricht parameters, which are a yearly budget deficit not higher than 3 per cent of GDP ratio and a debt–GDP ratio not higher than 60 per cent; TFEU, art. 119 states that their economic policies should be strictly coordinated within the Union; and TFEU, art. 126 states that Ecofin approves (unanimously or with a qualified majority according to the nature of the issue) and adopts the appropriate measures to implement the agreed economic guidelines, after consulting the EP and the ECB. Actually Parliament is marginalized, and the Commission plays only a technical role, monitoring and controlling activity, as even more so are the eurozone member countries, whose finance ministers informally meet with a president elect who holds a two and half year term by a majority vote, with the participation of the ECB, but without the Parliament.

The intergovernmental method prevails also because the most important steps toward a deeper integration, such as the empowerment of the ECB, the establishment of the European Stability Mechanism (ESM), the creation of the Banking Union, have been made by eurozone states, which cannot do without it. But, as we have already remarked, heads of state and government and national ministers in the Council are more inclined to act in terms of the national interest than are Members of the EP or EU Commissioners. The democratic deficit of the European Council does not mean that its members do not have the mandate of their voters, but that the Council’s legitimacy relies on a sum of mandates by separated constituencies. As a consequence, Council decisions are often felt in countries with weaker economies as imposed by the leaders of the stronger ones, in countries with stronger economies as unreasonable concessions, and in both types of countries sometimes even as decisions taken by a foreign government and implemented by technocrats who are not subject to democratic controls and are not motivated to listen to voters’ demands. Hence, there is a need to rebalance the relationships between the intergovernmental and community method of decision-making and between the powers of the Council and those of the Parliament and Commission in order to increase the legitimacy of EU governance. But this rebalancing is difficult since it should be accomplished within a Council, being the very institution that would lose power in the change, whose members are heads of government afraid of sovereignist reactions in their own countries. –

3. The Stages of the EU Exit Strategy

From 2010, the global financial crisis manifested itself in the EU mostly in the form of a sovereign debt crisis for the weakest EU member states, first of all Greece. It cannot be denied that the EU took many measures both to to prevent and manage the sovereign debt crisis, with a long and dense sequence of meetings and many decisions being taken since that year by the European Council and Ecofin. These measures were effective, but often too slow, costly, and with unintended negative consequences.

We can identify two stages of anti-crisis deliberations. The first, from 2010 to mid- 2012, was characterized by new mechanisms of crisis management (the ESM) and increasingly stringent budgetary rules (the Fiscal Compact Treaty); the second, from the second half of 2012 to 2014, was marked by increasing disagreement among member states over growth versus fiscal austerity (with proposals to solve the contrast including the Four Presidents Report) and a focus on reforming the SGP and creating the Banking Union. The requests made by various member states, first of all Italy, to use the flexibility clauses of the SGP for exceptional reasons favoured a more pragmatic and softer interpretation of the Maastricht parameters and practical neglect of some of the constraints of the Fiscal Compact.

As far as goals are concerned, we can distinguish between measures, such as the ESM, aimed at crisis management, and measures, such as the European Semester, aimed at crisis prevention. As far as the governance method is concerned, we can observe that few decisions- the European Semester and Six Pack and Two Pack- were taken according to the community method, with the majority being taken according to the intergovernmental method.

Let us go briefly through the complex sequence of decisions. The first stage of anti- crisis deliberations took place between 2010 and mid-2012. At the Ecofin Council of 9–10 May 2010, it was decided to create the European Financial Stability Mechanism (EFSM) as a new EU legislative act. Then the 17 euro member countries of the Council ‘switched hats’, transforming themselves into representatives of their states in an intergovernmental conference. In this capacity, they decided to establish the European Financial Stability Facility (EFSF) outside the EU legal framework. The EFSF was not a new formal treaty, but an executive agreement that established a private company under Luxembourg law, authorized to negotiate with its 17 shareholders about how the crisis in countries at risk could be managed. The market welcomed the bonds issued by EFSF: in two years, bonds for about €200 million were issued for 25 years at moderate rates; 50 per cent of them were subscribed by the eurozone and 25 per cent by Asian countries, most by central banks and sovereign funds. On 16 December 2010, the European Council voted an amendment to TFEU, art. 136 that states “the Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole”. As a result of this amendment, on 25 March 2011, the ESM was established by a European Council decision as a new treaty among the eurozone member states, endowed with its own

institutions. The ESM was signed by all 27 EU member states on 2 March 2012, but had to wait for the positive decision of the German Constitutional Court and complex negotiations about its legal nature before it came into force on 12 September 2012. The ESM is a public law international organization, located in Luxembourg, which provides financial assistance to member states of the eurozone with a maximum lending capacity of €5 billion. It replaces the two previous temporary funding programmes, the EFSM and the EFSF (which continued to be concerned only with the previously approved bailout loans to Ireland, Portugal, and Greece).

In the Ecofin Council of 7 September 2010, an important crisis preventative instrument was approved: the European Semester had the aim of ex-ante coordination of the economic and budgetary policies of EU member states, in line with both the SGP and the Europe 2010 strategy. Between the two European Councils of 24–25 March 2011 and 23–24 June 2011, several other deliberations were taken. The most important of these was the Six Pack, consisting of a package of measures, adopted through the ordinary legislative procedure, that were aimed at further tightening the policy coordination required by both the European Semester and the SGP. The underwriting states committed themselves to a set of domestic reforms intended to improve their fiscal strength and competitiveness. Stronger economic policy coordination was pursued at the time with non-eurozone member states (Bulgaria, Denmark, Latvia, Lithuania, Poland, and Romania) through the Euro Plus Pact.

At the European Council of 8–9 December 2011, the increasingly worrying economic crisis prompted German Chancellor Angela Merkel and French President Nicolas Sarkozy to propose to amend the Lisbon Treaty in order to integrate member states’ fiscal policies and impose automatic sanctions on member states that did not respect stringent budgetary criteria. Although it would have been possible to use the procedure of enhanced cooperation (according to TFEU, art. 32, a group of member states are allowed to advance toward deeper integration in policy areas that are not in the exclusive competence of the Union or do not concern the common foreign and security policy), it was preferred once again to adopt the form of a new intergovernmental treaty (owing to UK opposition and in order to avoid the active involvement of the Commission and Parliament that enhanced cooperation would require).

The new intergovernmental treaty, the Fiscal Compact, endowed with its own governance structure, had the aim of making the SGP parameters more rigid; it was signed by the 17 eurozone member states and all others (except the UK and the Czech Republic). The Fiscal Compact requires that all undersigning states, under strict Commission supervision and the jurisdiction of the ECJ, commit themselves to keep a balanced budget (i.e. a yearly budget deficit not higher than 3 per cent of GDP, a yearly structural deficit not higher than 0.5–1 per cent of GDP, the percentage varying in reaction to the entity of the debt, and a debt–GDP ratio not higher than 60 per cent, with the obligation to reduce one-twentieth of the excess stock every year); establishes fines up to 1 per cent of the GDP for states not complying with the rules; and requires

that each member state introduces the constitutional rule of a mandatory balanced budget. The ESM and the Fiscal Compact were new intergovernmental treaties established outside the legal framework of the Lisbon Treaty. They significantly reoriented the politics of the EU. Although involving the Commission and the ECJ, the Fiscal Compact symbolized the predominance of the intergovernmental method and formalized the equally important – or even the more important – role of informal Euro Summits in the EU governance system. Just to give one example, to enter into force the Fiscal Compact required the approval only of a majority of 12 out of the at that time 17 eurozone states, fewer than half of the 25 EU member states at the time.

A second stage in intergovernmental cooperation aimed at coping with the economic crisis, still in the double register of deliberations of both the European Council and the Euro Group, developed in the second half of 2012, when it became clear that fiscal consolidation was not a sufficient exit strategy and that had to be integrated by effective growth measures in the whole EU in general – and specifically in a reformed EMU. The 28–29 June 2012 European Council invited its president “to develop in close collaboration with the President of the Commission, the President of the Euro Group and the President of the ECB, a specific and time-bound road map for achieving a genuine Economic Monetary Union”. A Report was presented at the 13–14 December Council (together with a more detailed Blueprint for a Deep and Genuine Economic and Monetary Union, 2012, prepared by the Commission on the basis of the document of the four presidents). The Report (and the Blueprint) draw the guidelines for setting an integrated financial framework (a banking union), an integrated budgetary framework (a budgetary union), an integrated economic policy framework (economic union), and, last but not least, a system of democratic legitimacy and accountability (a political union). The ‘Four Presidents’ Report has been defined ‘the most comprehensive and strategic attempt by the European Council to identify the contours of a de facto euro-political union based on intergovernmental logic” (Fabbrini, 2015: 57). This is only partially true, since the Report also states that “one of the guiding principles is that democratic control and accountability should occur at the level at which decisions are taken”, which “implies the involvement of the European Parliament as regards accountability taken at the European level, while maintaining the pivotal role of national parliaments, as appropriate”. Fabbrini concludes that “intergovernmentalism requires interparliamentarism as its main check”. Actually, there are two checks, since the role of the EP cannot be neglected, and seems even more important than that of national parliaments as the key actor in a supranational democratic accountability. The intergovernmental logic prevails, but it is once again inextricably connected with the supranational logic, and one can even perceive in the Report a timid step toward a supranational democracy.

In 2013 and 2014, the first proposal of the Report, the Banking Union, started to take shape, in order to prevent a connection between national banks and sovereign debt that threatens monetary stability (Barucci, Bassanini, & Messori, 2014). Three mechanisms

were created: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), and a Deposit Guarantee Mechanism. Owing to the opposition of the German government, it was decided that the SSM, which entered into force in November 2013, under ECB monitoring, should concern only the main systemic banks and not the whole of the EU banking system (although it is authorized to intervene in other banks should national supervisory authorities prove unable to exercise their control). Eurozone states participate automatically, while other EU member states can request to participate as well.

It is worthwhile looking in some detail at the creation of the second mechanism, the SRM, since it highlights the conflict between the Council and Parliament over the predominance of either community method or the intergovernmental method of governance. The SRM was enacted in the double form of a regulation and an intergovernmental agreement, on the basis of a Bank Recovery and Resolution Directive approved in April 2014, after an understanding reached between the European Parliament and the Council in December 2013. On the one hand, the regulation – which was approved by the European Parliament in April 2014 and by the European Council in July 2014 – establishes uniform rules and procedures for injecting liquidity and recapitalizing credit institutions and certain types of investment funds under strict Council supervision and sets up a single resolution board, consisting of an executive director, four full-time appointed members, and the representatives of national resolution authorities, with broad powers in cases of banking disputes. On the other hand, the intergovernmental agreement instituted a Single Resolution Fund (SRF), situated outside the EU legal order, as a new intergovernmental treaty.

This decision was strongly criticized by the EP, which argued that member states do not need intergovernmental treaties to transfer funds to the EU budget, since they normally do so through the procedure of the Multinational Financial Framework. In a letter sent in February 2014 to Commission President Manuel Barroso, EP President Martin Schulz wrote: “The Commission should make use of all available means to defend the treaties and to stop the Council from setting a disastrous precedent through the adoption of an intergovernmental agreement to regulate matters that are part of a Commission proposal and on which the European Parliament has voted as co-legislator in committees and plenary”(European Parliament Documents,2014). But the letter had no effect, and at the end of 2014, 26 member states (without the UK and Sweden) signed it. The SRF establishes the transfer and mutualization of funds from national authorities to a distinct organization with its own governing body, the Single Resolution Board, which can decide to borrow in financial markets, with the purpose of making available medium-term funding to banks. In this way, the European banking sector is subject to a dual system of governance: a system of financial supervision that applies to the EU as a whole and a banking union that applies only to eurozone member states (and all those willing to be part of it).

The concern with financial stability and member states’ budgetary compliance with EU norms continued to be strong. In May 2013, two new regulations were approved (Two Pack) through the co-decision procedure, aimed at strengthening crisis prevention and crisis management with measures applicable to eurozone member states only (on the basis of TFEU, art. 136). On the basis of the Two Pack, eurozone member states are subject to a reinforced European Semester, an extended to ten-month cycle: by October, eurozone member states must publish their draft budgetary plans for the following year, by the end of November, the Commission has to make its remarks about rule complying, and by the end of the year, member states must finally adopt their budgets.

After 2014, the first signs of economic recovery in the EU together with the deepening of internal cleavages among member states fostered a discussion over the reform of the SGP and the interpretation of the Fiscal Compact, with requests by governments of the countries most affected by the crisis, such as Italy, to use the flexibility clauses of the SGP for exceptional reasons. This resulted in a more pragmatic and softer interpretation of the Maastricht parameters, a practical neglect of some of the constraints of the Fiscal Compact, and a more active role of the ECB, through the policy of quantitative easing (QE), but proposals such as the November 2015 legislative proposal by the Commission aimed at establishing a common deposits guarantee system had no result.

4. The Crucial Role of the European Central Bank

The ECB has been a crucial actor in the management of the crisis. Although lacking some of the powers of other central banks, the ECB has successfully defended the euro and protected eurozone member states, which are more exposed to the sovereign debt risk from financial speculation. Its effective measures included loans to banks at subsidized rates, a programme of unlimited buying of government bonds on the secondary market, the strategy of QE. At the Global Investment Conference in London,26 July 2012, Mario Draghi officially declared:

”. On 22 January 2015, the ECB joined other central banks in implementing QE through

an asset purchase programme (APP)

The APP – which is part of a package of measures that also includes targeted longer-term refinancing operations – expanded the ECB’s existing programmes of private sector assets purchases (the asset-backed securities purchase programme and the third covered bond purchase programme) to include purchases of sovereign bonds (through the public sector purchase programme). The net purchases of public and private sector securities have put €2.28 trillion into the eurozone economy by the end of 2017, at an average rate of €60 billion a month over an initial period of 18 months. At that date, continuing economic growth in the eurozone and inflation comfortably above 1 per cent prompted

is ready to do whatever it takes to preserve the euro. And believe me, it will be enough

“Within our mandate, the ECB

as part of its non-standard monetary policy

measures, with the aim of supporting economic growth across the euro area and helping

it to return to inflation levels below, but close to, 2 per cent.

some ECB policymakers to suggest winding down the programme and shifting from asset purchases to the use of interest rates to regulate the economy. But the ECB declared its intention to continue the QE programme until inflation rates were close to 2 per cent, and extended QE until the end of September 2018 at a new monthly level of €30 billion a month (starting in January 2018) and to December 2018

Then, at the end of 2018,

an extended period of time).

Owing to the slowdown in the eurozone economy, the Governing Council of the ECB decided, at its monetary policy meeting held on 12 September 2109, to restart net purchases under its APP at a monthly rate of €20 billion as from 1 November 2019, expecting them to run for as long as necessary to reinforce the accommodative impact of the policy rates, and to end shortly before key ECB interest rates were raised again. The ECB also decided to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when key ECB interest rates started to be raised again, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Moreover, the ECB decided to lower the interest rate on the deposit facility by 10 basis points to –0.50 per cent, and to leave unchanged both the interest rate on the main refinancing operations and the rate on the marginal lending facility at their current levels of 0.00 per cent and 0.25 per cent respectively (expecting these rates to remain at their present or lower levels until the inflation outlook converged on a level sufficiently close to 2 per cent), as well as taking other measures aimed at preserving favourable bank lending conditions, ensuring the smooth transmission of monetary policy and further supporting the accommodative stance of monetary policy.

ECB President Mario Draghi explained that these decisions were taken in response to the more protracted weakness of the euro area manufacturing sector, the continued shortfall of inflation, and the persistence of prominent downside risks and muted inflationary pressures. In his view, the euro area continues to be a resilient economy, but prospects for growth risks remain on the downside, owing to the prolonged uncertainties related to geopolitical factors, such as the rising threat of protectionism and vulnerabilities in emerging markets. He also affirmed that both economic and monetary analysis confirmed that an ample degree of monetary accommodation is still necessary, and that the comprehensive package of monetary policy decisions taken by the ECB aims to provide substantial monetary stimulus to ensure that financial conditions remain very favourable and support eurozone expansion, the ongoing build- up of domestic price pressures, and, therefore, the sustained convergence of inflation on the 2 per cent medium-term target. But Draghi also warned that benefits from monetary policy measures are not enough, and must be complemented by other structural policy decisions aimed at raising long-term productivity and growth potential, supporting aggregate demand, reducing structural unemployment vulnerabilities, and increasing resilience.

with bond

buys at €15 billion.

drew to a close (although the ECB decided to reinvest funds from maturing bonds

the €2.6 trillion bond-buying programme

accumulated under QE in the debt market for

5. Fiscal Stringency and a Difficult Return to Economic Growth

EU regulations, the fiscal compact, and the strategy of the ECB have avoided the failure of the euro and have helped the EU economy to enter a new phase of growth, but at the cost of increasing social inequalities and disparities between member states. Monetary policy has been the only available instrument so far to guarantee liquidity to market. ECB Qunatitative Easing has had a dual positive effect: first, the reduction of the euro/dollar ratio that favoured EU exporting firms in the US market and other dollar area countries; and secondly, the contrast of deflationary trends and their depressive impact on consumption and investment.

Monetary policy alone is, however, not enough to achieve sustained economic growth. It is necessary to complement it with a policy of private and public demand, aimed at expanding consumption, first of all in trade surplus countries such as Germany – in order to rebalance macroeconomic disequilibria in the eurozone – and with an investment policy aimed at completing the internal market with infrastructure connecting the transport, energy, and telecommunication sectors and other strategic services (Micossi, 2015). On the contrary, as a consequence of fiscal austerity, public investments in the EU as a whole decreased by 17 per cent, in Italy by 33 per cent, and in other Southern European countries by 50 per cent between 2009 and 2013. Policies that could foster economic recovery such as education research, health, environment, and public housing suffered most from the crisis. Investments reached an historical low, below 20 per cent of EU GDP. Private investments and credit declined as well, resulting in deindustrialization.

Industrial employment also declined, by 10 per cent in the EU and much more significantly in the Mediterranean countries. There are growing cleavages within the EU: unemployment and underemployment (mostly of young people) and risks of poverty and social exclusion are on the rise in the weakest economies, and the human development index has worsened. The policy of fiscal austerity creates a deflation risk that further reduces internal demand, and when internal demand declines even increasing export rates – fostered by low oil prices and declining euro/dollar ratios – are not enough to guarantee a stable recovery. It is true that in 2019 this situation has to some extent reversed, in the sense that domestic demand looks more resilient than export-oriented activities, which are weakened by the negative impact of protectionism and trade tensions. But the outcome is still anaemic growth; therefore, more public and private investments, first of all in the green economy, continue to be needed, mostly in surplus budget countries such as Germany.

The EU has tried to cope with the social consequences of the long crisis, including growing disparities among member states, through ambitious investments plans such as the 2000 Lisbon Strategy (that had the declared aim of transforming the EU economy into the most competitive and dynamic knowledge-based economy in the world within ten years), Europe 2020, a ten-year strategy for growth and employment, Horizon 2020, an investment programme in research and infrastructural networks, the Transeuropean network, the Connecting Europe Facility, the 2015–17 European Commission Investment Plan for Europe (or the ‘Juncker Plan’). All well intended programmes that

however achieved less than expected. Let us discuss in some detail Europe 2020 and the Juncker Plan.

Europe 2020 was agreed upon in 2010, acknowledging the shortcomings of the Lisbon Strategy and with the aims of finally getting out of the crisis, overcoming the weaknesses of the present growth model, and achieving clever, sustainable, and inclusive growth. The five primary goals – employment, research and development, climate and energy, education, social inclusion and poverty reduction – had to be achieved in ten years through exemplary initiatives to be taken jointly by the EU and member countries’ governments in the areas of innovation, digital economy, job creation, programmes for youth, industrial policies, poverty eradication, and efficient use of resources. As usual, goals were better specified than the means to achieve them; references were made to the single market, the EU budget (which was, on the contrary, reduced for the years 2014–20 to €960 billion in financial commitments and €908.4 billion in payments, although allowing greater flexibility), the monitoring of member states’ economic and public financial policies, and EU political relations with third states. In March 2014, the Commission presented its evaluation of the programme to the Council (European Commission, 2014), observing that goals had been almost achieved for education, climate, and energy, but not for employment (in spite of the funds allocated by the EU budget and the European Investment Bank for youth employment and small and medium-sized firms), research and development, and poverty reduction. The Commission’s provision of an average 1.3 per cent EU growth rate in the 2010–20 GDP is well below the average 2.3 per cent rate of the pre-crisis 2001–07 period, which means that the crisis destroyed part of Europe’s productive potential and that huge investments are needed in order to rebuild it.

The Juncker Plan, approved by the Council in December 2014, aimed to deal with the

investment gap left as a result of the financial and economic crisis (European Commission,2014). The Commission’s agreement with the European Investment Bank (EIB), which received a guarantee of €16 billion from the EU, gave birth to a European Fund for Strategic Investments (EFSI), which was projected to mobilize around €315 billion in investments and involve 700,000 small and medium-sized companies that were set to benefit from improved access to finance. In spite of limited resources, EFSI was successful: between 2015 and 2018, 898 operations were approved, being expected to trigger €335 billion in investment across the 28 EU member states, more than the original goal of €315 billion. The European Council and the European Parliament decided to extend its duration and capacity to €500 billion by the end of 2020. The Plan also had the merit of making clear the Commission’s belief that a fiscal shock was necessary to help the ECB support structural investments and enhance competition in the single market. Recalling the ‘golden rule’ of the June 2012 Compact for growth and jobs, it was decided that public deficits resulting from financing the Plan would be exempted from the constraints of the SGP (or at least accounted for differently from those financing consumption). A new type of regulated flexibility was thus introduced, making possible growth policies compatible with budgetary discipline. The Plan should be appreciated also for avoiding geographical earmarking; for not requiring that a member state’s contribution to EFSI is necessarily matched by

the Fund’s investments of equal amounts in that country; and for encouraging public/private cooperation by establishing that the Plan focuses on investments of community public interest in the private sector (especially in favour of small and middle-size firms), and also able to be financed by private capital (Bruni, 2015).

The Plan is, on the other hand, open to criticism, for two primary reasons. First, it did not envisage additional resources: the €16 billion guaranteed by the EU was obtained through a reduction in other appropriations of the EU budget, including those for research. This was because of the chronic lack of resources for the EU budget, which will be solved only when the EU has the autonomous power to raise taxes and creates a European Treasury that issues eurobonds. Secondly, given the political rather than technical nature of questions such as whether to invest and how to distribute investments, the management of the Plan, instead of being given to the EIB (through a fiduciary fund), should have involved high-ranking representatives of member states’ treasuries, in a kind of extended directorate or European fiscal institute – as a step toward the creation of a single EU Treasury (on the model of the European monetary institute that led to the creation of the ECB), which at first could concern only the countries of the eurozone (Maiocchi, 2015).

The negative implications of fiscal austerity are only partially neutralized by the monetary policy of QE and by investments programmes such as the ones we have discussed. Therefore, it is urgent to ensure that budgetary rules are more flexible for those low growth member states that intend to implement difficult and costly structural reforms. It is also time to acknowledge that the criteria so far adopted to assess member states’ compliance with the SGP (the debt/GDP ratio and the deficit/GDP ratio) are inadequate and should be integrated with other significant criteria, such as structural surplus/deficit, private indebtedness, and export growth rates. Adding these other criteria could assure a more accurate measure of the macro-economic fundamentals of various countries, changing the evaluation of the performance of economies like Italy’s and thus making possible a greater flexibility in governments’ fiscal policies and public investments for growth and jobs. Finally, a better coordination of member states’ industrial policies is required, which could further stimulate economic interdependence and the creation of value chains in the European industry, as argued by business interest associations in the eurozone countries.

These proposals and recommendations have been met with scepticism by all those who think they cannot be implemented until the key contradiction that is entrapping the EU is solved. Claus Offe, for instance, affirms that the road towards deeper integration is blocked by the fact that “what should be urgently done is mostly unpopular and practically impossible in a democratic context” (Offe, 2014: 20). What should be done is debt mutualization and productivity increase. But, on the one hand, a large scale and long-term mutualization of the debt, which would have strong redistributive effects between member states and among social classes, is rejected by most citizens of core Northern European countries who have been less affected by the economic and social crisis; whereas, on the other hand, peripheral Southern European countries should pursue policies aiming at enhancing productivity and achieving compatible unit labour costs in order to make their economies more competitive and

put less pressure on their public accounts, but their electorates are hostile to such policies. There is a divorce between politics and policy in the sense that policies necessary to achieve sustainable growth are neither supported by most voters of member states, nor put at the centre of EU strategy.

National/populist parties and movements in Northern EU countries – and pro-EU government parties that fear their competition in the polls – refuse to guarantee the debt of indebted countries with the money of their taxpayers. Their national/populist counterparts in the South oppose fiscal austerity and financial stability policies when they are in opposition and implement them inadequately when are in government, while pro-EU government parties are torn between compliance with EU rules and the risk of losing votes. In this situation, representative democracy is under severe stress: as we argue in Chapter 2, populist politics provides a simplified, distorted portrayal of the crisis and identifies easy scapegoats in the EU and the euro; while crucial decisions of monetary and fiscal policies are taken by supranational technical bodies (the Commission, the ECB), without adequate control and supervision by the EP, thus fuelling further the national populist protest.

The whole process of European integration is at risk. The integration crisis is the last stage in a sequence that began with the real estate subprime crisis and big US investment banks and quickly contaminated the global economy. The crisis of European integration consists of a renationalization of the culture of solidarity of the strongest EU states that impose fiscal austerity on the weakest ones in order to regain the trust of international finance; but the austerity cure risks to kill the patient, since it hinders domestic demand, restricts the tax basis, and makes the debt situation worse, thus forcing the indebted countries to depend even more on their creditors (the EU, ECB, and IMF troika). The rest of Europe cannot succeed in restoring growth without Germany, and Germany remains wedded to the austerity cure. Pro-European parties, still a robust majority in the new Parliament elected in May 2019, should therefore take a new course: an effective strategy for stimulating growth and jobs that could compensate for the negative effects of fiscal austerity (however important that might be) and a democratization of decision-making processes in EU governance.

The president of the 2019–24 Commission Ursula von der Leyen announced in her first speeches in the European Parliament a programme of policy measures aimed at revitalizing the European economy, speeding up digitalization, implementing a green deal for Europe, bringing to life the Pillar of Social Rights to life, and providing common solutions for immigration. She also pledged to strengthen European democracy by granting greater powers to Parliament and citizens vis-à-vis the governments of member countries. As we argue in more details in Chapter 11, it is an ambitious programme that can rely on the support of a three/four-party coalition (EPP, S&D, renew Europe, Greens), but that, given the strong intergovernmental character of EU governance, needs to be effective to be pursued by the European Council as well. In the Council an effective strategy to relaunch the European project will find the support of leaders such as Emmanuel Macron and most member states (first of all the largest ones, France, Italy, and Spain), but also the resistance of eurosceptic governments and the reluctance of the German government, although the recent

stagnation of the German economy fosters a changing attitude towards its huge public budget surplus (as with the already announced €60 billion plan to fight climate change). However, for the moment, the main policy decisions to help growth and employment remain those of the ECB (such as the restarting of the QE programme, announced by Draghi in September 2019 and likely to be continued by new president Christine Lagarde). But monetary policy is a necessary, not a sufficient, condition for revitalizing the European economy. The cleavage between financial austerity-minded governments and public investment-minded governments is here to stay, but a new compromise is possible based on huge public and private investments in the green economy, physical and social infrastructures, and science and technology, and on a trade-off between the flexible application of fiscal rules and the implementation of structural reforms.