Posts contrassegnato dai tag ‘Fiscal Compact’

Why Fiscal Compact and ESM won’t save Europe

By Francesco Finucci

The strength in economical policies is founded on the strength of beliefs they are based on. No structure lives when even a feeble impression of will to escape is perceived. But an age of uncertainty as the one following the crisis of 2007/2008 could not be free from a “spirit of plunder”, growing higher and higher with time. The real symptom of disaggregation lies, in the end, in such a phenomenon. No prospect can be imagined if the choice is focused on what to do, and no reflection can be recognized, behind, on what to be.

Some time ago, on the Italian daily newspaper La Repubblica, Barbara Spinelli underlined one of the fundamental elements concerning the European model rose from the recent crisis of sovereign debts. She unveiled a secret that our identity thought desperately tries to cover, the unnamed temptation for a wall1. First shock: the image wandering in European conscience in association with the therm “wall” reminds that so ancient black hole of Berlin during the Cold War. Something’s like a barbaric voice of night hide in places thought as distortions of time come in the civilized world as memory, more than as politics. Something breaking out from the raw mind of an Israeli governor as Sharon, when, in 2002, the decision for a new wall of shame was taken.

We looked with pity, we looked in anger, as a man observing the misery of ants. We cried the disgrace of barbaric thought, inflating Europe with concepts of happy-ending and intellectual rest. Now, how could such a defeatist egg-head bother the rest of the victorious people with such a troubling vision. How could a journalist speak of nonexistent barriers we can’t see. How she dared.

Well, Barbara Spinelli found the question, the same underlined by Richard Sennett, sociologist at London School of Economics: It’s only there, in the capability in doing something with other peoples, with the ones we don’t know, with the ones we don’t like, or at the contrary, sometimes, that we can also consider unpleasant that there can be the way for our future2.

An other shock. What an idea of growth and welfare? Ridiculous! Economics cannot roots on paternalism. We own the right to maintain what we obtained and deserved, in this modern evolutionist conflict. Overlooked the fact that Sennett’s speech is precisely focused on organization in businesses, the real response to such a question, not completely unfounded, can be recognized in the words expressed by -this is not irrelevant- an economist, Barry Eichengreen, professor at the University of California. Eichengreen pointed out how one of the most problematic faces of European crisis (not the only one, as just highlighted by Sennett) could be the one of Trust Deficit3

Eichengreen, during his pitiless analysis, reports three point of deficit in trust.

  • Leaders/Public: The bond liking governments and populations is getting more and more unraveled. The institution of peoples, European Union, is felt, day by day, an empty shell of fear and lack of prospects.

  • Leader(State)/Leader(State): Suspect among representatives is growing higher, moving on the frequencies of finance, of policies beggar-thy-neighbor, of integration as a method of control and control as a method of abandonment.
  • Group/Group: the dominance of suspect as the definition of a system waiting for the order “every man for himself” can be recognized, or even influences a spirit of plunder that’s the real index of the medieval we are playing with.

The elemental function of structuring Europe held by cooperation, as seen, can be considered a common element in those points of view. Nevertheless, the emerging European question regards the same political nature of such an institution. And we’re not speaking about the problem of a lack of a serious political integration, repeated ad nauseam everywhere the word “Europe” is casually whispered.

The system of European Union lies on a tradition linking the western civilization around the phenomenon of political democratization by law. Discovering word as the capability to extend existence, the world survived to WW II gave life to hierarchical schemes elaborated to give response to a founding thought, the one of renaissance, the one of hope: Democracy. Problems, instead, were present, and we saw the consequences. Now is EU under attack, but why? The main reason is the one inter-linking EU and finance. Managing complexity means moving data and resources in enormous quantity. This is the definition of a system that cannot crash. I.e. a net subject to crisis when operators discover how fragile the risk covering strategy is. Where complexity takes over, only trust can hold on reality. The entrance in existence needs a ticket marked with faith.

Trust is the fundament for systems of joint responsibility. Joint responsibility and trust are the two pillards of societies after WW II. Such a building constitues the formula in response to the need for Democracy, a social scheme of entropic free choice, where appartenance is signed with high incidence of casuality and consequently escapes and assaults are determined by details. Fluidity preconized by Zygmunt Bauman some years ago can now be seen more clearly. This is no more fluidity. It’s a game played on the film dividing existence and nonexistence. It’s the complete oxmosys between real and unreal. However, that’s the perception. The one bringing man to law as a churchgoer finding peace in pray. Giving us our daily bread or bringing by its own effort rights, freedom and democracy. One between the two, that’s the same.

But a law, even a constitution, lies on paper. And so, how can it become something real, how can it become really freedom, equity, justice. How can it exist?

Well, we found that palaces, common rules, greetings and declarations could assure existence to principles we needed. As if those mountains of paper could take life, starting to breath and walk. We were the inventors, feeling ourselves similar to these ancestors of Maori tradition, sustaining existence by remembering old songs, by singing. The experiment of supranationality is the highest hazard of our time, because it means that if we fall, we fall together, with or without solidarity. We sang this song of forgetfulness making a deal with disaster, raising the bet.

Unfortunately, the list of errors is so long that only a complete redefinition of targets can save Europe from a slow decline (if we want to consider ourselves lucky).

The first and more significative case of European error is the complete foolery of Schengen Agreement of 1985. Such an agreement clearly shows the dangerous direction taken by European countries (somehow, among other, accepted also by nations out of Schengen Area). The central element justifying the entire system elaborated in Schengen is the one developing the method of exclusive-Europe. It artificially builds a region by closing it under a shield assuring European people from “invasions” by letting culture and identity, contrary to every document signed in forty years, be iced in this long winter we are experiencing. More, everybody knows that different individuals forced to live in the same space, sooner or later, will start to strangle each other. We fear everything’s out, we are starting to hate everything’s in.

The gloomy image of strangers pushing on the barrier went on afflicting European identity, and so European citizens and institutions for decades, stationed within the cracks separating leaders charged with responsibility towards their own countries. Despite a generous production of words we observe an high fragmented system, with high conflict between UE and foreign and latent one among the same European states.4

I would like to underline the aspect of latent conflict, because for a long time we thought, delighted by a celebrated series of philosophers, that the noisy persuasion given by majority would have brought to that not so veiled ethical state we chased with democratization process. Dissents exist, luckily, but conflict exists too, even if a distorted vision of society goes on speaking about armed violence in order to honor this so peaceful clove of world. More. Conflict’s permanence is intertwined with society, sometimes even functional for its survival.

The only way we found was to clean Europe from rubbish. From each drop of evidence that violence remains, even as founding element. We hid it under the rug. We invented sins where administrative offenses were. The case of debt it’s a clear example of this tendency.
The predatory approach to tributary collection in Italy reveals something more than a wrong link between public administration and citizenship. It makes clear a slip from infringement, as temporary condition never damaging the state of individual, to crime, as a precise position, interlinking legal response and ethical consequences in the moral status the individual owns in society.

Because if moral can be judged by exploring successes of the individual, debt is ethical debt, is lack in front of society, even rubbery.
State, at the contrary, divided by corruption, get unraveled in individuals never exactly recognizable as men of State. What have this to do with EU?

Well, the same fragmentation we found in national states, especially the ones characterized by an higher level of corruption, can be recognized in European supranational leadership. The same policy of debt too, evidently.

We arrived to the second big, big error we’re committing.

The notorious fame that Fiscal Compact has get doesn’t need for explanations. The effect on economy of European countries, at the contrary, has to be analyzed.

Fiscal Compact, as known, includes a “budgetary position […] balanced or in surplus” (Art. 3.1). Evidences brought by Eurostat (The European institute for Statistics) point out a medium rate Deficit/GDP in eurozone of 6,2 % (2010). Just take the case of Italy, in table 1. In 2010 Italian quotient between Deficit and GDP was 4.6%. Fiscal Compact

imposes a restrictive limit to fluctuations of Deficit/GDP established as ± 0,5.

Eu countries + UK and Czech Republic Deficit/Pil Eu countries + UK and Czech Republic Deficit/Pil
Austria -4,4 Italy -4,6
Belgium -4,1 Luxemburg -1,1
Cyprus -5,3 Malta -3,6
Estonia 0,2 Netherland -5,1
Finland -2,5 Portugal -9,8
France -7,1 Slovakia -7,7
Germany -4,3 Slovenia -5,8
Greece -10,6 Spain -9,3
Ireland -31,3 Czech Republic -4,8
UK -10,3
Table 1 (Source Eurostat)

That the theory. The provision, photographing reality, was published by the same European Union: Recession (-1,4%) and Deficit/GDP at -2% in 2013, the year chosen to make deficit magically disappear. Obviously the management of spending review is something of terrible difficulty, we already know. But the central question is another one, cried from all around the world to European institutions, the one of time. Time, because the fragile balance between incomes and expenses touches services fundamental to welfare state. It’s the leitmotiv repeated, underlined, reported by famous economists: States expenditure is primary to avoid the fall in poverty of the most weak ranges of population. It means hospitals, schools, pensions and so on. This has not been only claimed from economies where such an instance is rooted in society (for example by the Italian economist Gustavo Piga), but also from nations where the dramatic effect of a pale welfare on society is clear. It’s the case of the appeal to Obama signed by Arrow, Diamond, Maskin, Schultze, Sharpe and Solow, in order to avoid the choice to impose budget balance in constitution. It’s not a mystery the influence of pensions (30,2% in Italy) in state expenditures. Not a news even the idea genially produced to reduce the quotient Debt/GDP to the rate of 60%. The first one emerges as an old demographic issue, especially in Italy. The second belongs to the complex of convergence parameters of Maastricht Treaty. The not marginal problem resides in the fact that reducing expenditure needs time. But, once more, time emerges as the real protagonist of foolery. Foolery always deserves a peculiar attention, if nothing else to assure irony where rage reigns. And rage reigns where governors take foolish decision. As the one of reducing 6% of Deficit/GDP to zero.

We saw how Europe was designed with the principal instance of security. Now security becomes the one of currency by stability of balance. But we forgot the lesson of Eichengreen and Sennett. We forgot how social cohesion may assure real political efficacy more that insignificant institutions clad with good intentions. That trust cannot be built on such procedure:
The Contracting Parties that are subject to an excessive deficit procedure under the

European Union Treaties shall put in place a budgetary and economic partnership

programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of their excessive deficits.

It’s not only the arrogance of prestamped solution that horrifies. Responsibility in international relationships has radically changed from Maastricht Treaty. For the first time we tried to assure a new method of supranational policy making, where decisions are taken from authorities interlinked not by a common electoral mandate, but by a precise choice, a pact between peoples. The hypothesis of letting decay the highest, greatest hazard of Europe to assure the miserable return to ownership lead by the strongest one, something like an ordered anarchy, is a nonsense. More. Once disempowered debtor states, we decided to charge a new institution created ad hoc with

the weight of responsibility. We have opted for ESM (European Stability Mechanism), that will replace EFSF since 2013. This the article number 8, 5th comma:

The liability of each ESM Member shall be limited, in all circumstances, to its portion of the authorized capital stock at its issue price. No ESM Member shall be liable, by reason of its membership, for obligations of the ESM. The obligations of ESM Members to contribute to the authorized capital stock in accordance with this Treaty are not affected if any such ESM Member becomes eligible for, or is receiving, financial assistance from the ESM.

No news, it could seem. The problem lies in the historical moment when this treaty has been hypothesized. Tensions among European representatives are spreading rapidly. Declarations on the menace of the new Germanic enemy are quite common. We must not let these voices get place of cooperation. The same line taken by Angela Merkel and Nicolas Sarkozy, some time ago links in common memory the thought of fall of Euro and the one of fall of Europe in conflict. The German chancellor said:

If the Euro falls so does Europe. No one take for granted other 50 years of peace in Europe.

Unfortunately institutions won’t prevent this, and the idea of charging its with all the responsibility is almost suicidal. The reason why can be found by analyzing the principal schools of thought about the problem. We can recognize:

-The school of institution building

-The school of bouncing

-The school escape&gain

-The school of diaspora

The school if institution building is the one of economists, politicians and citizens who cannot forgo from creating rigid structures in order to avoid insecurity. Quite right, we can admit. It’s the line that permitted Rigid Constitutions. As known, however, the United Kingdom has never had phenomenon of dictatorship, while maintaining flexibility of Constitutional structure. Feeling can, sometimes, more than structure. We must understand how much empty is a law without individuals acting with the conviction of its importance.

What is more, as well underlined by Gustavo Pica during a meeting at Sapienza University, criticizing the line taken by Mario Draghi during the same meeting, institution are not edifices that arise in a moment. We needed ten years to assure the functioning of Euro. Do we have so much time?

The school of bouncing is a very interesting phenomenon in the so called “civilized world”. It’s the voice of fear, the one of exclusion as method of soul-washing. More than a voice has claimed the criminal historical responsibility for whom who will put Greece out of Euro. They came from important journals as Il Sole 24 Ore, from economists as Paul Krugman, from important websites of citizen journalism as Agoravox. Sometimes, when tension starts to be unsustainable the idea of expelling the sacrificial victim emerges as the black memory of past (or latent reality hidden with care). I have no doubt that this fear hides a complex of reasons, not all of them founded on interest. Sometimes it happens that the thought of everything we care can bring to bad decisions. However, be sure that another country let descend the stairs of welfare in Europe B, the one where imposing democracy is not so important, won’t change the right idea that strength is right, full stop. The liberal choice taken by France to impose an exclusive weapons commerce with Libyan not-so-democratic troops is an evidence among the others5. Will we change this reality?

The school of Escape&Gain has been supported by Krugman in an excellent and moving article in the American journal New York Times. He said:

What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.6

In my personal opinion, supported also be the entire reading of this article, the words expressed by Krugman are words of provocation, a provocation that resides inside every man who entered in contact with the study of Economics, the feeling of urgency for an arrest of human suffering.

Such a feeling deserves a peculiar attention, especially because of the important element it pointed out: An economy founded on exportation can take great advantage from getting out of monetary union. It can take profit from devaluation of currency and placing on the market its goods. This solution has been proposed especially for Italy, commonly considered an exportation lead country. This would directly exclude Greece and other nations not so strong in international market. Moreover, there are other economical unknowns. We’re speaking about the real competitiveness of economies with a low rate of expenditure in instruction, formation and research, but also about the possibility that the damage produced by the probable devaluation of currency could be higher than the advantage, especially considering the strategical relationship existent among countries about energetic market.

Other unknowns are to be treated further.

In the end, the school of diaspora. Europe has failed, Europe is finished. Who would say that such a vision is still unfounded? When chaos is so heavy no time remains to find the enemy, the only acceptable order is the one of “every man for himself”. Believe me that you would not like to see such a solution take life. Because of an high number of politic reasons, bound also to the choice of Escape&Gain.

Just imagine how high could be the price of something that looks like a dismemberment of European Monetary Union. An unreliable neighbor is a very bad neighbor. It’s not clear what kind of scenery could open in front of an Europe in diaspora. But if the momentary unbalance given by a country abandoning the common currency would be problematic, the one where every nation comes back to the precedent monetary system would be a good laboratory for chaos theory. How much desire will have European countries to exchange each other? If now we feel ourselves so European that an enormous mass of gall clouds reason, then there would be something like medieval crusades spirit.

“But” you could say “no solution remains. Good job. You have just erased each possible resolution. Oh, that’s so easy, the road that brings from critique to escape”.
Yes. Each primary effort was to erase each possibility of solution. Of economic solution. Why? Because European tradition on application of economic theory and realization of jurisprudence was, to be clear, a fall into nothing. Powder.

It’s the false myth of rational choice, the idea of man as an empty bottle to be fulfilled with contents and thrown into the sea. We must restart from humanity as the only real link between men and nations. We must because the European system we’re building is an unstable and unpredictable one. Another reason for the refusal of institutionalist shortcut: the strict code that animates pillars as ESM, EFSF and Fiscal Compact reduces the space necessary for nations for fluctuation of their reciprocal trust. We didn’t try to find a political solution, a return to cooperation among European leaders. We simply forced them to adapt their opposite tendencies, magically transforming them in Guarantees. Such an interesting method of non-persuasion, I think, won’t work with efficiency. It means putting in a bag an enormous amount of money trying to make this the motivation to remain in good terms. No point in underlining how utopic this thought is.

At the contrary, the idea of closing different states in a suffocating box will even increase their tendency to escape. This because of two different reasons.

The first one is related to the nature of such intervention. The speed at which the situation degenerated imposed the exploration of methods already known, and the collision with the sternness of Germany, France and Netherlands worked in this direction. So, we opted for the choice of plumping debt with new debt, in order to assure a future rebirth. Something similar to the American aid system of Marshall Plan. This kind of answer, in any case, works in two different circumstances: In long term and severe recessionary cycles, even if widespread, at the unavoidable condition: provision of growth. I fear there will not be for a long period. In short term, the established hypothesis of a forthcoming turning point. The same response: the idea of a short term is not conceivable.

Moreover, the idea that imposing a strict control will save us from corruption has the same effectiveness of the one that militarizing an area this will be sure. This introduce the second reason why the suffocating box won’t work. We’ll utilize, with high attention and care, an instrument let by Albert Tucker, in fifties, the Prisoner’s Dilemma. The Prisoner’s Dilemma is an important example of Game Theory. It has the worth of separating the choice of economic agent from its effective best interest. Because where cooperation cannot be started, staying certain conditions, a tendency to loss of benefit is predictable.

Tucker took the case of two prisoners who had no possibility to convey. Each of them has two feasible choices:

Stay silent, with the hope that the other one will do the same. Such a cooperation would cause the highest benefit, because this would mean the permanence in jail, for each one of the prisoners, for one month. Confess, knowing that this means being free, dumping the whole guilt on the other prisoner. He will be free, but the other will stay prisoner for one year, if he doesn’t do the same.

Prisoner B cooperate

Prisoner B defects

Prisoner A cooperate

1 month; 1 month

12 months; Free

Prisoner A defects

Free; 12 months

3 months; 3 months

Table 2

The mechanism of Prisoner’s Dilemma can be recognized also in ESM, with the preliminary consideration that each lack of communication may provoke a tendency to escape. The admonishment given by Eichengreen and Sennett remains alive. Where the capability of a society to stay united fails, everything’s lost. This is the bet we are trying to raise, because the choice to putting all the resources together means also the double role of guarantor and debtor, of cop and robber, of judge and defendant. More, it means also a game where the company “Europe” is surrounded by shareholders, each one of them trying to find out who is the one that will bring such a massive holding to bankrupt. Each of them, in the end, is looking for the right moment to leave. Because the counterpart for integration is disintegration. We live together, we fall together.
This way, the strategy of austerity seems always to have a plan B, a secondary exit, like a party where the last remaining has to pays the bill. A really expensive bill.

Let’s think about the kind of behaviour that this “ESM prisoner” will take.

The common cash has been deposited, everybody knows his spending limit. But men have a strange idea of relax, they’re used to narcotize their capability in reasoning. If someone seems to pass this limit, to spend more than how much he can, what will let this companionship united? Violence or Trust. And the first one may act on present, but compromise future, often creating more damages than those it avoided. More, violence is an autocorroborative method. It goes on recreating itself, changing people, drying up bonds.
Hypothizing that violence won’t occour, however, we find a not better scenary. Because a lack of leadership becomes, here, a push towards
beggar-thy-neighbor thought. The relationship between the state who doesn’t respect the pact and the others worsens, but the one among the others worsens too. Because the choice to leave, letting the charge of debt to ESM, is a deep temptation, especially in case of high probability that one of guarantors will go out:

State B stays

State B leaves

State A stays

A pays the partial loss of funds;
B pays the partial loss of funds
A pays an higher loss of funds;
B leaves;

State A leaves

A leaves;
B pays an higher loss of funds;
A leaves;

B leaves;Table 3

The table number three points out how the centrifugal tendency in ESM is not improper use of immagination. Its an element directly conditioned by the trust among states. Because a progressive lack of trust means a progressive augmentation of instability in ESM. If we compare the damage in remaining in ESM while other states leave with the fundamental characteristic of European institution, the one of joint responsibility (namely the fact that the choice of an agent to stay influences the choice of others) such a propensity can be provisioned by now.

If we want to avoid another season of tensions among European leaders we need no institutional declaration, but the common background of a shared strategy. A Strategy founding the idea that European peoples need each other. More. The convinction that we ARE the same people. Such a cultural step cannot be processed in European Parlament, it needs to take to the streets, sweeping away nationalistic rusts raising throughout Europe.

Economical solutions exist. We need a common regulamentation of financial flows and speculation risk taking. We’ll need UK. We need more transparency of bank deposits. We’ll need Switzerland. We need a common, strong and effective legislation on corruption, especially for public administration (the British legislation introduced in 2011 with Bribery Act could help). We’ll need Italy, Greece, Spain. We need, overall, a plan of reduction of debt. How? Well, the central point is that those debt flows are crossed. It can be clear at a glance to data published by the American journal New York Times.

Britain France Germany Greece Ireland Italy Portugal Spain Japan US
Britain 321$ 12$ 326$ 28$
France 22$
Germany 54$ 111$ 88$
Greece 1$ 54$ 19$ 0.3$ 3$ 10$ 1$ 1$ 3$
Ireland 17£ 49$ 3$ 4$ 19$ 11$
Italy 26$ 366$ 10$ 39$ 3$
Portucal 19$ 18$ 33$ 1$ 62$ 2$
Spain 118$ 58$ 6$ 26$
Japan 8$
US 345$ 322$ 324$ 1$ 163$ 796$
Debtor (on lines) and creditors (on columns) in billions of dollars. Source: NYT

As you can see, Japanese and American role in European debt can be considered, quantitatively marginal, almost in states where the crisis of sovereign debt has been deeper (Greece, Ireland, Italy, Portugal and Spain). The hypothesis of cross-debt reduction doesn’t seem, today, a paranormal phenomenon.

Today, because if China will decide to turn its attention on Europe, after having bought part of the American debt, the situation will get harder. The declaration released by Wen Jiabao, Chinese Premier, on February, has been ambiguous, on purpose, in my personal opinion. Something like an attentive waiting for European moves.

At the contrary, we can’t wait, because signs of sociopolitical breakdown are getting graver, lead by some masters of enemy’s creation now finding possibility to emerge. They are nothing. It’s the population that is changing, rapidly and without control. That’s the reason why we need more than economics. We need politics as capability in taking common choices. For example, I stay sure that an higher level of possibilities to move in Europe, to take contact between peoples, a real aid to movement, not the derisive projects for who could also without help, that an higher effort to affirm that we ARE European is the only acceptable solution. This is the reason why I’m also sure that Fiscal Compact, ESM and EFSF won’t save Europe. We will. We’ll do it if we’ll understand that cooperation among nations operates when becomes part of a wider project, the one of human reach for happiness.

We HAVE to stay human. It’s the only way to do almost everything that will endure. We are experiencing dark moments as we had never seen since 1929.

A sense of despair is perceptible, crawls down the streets, infiltrates in everyday life.

In a moment of desolation, however, stays freedom too. Stays the possibility for changing, restructuring reality with new prospects. Stays, indestructible and inalienable, that essence of human nature, the gigantic presence of consciousness, hidden in a corner, stubborn, with the fervent belief that no darkness can extinguish our unique capability to turn the light on, shining in that peculiar shape of hope we call will.

1“La tentazione del muro” by Barbara Spinelli, Repubblica, 22 February 2012.

2“Richard Sennett: Per uscire dalla crisi impariamo a collaborare”, by Paolo Magliocco, Il Sole 24 Ore, 4 April 2012.

3Europe trust’s decific” by Barry Eichengreen,Il Sole 24 Ore, 15 March 2012.

4The center of European civilization reveals, here, shocking similitude with Nuer population, studied by E. E. Evans-pritchard: his model of fragmentation stays valid, revealing how enemies invigorates social cohesion.

5“Parigi presenta il conto a Tripoli. Pressioni sulla Libia dopo il forte calo delle commissioni militari” by Gianandrea Gaiani, Il Sole 24 Ore, 9 October 2011

6“Europe’s economic suicide” by Paul Krugman, New York Times, 15 April 2012