Because only with Draghi in Brussels will the Stability Pact be reformed properly
The new Stability Pact? Less unrealistic than the previous one, but far from representing an adequate response to the challenges of the present. But with Draghi at the head of the EU Commission… Gianfranco Polillo's point
In peacetime, when Vladimir Putin had not yet decided on the revanchist adventure, the "Stability Pact" had been, for the European Union, above all a rhetorical superstructure. Complicated numerical rules, codified in laws that are difficult to apply. Which very few had respected. Just think of the one relating to debt: for the share of the debt/GDP ratio in excess of the 60% level, the reduction rate had to be equal to 1/20 per year on the average of the three previous years (backward-version looking). The rule was also considered satisfied if the reduction of the debt differential compared to 60 percent had occurred, based on the European Commission's forecasts, in the three-year period following the last year for which data was available (forward version -looking). A puzzle. Or the even more controversial calculation of the structural deficit corrected for the trend of the cycle.
It will therefore not have been a coincidence that the procedures relating to the so-called "corrective arm", aimed at imposing fiscal interventions on individual States to contain deficit and debt, although initiated, subsequently resulted in very few sanctions. The only notable exception is Greece. But in that case the country had already entered the spiral of terminally ill patients. The public accounts had been "tampered with". The real economy was in tatters, with a current account deficit reaching 14.6 percent of GDP (2008). The debt/GDP ratio had reached a peak of 175.2 percent (2011). The foreign debt, at the beginning of 2011, was 107.5 percent of GDP. If, in 2008, there had not been the bankruptcy of Lehman Brothers, which had radically changed the sentiment of the financial markets, the agony would probably still have continued.
The complex community rules had not, in fact, been able to signal the onset of the crisis in time. Showing a deficit that found its explanation in the circumstance that while codes and codicils were discussed in the institutions, the actual model of economic and financial relations had a different structure. The sky of theory and the concreteness of action.
With the birth of the euro, the economic center of gravity of the Union had become Germany, strongly strengthened after its reunification. Its strong point is manufacturing, capable of establishing itself, thanks to the best production techniques, on an international level. Following this was a series of countries – Holland in particular – on whose partnership much of the foreign trade flow depended. In particular through the port of Rotterdam.
The main German specialization was the production of capital goods, essential to encourage the growing industrialization of areas which, in the past, belonged to the great world of underdevelopment. The so-called "emerging economies" of which China was the leader. Those productions obviously needed energy at affordable prices, which Germany had obtained thanks to its preferential relationship with Putin's Russia, still trying to remain within the European orbit. An extraordinary liaison was thus established. Thanks to the Russian gas from Nord Stream and other pipelines, the German technological power could produce at competitive prices, and then sell especially in the most intensely developed areas. Which, in those years, were represented by the emerging economies.
From 2001 onwards the current account of its balance of payments had begun to grind asset after asset, reaching 5.1 percent of GDP in 2010. In the same interval the Netherlands reached 6.9 percent of GDP. Resources that were not destined to be sterilized, but represented the basis of intense financial activity, especially in favor of other European partners, whose economies could not keep up with the pace of international competition. And as a result they had growing imbalances in their balance of payments. In 2010, if we exclude the countries that will have to resort to the State Rescue Fund (Cyprus, Ireland, Spain, Portugal and Greece), Germany, Holland, Belgium (and to a minimal extent Finland and Malta) were able to finance the remaining 9 countries and, at the time, present a net balance towards the Rest of the world of over 333 billion euros.
This scheme, based on the close integration between elements of the real economy and financial structures, was able to operate until the "subprime" crisis, following the bankruptcy of Lehman Brothers, demonstrated that we had gone beyond the Pillars of Hercules. In unknown territory. The increased awareness of the changed financial risks had led, at the time, to a strong definancing of the most fragile areas: Greece and the other European countries then assisted by the State Rescue Fund, but Putin's Russia itself which, although belatedly , will suffer a sharp contraction in income. Crisis which will be at the origin of that change in foreign policy choices today tragically evident in the expansionist aims of the men in the Kremlin. And so since the time of peace, which was mentioned at the beginning, Europe, but the entire West, has slipped, almost without realizing it, along the path of a war whose future outcomes are not easy to see.
The major limitation of the new rules of the Pact, beyond the technical findings, is that of not taking into account this different reality and the geopolitical changes that have occurred in the meantime. The clashes on the borders of Europe: in the east (Ukraine) and in the south (Israel) are the most evident manifestation of this. To the point of having forced the United States itself (but will it be the same after the next presidential elections?) to hastily reconsider its strategies. And attempt, in extremis, to reposition itself in that long-abandoned Mediterranean where the new regional powers (Iran, Saudi Arabia, Turkey, Israel itself) play their game. All this while Europe, which should have a central role in guaranteeing a strategic balance, is toying with the new numbers of the Stability Pact. The latter agreement is less unrealistic than the previous one, but still far from representing an adequate response to the challenges of the present.
Despite everything, we are, however, hopeful. Mario Draghi's candidacy for the presidency of the European Commission has, in some way, been made official. It is the “whatever it takes” that the Union needs. If this solution were reached, the new Rules of the pact would only be a belated backlash, aimed above all against the European Commission itself, whose original proposals were far more advanced and capable of responding better to the complexity of this new phase. This means, however, that there is a consolidated base from which we can start again. Even more so since the three years left, before the new rules come into full force, may represent an emergency exit that could represent the necessary escape route.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-solo-con-draghi-a-bruxelles-si-riformera-bene-il-patto-di-stabilita/ on Fri, 22 Dec 2023 10:03:34 +0000.