The pandemic crisis scenario exacerbated the criticism towards the EU Monetary Union and the lack of coordination between the Member States in managing the emergency. At the national level, many political parties reclaiming the national sovereignty (e.g. Italexit, Fronte Sovranista Italiano and some other Center-Right parties) consolidated and improved their electoral base, supported by several interesting thesis and solutions to the EU structural problems observed in the last 20 years. The term “populist” used in the past to describe these ideas as “negative and revolutionary”, looks nowadays like a modern point of view, supported by eminent economists and a huge percentage of the population.

Due to the pandemic crisis, the main critics of the EU system are largely discussed in these last months. The impossibility to adopt at the national level a proper monetary and fiscal policy, the limitation imposed by Maastricht parameters, the EU debt crisis, the negative leverages activated (decrease of labour cost and higher tax pressure), the increase of unemployment rates, the depression of demand, the problems created by the free movement of capitals and goods and the wrong relationship between trade balances and capital flows in Europe are just a few examples of these critics. The discussion on the possibility for an EU State Member to abandon the EU Monetary Union sometimes meets the scepticism of media and politicians working in the EU institutions.

One of the main topics of discussion is the potential decrease in purchasing power for citizens of these EU countries in case of an exit. Many economists assert that the purchasing power will initially remain unchanged and will subsequently increase following the improvement of all the economic indicators deteriorated in the last 20 years. It was observed that many EU Members already lost their purchasing power in the last years (in term of national savings and salaries), thanks to the EU system imposing an overvalued currency. In this situation, many companies used the reduction of labour costs as the only leverage to increase their competitivity in Europe.

In case of exit, some people are also convinced that the new local currencies would suffer a heavy devaluation. Eminent economists say that this will depends on the new currency demand; as an example, Italy is one of the main exporters and the top manufacturing countries in Europe, despite the use of an overvalued currency such as Euro. In a potential “exit scenario” many foreign businesses will keep on ordering Italian goods and this will sustain the demand of Italian currency and its value (internal demand could also receive a boost in this scenario). In addition, in the case of monetary sovereignty, the mechanism of flexible exchange rates will benefit the increase of export.

Another discussion is on the risk of hyperinflation in the future scenario where local governments can finally decide in autonomy about their monetary and fiscal policy. Usually, Inflation depends on governments’ economic policies, on the economic conditions and on external factors (such as the price of fossil fuels). Nowadays we are experiencing a climate of “stagDeflation”, where prices decrease since the economy (demand and productivity) is stagnating. This is a problematic situation occurring in all advanced economies and in particular in the eurozone. As a plant in dry soil can benefit from small rain, the demand could only benefit from a loose monetary and fiscal policy: in this situation, few additional inflation points could be positively considered, also in term of quantitative/qualitative improvement of the employment indicators (that deteriorated in the last 20 years). Economists assert that any price increase will already be compensated by an income increase due to the economy’s improvement, with no risk of hyperinflation. In addition, several economic models demonstrated that there is no automatic relationship between a currency devaluation and the inflation increase (the second variable is only marginally influenced by the first). Finally, it’s important to mention that in the last year’s Euro lost about 25% of its value against the USD and this only had a small impact on inflation. Sometimes it looks a bit absurd to compare this “fear of inflation” with all the “sacrifices” made by the EU countries in the EU project.

Also, the fears of a higher Public Debt and the risk of default, linked to a potential exit from the EU system is under debate. Many economists indicate how this risk is already tangible for the EU Members since their Debts are expressed in a currency that they cannot directly control. This exposes EU Members to the volatility of financial markets and to the ECB’s decisions. At this purpose, it’s interesting to follow all the discussions on the free movement of capitals (as a preliminary condition for the introduction of Euro), on the spread mechanism and on how the Public Debt will be negatively affected by the European “conditional” funds. Many economists support the concept that a State issuing debt in its own currency can never go in default. Finally, it’s also important to study the Debt structure, in particular the strong and risky increase of Private Debt, due to the crisis, to the EU austerity policies and to the depressed level of demand in the EU area.

On the other hands, national control of Public Debt (expressed in local currency) is also useful in the discussions on the Spread issue. In particular, in case of exit from the EU system, the spread should not skyrocket, since the interest rates (especially those on bonds) are always under the control of the central banks, regardless the level of Deficit and Public Debt. In the last years, EU Members were subject to the open capital markets and to the spread mechanism, with the impossibility to determine their interest rates; in this scenario, the ECB rarely acted like a “real central bank central” due to its limitations as a lender of last resort. Also, the latest events confirmed that the spread doesn’t depend on governments “reliability” but solely on the ECB monetary policy, as demonstrated by its recent massive purchase of EU governments bonds: this contributed to the low-interest rates in the Eurozone despite the natural explosion of deficit and debt levels during the pandemic crisis. Finally, this cash injection by the ECB will represent only a temporary measure.

The people scared by a possible risk of default cannot deny that the EU Members macroeconomics indicators deteriorated in the last twenty years as a direct consequence of the EU policies: internationalization and relocation of large companies, austerity policies, demand depression, cuts of the public spending (health, education, etc.) with a negative impact on the private sector, preferential treatment for some EU countries (unsanctioned for their recurring trade balance surplus or for exceeding the parameters) are just some examples. Also, the production system in some EU countries has been weakened by the EU overvalued currency, by years of austerity and investments cuts, in absence of a coordinated and common EU investment policy.

On the other hands, the EU resources available to fund the post-covid recovery look like loans to be repaid in the next years; even the Recovery Fund “grants” should be repaid with additional contributions from the EU Members. In a nutshell, the net yearly amount available for the EU countries (grants minus additional contributions) represent only a small percentage of their GDPs and comes with stringent conditions like the investment in specific projects (under EU approval) and the compliance with EU specific recommendations (e.g. cuts in public spending, deregulation of labour markets etc.).

In conclusion, also a change of EU governance rules doesn’t look easily feasible (to “reform the treaties” it’s required the unanimity of all 27 EU Member States) and the EU countries’ economic, political, social conditions are still extremely heterogeneous. In the next months, the EU institutions should seriously take into consideration how to solve part of the problems above described, that are now understood and experienced by an increasing number of EU citizens (represented by a growing number of political organizations). Nowadays the EU members’ economic indicators are not in line with the initial objectives identified by the European founders and, unless the above-described issues won’t be seriously approached, there will be the tangible risk of failure for the European Project.

Article edit by

Prof. Paolo Bongarzoni – PhD Vice Dean SSM ex Corporate Director

Thomas Fazi – Journalist & Writer

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