Without Eurobonds, Italy risks a debt restructuring accompanied by austerity. The currently planned Recovery Fund is not enough to solve the EU’s problems
Sergio Cesaratto is Professor of Growth and Development Economics and of Monetary and Fiscal Policies in the European Monetary Union, University of Siena. His newest book, “Heterodox Challenges in Economics – Theoretical Issues and the Crisis of the Eurozone” was recently published by Springer Read our review here
Interview by Lorenzo Torrisi
The original Italian version at Il Sussidiario can be read here
Brussels does not seem to be concerned about the stop to the ratification of the Recovery Fund that came from the German Constitutional Court at the end of last week. “We are convinced that the recovery plan will be launched as planned and our goal remains to complete the ratification process by the end of the second quarter of this year,” an EU spokesman said. Almost at the same time as the Karlsruhe judges pronounced their decision, Mario Draghi relaunched Eurobonds at the last European Council. “I know it’s a long road, but we have to get started. It’s a long-term goal, but it’s important to have a political commitment,” said Draghi, who added: “We have to design a framework for fiscal policy that is able to lead us out of the crisis”. Just a coincidence? “Probably not entirely – is the opinion of Sergio Cesaratto, Professor of European Monetary Policy at the University of Siena.
Question: At the last European Council meeting, Draghi proposed Eurobonds once again. Almost at the same time, the German Constitutional Court blocked the ratification process of the Recovery Fund, which had already received the green light from the Bundesrat and Bundestag. Just a coincidence?
Cesaratto: Probably not entirely. The Court in Karlsruhe has for the time being suspended the ratification by the President of the German Republic. I suppose that in the next few weeks the Court will rush to limit the consequences of the appeal by Prof. Bernd Lucke, the founder of the AfD [Alternative für Deutschland, the German extreme right-wing party] who, with other eurosceptic professors, asked the Court to stop the law approving the Recovery Fund because it is anti-constitutional. The reasons for the appeal are always the same as in past appeals: German constitutional law imposes strict parliamentary control over fiscal policy and this, rebus sic stantibus, cannot be delegated to Brussels. The German court will probably listen to the plaintiffs’ arguments and reject the petition with the proviso that the cession of fiscal sovereignty is a one-off and dictated by the pandemic emergency. So much for Europe’s Hamiltonian moment, the American federalist turn at the end of the 19th century, when the debts of individual states were pooled. It was the true birth of the United States. Apparently not so for Europe.
Question: It is certainly not the first time that Eurobonds have been discussed, but all proposals have so far fallen on deaf ears. Draghi must know this well. So why has he brought it up again now?
Cesaratto: It is a message to the German establishment: look, no matter how hard the German High Court tries to put a stop to the mutualisation of debt, both with regard to purchases by the ECB and to the first and, for now, small and episodic form of Eurobonds, this is the direction. The only one, moreover, that after the storm of the pandemic and the slow decay suffered by Italy in the euro can guarantee the survival of the single currency.
Question: There are those who point out that with the Recovery Fund there are plans to issue bonds by the EU, in practice a form of Eurobonds. What do you think?
Cesaratto: The stability of Italy’s public debt can only be guaranteed by forms of conspicuous European support from the ECB and by issuing common debt securities (perhaps limited to public investment), the famous Eurobonds. The alternative would be a restructuring of Italy’s public debt accompanied by fiscal austerity. Both measures would be paid for primarily by the Italians themselves, and even a moderate like Draghi would oppose it. The German Constitutional Court opposes the Eurobonds, spurred on by appeals from the ultra-right. A guerrilla warfare will continue rather than having a definite outcome, fiscal federalism or a break-up of the monetary union. Without constitutional reform in Germany (and perhaps other countries), deep reforms of European governance are not possible. Only a possible SPD-Grünen-Linke government could go that far, but it would take courage and above all an enormous consensus of German public opinion. Moreover, without some form of mutualisation of the stock of public debt – i.e. of past debt, not just new debt – a common European economic policy could be complicated in the event of economic recovery and rising inflation. Italy needs interest rates close to zero in order to sustain or reduce debt, and to grow a little. No matter what the inflation rate. Apart from introducing more tolerance for inflation, if rates are to be raised, then there is no other way but to re-issue Italy’s maturing debt with a European guarantee to keep rates at bay.
Question: According to a Brussels spokesperson, the decision of the German Constitutional Court will not cause any delay and the ratification process of the Recovery Fund by all member states will take place by mid-year. What do you think about this?
Cesaratto: As I said above, realpolitik will probably prevail. Let me just add this: Europe’s performance with regard to the supply of vaccines has been woeful. Big Pharma has made a mockery of Europe. The former US Secretary of State, Henry Kissinger, became famous for sarcastically asking one day: “Europe? What is its telephone number?” And the European High (sic) Representative for Foreign Policy was mocked in Moscow a few weeks ago .I mean, having thought of a common vaccine procurement policy was a good step. But without a political Europe, from vaccines to monetary policy, Europe will continue to be a disaster. But the shift to a political Europe is tremendously difficult and with high risk of anti-democratic centralisation. We always blame Germany. But France does not seem federalist to me. And are we sure that the Italians wish to cede further sovereignty? The combination of a currency with the remote possibility of political union was a fatal mistake. We can’t stand still; going forward with integration we can get better, or worseI imagine.
Question: Italy is so far the only country that seems willing to use the entire share of the Recovery fund loan. What do you think? Is Italy wrong or are the other countries wrong?
Cesaratto: Yes, this has struck me too. On the one hand, some “virtuous” countries are already obtaining funds on the markets at low rates, and therefore do not need these loans; while others, such as Spain, are obviously willing to pay a little more in interest in order not to get into debt with the EU. Their choice is not a good thing for Italy. Let us also remember that we are going to use these loans to finance expenditure that is already more or less planned, so that it is not additional debt on top of what is already on the books: it is just a cheaper way of issuing already planned debt. Only non-repayable loans will finance additional investments. If Italy is the only one to borrow from the Recovery Fund, the European bluff that inflates the Recovery Plan by passing off what are loans as non-repayable aid will be exposed. It is not an outright lie as was the infamous Junker Plan, but we are almost there.
Question: The Recovery Fund was conceived almost a year ago and perhaps with a different expectation about the duration of the pandemic and its impact on the economy. In the light of what the US has put in place, should the European plan be revised or accompanied by some other intervention?
Cesaratto: What is being done in Europe pales in comparison to the trillions in the US plan. Let’s remember that in the US the expansion of public deficit spending is carried out at the federal level with the support of the Fed, not by the individual states of the Union that do not have a central bank and are therefore bound by a balanced budget. But the US is a political union, meaning a basis of cooperation, while Europe is in a state of disarray in the face of the pandemic, in terms of both fighting the pandemic and the economy. We will see after the German elections, but there are no courageous leaders on the horizon, and Merkel has been for years a procrastinator whom we shall not miss.
Question: In the light of the situation, does the ECB’s role become even more crucial? How long will Italy still be able to count on its purchases of government bonds?
Cesaratto: It will be the lesser evil that Germany will have to accept, unless it makes radical choices in one direction or another. We will see with the next government.