On May 5th, Germany’s Constitutional Court formally asked the German Government and Parliament to verify that the ECB carried out its quantitative easing policy in a “proportional way” without favouring any specific government or without exceeding its mandate (since 2014 ECB purchased more than 2.2 trillion euros of public sector debt). In the next three months, the ECB will be asked to demonstrate whether it balanced the economic and fiscal impact of this monetary policy. The consequences of this declaration could seriously threaten the ECB’s future support to EU governments in this financial emergency and could strongly affect financial markets. At this stage, an analysis of the EU Single Market evolution could also be useful to understand the current scenario and the effects of this pandemic emergency. Starting from the initial EU economic/social cohesion policies, even if they aimed at reducing the gaps among EU regions (through the “free movement” of goods/services, people and capital), several studies show that they didn’t achieve the expected results. This is confirmed by the “optimistic” targets initially set by the EU Commission reports of convergence, in terms of price stability and unemployment level. Despite the convergence policies adopted between the 80ies and 90ies focused on reducing the social/economic inequalities, their effects were not so remarkable, even if a huge amount of resources were allocated.
One of the main criticisms of the Single European Act (1986), the Maastricht Treaty (1993) and the European Monetary Union (1999) was the adoption of monetary restrictions policies for EU members in combination with the free movement and liberalisation strategy. In this process, the big multinationals were favoured in implementing their cost economies and their easy/cheap access to capital; in particular, they were facilitated by the easy delocalisation process (e.g. high EU investment in transport infrastructures).
The social-economic convergence and the free movement of goods/services, people and capitals were initially considered the main conditions for the start of the European Monetary Union; nevertheless, the criticism towards the free movement of capitals increased due to the limits for the Member States in adjusting the interest rates level (together with the public debt level) and due to the rise of strong international speculation. In addition, the Member States’ power to unilaterally adjust their exchange rates, already limited by the adoption of the European Monetary System in 1979, was totally cancelled with the introduction of the Euro. Finally, monetary sovereignty was completely lost with the introduction of the European Central Bank in 1988.
In 1992, the Maastricht Treaty introduced two main strict parameters (3% deficit/GDP and 60% Debt/GDP) together with other important limitations on nominal interest and inflation rates, on exchange rate adjustments and on the possibility for central banks to act as last resort lenders. Nowadays, it’s not yet clear the definition process of these two parameters as well as their implementation process, also because the majority of the Member States struggled in complying with them (in most cases, even some “accounting cosmetics” were adopted). For these reasons, many important economists pointed out that these regulations represented a limitation to the economic system’s growth, together with the high cost of convergence (probably not 100% achieved).
Important academic studies highlighted how the EU measures contributed to limiting the economic potential growth: in addition to the restrictive constraints imposed by the Treaty of Maastricht, the Treaty of Lisbon and the Fiscal Compact strongly affected the industrial production, the unemployment rate and the customers’ purchasing power. In particular, the introduction of the balanced budget in the Constitution (Fiscal Compact 2012) had dramatic consequences on Governments’ public spending and tax pressure; for this purpose, several important economists and politicians suggested not to consider the investment spending in growth for the calculations of Maastricht ratios.
As anticipated, with the free movement of capitals and the introduction of Euro (adopted in 1999 and officially introduced in 2002) the EU States’ flexibility in adjusting interest and exchange rates or in borrowing from public institutions were replaced by the logic of capitals market; the liquidity crisis experienced during the last financial crisis became a solvability crisis also because of the international speculation and the high spread. In addition, the non-conventional measures adopted by the ECB (LTRO, OMT, and QE) were not 100% effective due to the impossibility for the central bank to be a last resort lender and due to local banks’ inefficiencies towards borrowers.
Many businesses suffered the “strategic” policies on Trade Balance, exchange rates and capital markets adopted by some EU States (before and after 1992). In particular, the loss of competitiveness was triggered by the impossibility for governments to adopt a fluctuation/differentiation policy on exchange rates, by the reduction of public spending for growth, the increase of tax pressure, the demand stagnation and credit crunch from banks; in order to be more competitive many businesses were obliged to further decrease the cost of labour and the spending in innovation.
In particular, since the adoption of the EU Monetary System (1978) till 1992, some countries (e.g. Germany) constantly increased their international exports by devaluing their currency and exporting their excess of capital (coming from their Balance of Trade surplus). After the reunification of Germany (1990), the increase in local demand contributed to a Balance of Trade deficit and, for this reason, Germany started to import capital, forcing other countries to increase their bond interest rate: this triggered international speculation in 1992. In addition, Germany’s Current Account Balance, in deficit till 2001, recorded a surplus after the introduction of the Euro (Italy and France registered an opposite trend). Germany also benefited from a low inflation level and from the traditionally strong presence of big companies (strong export market), while in Italy, the GDP per capita was lower due to a huge presence of small/medium companies. Germany’s bonds usually attracted international capital, in part reinvested in high-return bonds from other countries; this process was favoured by the high spread and by the declassing of these countries from rating agencies. In this situation, Germany lent capital to the importers of its products, and the mechanism of spread contributed to decreasing other States’ competitiveness (due to their bonds’ high-interest rates).
In 2002, ISTAT calculated that 2,5M of Italian families lived under the poverty threshold (~11% of families) and 8% at risk of poverty. In 2015, the Italian residents in absolute poverty increased by 5M and families without any revenue were 1.582.000. From 2008 to 2016, the unemployment rate increased from 6,7% to 12% and the youth unemployment rate (under 24 years old) from 21,3% to 39,2% (inferior only to Greece and Spain). Unfortunately, with the recent pandemic crisis, GDP and other indicators could even get worse. In addition to the monetary injections currently discussed by EU authorities, it will be necessary to clarify the role of the ECB and the “non-bailout clause” (especially during emergency periods), to renegotiate the EU parameters and to invest in growth initiatives (e.g. decrease of tax pressure and strategic investment in innovation).
Article edited by Prof. Paolo Bongarzoni
PhD Strategic Management & Economics – Vice Dean, Business Professor