Those who consider themselves as élites have always aspired to rule, albeit in a respectable democratic environment and following its norms. The last thirty years have seen an attempt of various technocracies to acquire a ruling hegemony over key issues. They have done this in an inconspicuous way, so that the underlying process has largely been unnoticed. The present economic crisis sheds new light on this surreptitious process.

The success of speculative attacks

The success of the speculative attacks against euro-zone countries is due to a chain of policy misbehaviours, driven by false truths and ill-based analyses. The seeds of such a perverse chain were sewn in the 1980s with the transfer of power from the state to central banks; they were strengthened by the ban on central banks - later including the ECB – buying bonds issued by national governments (Art.101 of the Treaty). Key agents in this drama were the bank technocracies, both national and international, and the European Commission. The vilains de la pièce are the democratically elected governments (regardless of their political inflection), who  passively transferred constitutionally relevant powers to such technocracies.

The ‘therapies’ based on fiscal austerity are the ultimate outcome of such a chain of decisions. It is said that they will stop speculative attacks. I argue that they will simply prepare fresh bases for new attacks, triggered this time by recession indicators and/or by the absence of relevant improvements in the debt/GNP ratios. There is only one way to frustrate such speculative attacks: rendering the ECB a lender of last resort for sovereign debt, as recently argued by P.De Grauwe, D.Gros, S.Micossi; that is, by restoring a pre-1980 institutional way of organising economic policy making. But the ECB resists such a suggestion, with the support of European governments.

As Susan George puts it bluntly: “The ECB is the obstacle to success, not the Euro per se. The ECB doesn’t lend to governments but to banks, at 1% or less, and then banks lend to governments ... The ECB unlike every other central bank doesn’t issue Eurobonds. So we have government by the banks and the ratings agencies”. And as for the polity abdication she adds: “Now the European Commission wants to examine all individual country budgets before their parliaments vote on them to make sure they meet certain standards. This is a blatant attack on democracy”.

This is a straightforward, though partial, answer to the question raised at the start of the debate on ‘The road to Europe’ by Rossana Rossanda, when she asks: Was starting from the monetary union the right strategy for building the political union of Europe? Mario Pianta has provided a further part of the answer by reconstructing, from a historical economic perspective, what has happened. What I want to explore further in this article is how this absurd process came about; that is, secured by which cultural distortions, wrong reasoning, and false popular beliefs.

Current policy attitudes that give succour to speculative attacks

The speculative attacks owe their success to the fact that when professional speculators begin to sell the national bonds they have gradually acquired en masse, the decline in their value and rising risk premiums for their renewal induce a herd of other actors who hold the same bonds to sell, multiplying the effects of the speculators’ sales. At the same time speculators sell future deliveries of the identical bonds, that they will acquire at a price that would have fallen if their action has succeeded. The success depends on the fact that (a) the other asset holders believe in the risks of failure and sell the affected bonds and (b) nobody buys them. Should the ECB manifest itself as ready to buy, the bonds would continue to conserve their existing values and the awareness of this would reduce panic. The ECB should buy, immediately, only a relatively small amount of the affected bonds which it can then get rid of over a longer period.

The problem is that, at present, the speculators are relying upon the fact that there will not be a speedy purchase of the affected bonds and that the false reasons why the bonds’ holders should panic will be supported, instead of being refuted, by the ECB and the European governments.

The Italian example

Let us look at the Italian example. The amount of Italian bonds held by foreign subjects is about 50% of its GNP: the average interest due, before the speculative attack, upon such accumulated stock was in the order of 4%. This implies that Italy had to transfer goods, services and wealth assets abroad in the order of 2% per year of its GNP. A sustainable burden, indeed, that should not have raised doubts about any possible failure!

The question of the need for a total restitution of national debt is never raised when things are normal. Debts have not been wholly repaid for centuries; they keep being renewed, as they do for most firms, without any necessary negative consequence. The few exceptions were due to a short-sighted way of managing the corresponding crises. Obviously, should the renewal of the debt happen to be subject to ever-increasing interest rates, failure would become a real possibility. Professional speculators do not care about this – since they make their money from the blitz and are interested neither in the interests nor in the restitution. Only policy makers should care, by immediately countering the inducement to panic with wise reasoning and wiser actions.

Unfortunately, they now do exactly the opposite. The ECB, by delaying the purchase of the affected bonds under the shelter of Article 101, uselessly elicited the budgetary interventions of the member states, with the unpleasant side-effect of triggering the anti-cohesion attitudes which are nested in their bellies. The governments embrace the soundness of the ECB ‘philosophy’, enforce the austerity devised by the IMF (with the structural adjustment programmes), flood their parliaments and electorates with inappropriate platitudes, such as “one cannot live beyond one’s means” or “imposing burdens upon future generations”.

These are platitudes, as two hundreds years of good economic analysis has taught us: no country can use the resources of the future but only those existing in the moment an action is undertaken. The implications for the future depend on the specific quality of the action, not on the way it is financed. The only counter-argument - the possibility that financing a public action through public debt instead of with taxes might displace real investments - appears nowadays to be irrelevant. Real investments are more likely to be discouraged by gloomy economic perspectives, while financial opportunities are strong candidates to crowd out real investments (as the growing literature on financialisation has shown).

This does not imply that a great accumulated debt does not raise problems. There are several qualitative as well as quantitative problems, but they do not depend on these platitudes, which unfortunately appeal to the naive psychology of the ‘man in the street’. In the name of such platitudes fiscal austerity is brought about, making us all look more like the flagellants of the thirteenth century than the rational and educated people of the twenty-first.  Flagellantism had one merit. It harmed only the flagellants with no other consequences. Fiscal austerity, on the contrary, prepares the basis for further speculative attacks. 

Facts and questions

The ECB, it is said, is frightened to act as a lender of last resort because it fears feeding an inflationary wave. Here we really enter into the central myth upon which the ECB has constructed its hegemony. The psychological shock brought about by the big inflation of the 1970s was crucial in inducing the transfer of powers to central banks, sheltering them from policy makers. The control of inflation became the ECB’s main assignment. What use has been made of such empowerment, unmitigated by the usual check and balance principles of democratic rule?

Since the outset, the ECB established its code of conduct on the basis of a supposed long run (causal) correlation between the supply of money (M3) and the yearly rate of change of the prices of consumers’ goods. By forecasting for the future a rate of growth for the Eurozone of 2-3% and by considering as acceptable a rate of inflation not larger than 2%, the ECB decided to allow M3 to expand on average around 4.5% per year and maintained such ‘official’ rule over time. However it failed to hit the target, so that the average rate of growth for M3 in the period 2000-2008 was beyond 7%, while the rate of inflation remained stable. The single divergences from the 4.5% target were officially justified as temporary on the basis of contingent but relatively vague circumstances. If one looks at the data, however, the correlation between the excess of M3 and the rise of wealth assets’ prices appears evident. Faced by this speculative bubble the ECB simply decided, “to lean against the wind”, but only very modestly. Several strategic questions pose themselves as a result.

Why should the inflation of goods be considered as evil and that of wealth assets as an acceptable symptom of good health? On the basis of which arguments has the conspicuous distortion of the relative prices due to asset price inflation been considered as tolerable on the ground of social justice and compatible with stable growth? Was it really true that the ECB had the wherewithal to control the rate of growth of M3 and that the correlation between M3 and the rate of inflation still applied?

The ECB supported the “leaning against the wind” strategy in a very lukewarm way. The alternative strategy debated among central bankers, and de facto adopted by the ECB, was that of “cleaning up” after the bubble burst. On what basis did the banks assume that they would be able “to clean up”? And why now, after the mess of the burst, and the central banks’ evident inability to “clean up”, has the ECB not taken a step back and invited governments to discuss the entire institutional arrangements of European economic policies, including budgetary, industrial and trade policies?

De Grauwe reports that in 2008 the ECB did not hesitate as a lender of last resort to finance the banking system with fresh money in order to avoid chain failures. No inflation spiralled then. Now it hesitates to perform the same role with respect to the sovereign debt of member states, which are only 80% of the Eurozone GNP, while banks’ liabilities were in the order of 2.5 times GNP. Isn’t the risk of chain failures of states similar to those of banks, and aren’t their consequences even more serious?

These questions should have been raised by governments and more in general by the polity. Probably the ECB fully expected to be called upon to explain its own responsibilities and lay low for a while. Afterwards, having seen no observable political reactions, it has come back to preach (now in unison with Mrs. Merkel). 

Can we return to growth?

This is the only serious problem facing us. The little we know about the mechanisms for accelerating growth (and we should be honest about how little it is) suggests a few things. It rules out their compatibility with recession-inducing fiscal austerity. It suggests starting an expansive cycle driven by real investments. This cannot be done by the market, but ought to stem from a shared and credible European industrial programme, requiring the cooperation of member states, of productive firms and social partners.

Although I cannot go into the details here, this implies not only spending - which requires a federal budget and an accommodating monetary policy - but confining one’s spending to a defined programme and making sure that it functions. Credit should not go towards funding financial activities, but only productive ones, both directly (the real-side investments) and indirectly (research, improvement of knowledge and of the quality of human resources). This requires a substantive institutional re-organisation not only of the ECB but also of the banking system and the space for financial operations. Several suggestions have been made here and elsewhere. I want to add here just two considerations.

The first one is that, should the financial operators decide to move their activities out of the Eurozone as a consequence of the restrictions upon them, this should not worry member states much, on condition that the European programme for the development of the real economy takes off and acquires momentum. The best operators are able to sniff growth and will come back.

The second consideration is that, paradoxically, we are presently in the best possible conditions for taking off through an investment-driven cycle. Spending for investment activities has expansionary effects upon consumption; the demand generated by such spending could be met by using the present excess capacity and unemployment (instead of imports and/or inflation), while waiting for the new investments to be turned into (additional and possibly different) productive capacity. The environment resembles that of the US at the end of the last World War. A modernised version of the US strategy for industrial conversion to a peace economy is possible, together with a selective use of some of the instruments that were adopted in the European reconstruction period. The challenge is that of defining a programme and a set of instruments suited to convincing firms to invest in such an epochal challenge, making Europe a fully fledged competitive actor at the global level.

But first the polity needs to shed its platitudes and return to reason and knowledge. And this is the toughest part of the story. The open-mindedness of which the Roosevelts and the Churchills were sometimes capable has unfortunately faded out of sight.