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martedì 26 Gennaio 2021

And if tomorrow, and I stress if... Germany, UE and the Buridan's donkey

Germany, UE and the Buridan’s donkey

Leggi l’articolo in italiano

The year is 1987. My friend Edzard Reuter, the powerful chief of Daimler Benz (The company owning Mercedes), gives me the high honour of a personal invitation to a secret conference,since I am the head of a great German industry, the Iveco Magirus. It is a type of event that can only be held in Germany. Industrialists, financial experts, politicians, trade unionists and even journalists, about thirty people are present. Sitting around the table all day and discussing about concrete things, speeches and choices are made in such an effective but completely informal way that nothing is ever leaking out. The complete opposite of many Italian conferences, where everyone goes, maybe for a fee, to decide nothing and say the obvious with the unique purpose of showing off on TV or in the press the next day.

On that day a discussion on wage increases for the new employment contract of some landers in Germany is planned: some negotiations and minimum strikes for public opinion are expected, but what will be the final outcome is already planned and defined.

Then the debate on Europe is taking place. Almost at the end, the secretary sitting next to me whispers in my ear the translation of Edzard’s unexpected words: “I know that my friend Garuzzo does not share many of the ideas you have put forward. I ask him to say frankly what he thinks.” I’m amazed, but I’m not unprepared for the subject. I decide to go down hard.

“As for Europe, you Germans have been at a crossroads for a long time,” I say, “but you’re stalling and not approaching with determination any pathway.

The first alternative you are facing is to build a united Europe, a  really united. You can do it. You have money, organization, credibility, cohesion, industry… Even geography is at your side and you shouldn’t do as the Piedmontese did, who sacrificed Piedmont, from autonomous kingdom to a peripheral province, to “make” Italy. You would be the undisputed leaders of that Europe. But be careful. In that project, as leader, you should take on board the problems of the whole of Europe. So, for example, the problems of Greece or Scotland should be treated as your own.”

For the love of my country, I don’t mention Italy, but everyone understands. As for Scotland, they hadn’t found oil there yet.

“Second alternative – I continue – Deutschland über Alles. Then, agreements with the Japanese to the detriment of France and Italy (in those days they were negotiating car import quotas and the Germans were playing against us because they had favorable bilateral agreements that our rulers were unable or unwilling to make), industry and finance concentrated only on your territory, ruthless competition to the other nations of Europe, fighting behind the scenes to those who try to emerge and no help to those who were in trouble … À la guerre comme à la guerre.

So far you haven’t decided on the alternative, and you’re swinging from one position to another.”

And finally a hot discussion is starting. “It’s not true,” shouts the president of Baden Wurttemberg, “we are convinced pro-European supporters”

When they calm down, Reuter draws the conclusions: “Perhaps, my friends, there is some truth in what Garuzzo says… Beware that Europe doesn’t end up like Buridan’s Donkey, dying of hunger with two piles of hay in front of him, not knowing which one of the two to chose.

Many years ago I reported the curious moment I experienced in the 1980s for a book that I never published. More than thirty years have passed since that day, and the Germans still haven’t chosen, and Europe comes to the paradoxical end of the imaginary “Buridan’s donkey”, who dies of hunger despite having hay in front of him.

It seems the right time to me to retrieve that story today, when Europe lacks a leadership that would be more necessary than ever at this time of crisis. Because now still, as was the case at that time, Germany has not had the ability, or the will, to choose. But times have changed and, maybe, the socio-economic post-temperament of the coronavirus epidemic could lead to some rethinking. It is perhaps useful to add a few considerations.

1 – Italy cannot leave the European Union

For Italy it would be very damaging but still possible to leave the European Union, but it would be unthinkable to leave the Euro, for technical reasons rather than political ones. I prefer to demonstrate this with what scientists used to call “thought experiment” – for the use of those who, once in a while, propose meaningless initiatives.

Let’s suppose (putting us in a pre-pandemic scenario) that the first of January of a certain year a New Lira will start, with a 1 New Lira for 1 Euro exchange rate.

Immediately, those who have Lira will try to exchange them into Euro, which it would be rightly considered more reliable. At the same time, both funds and private investors would bet against the Lira, and the speculation “forward” would be activated, i.e. they buy Euro today, 1 to 1, to be paid with Lira tomorrow 10 to 1.

In the face of the offer, the New Lira devalues against the Euro, despite efforts of the Bank of Italy trying to defend it to the bitter end, without success, as it happened in the past (remember the times of Ciampi and Amato), and bleeds out of “precious currency”. The machine of widespread speculation is set in motion: the Liras burn if kept in the pocket for a while and, as always in these cases, there are those who get rich by speculation on the differentials, while those on fixed income are penalized.

It is inevitable: at the end of January the New Lira is changed against 10 euro cents, at most.

The costs in Lira for the import of food and energy from foreign suppliers, who want to be paid in Euro, increase: in a month Italy scores 80% of inflation rate. Workers’ strikes are starting to obtain wage increases, retired people, who cannot strike, will have to tighten their belts. The government intervenes, and what for? It can only suspend the  exchange of New Lira with the Euro and the Dollar and block the bank accounts in Italy: only a few New Lira from those accounts can be withdrawn every month by the holders. To satisfy public opinion, Parliament issues laws that promise years of imprisonment for currency exporters, penalties that will never be imposed on anyone.

A surreal scenario? Not at all: just have look at what happened in countries in similar conditions, such as emblematic cases in Argentina and Venezuela where taxi drivers and pensioners in Buenos Aires know and practice more financial transactions than professional financiers. Between the years 1980 and 1990 we can remember the sad story of the old Lira forced in the “monetary snake” exchange regime, until the maxi-devaluation, when the Mark value went from 740 to 1100 lire in a weekend, after the Italian industries competitiveness was already collapsed as a result of a prohibitive exchange regime.

The described scenario would be inevitable if some unwise government really led to the unhappy “return” of the Lira. However, it is not easy to predict what political consequences this would have. No government could immediately cancel the macro-nonsense and return into the Euro and back in Europe. In exchange for what: a Peronist government, a Mussolini government, an unprecedented government of the poors? Who knows. Most probably, falling into a dictatorship.

2 – As it is, the European Union doesn’t work.

The Union’s malfunction, which everyone complains about, is structural.

The Strasbourg Parliament has no real power. The Commission in Brussels has enormous powers, especially regulatory ones, but it is not elected and as a matter of facts, it is not accountable to anyone. Can you imagine a more undemocratic scenario? Technically, it is run by Germany, which has the economic power and benefits from the geographical proximity. Few concessions to France and Holland are offered, in order to look like an international entente, and that’s it. The financial rules decided by the E.U. are absolutely binding while no common rules, such as taxation, financial costs, bank support that allows an egalitarian economic habitat are foreseen. In the “animal farm” of Orwellian memory, those who are more equal than others are simply more “virtuous”.

Germany has devoted a great deal of attention to enslaving the structure of the Union by occupying its staff seats. For decades, Italy has been disinterested in it. Even, indeed, often the Italian appointed commissioners, have assumed theoretical, snobbish, almost naive pan-Europeanism attitudes, without spending themselves to protect the Italian interests. On the contrary, their German and French colleagues have deliberately (almost exclusively, perhaps) pursued the interests of their countries. This was explicitly acknowledged to me, back in the 1980s, by Martin Bangemann, the powerful “Commissioner for the Internal Market and Industry”, the former German Minister for Economic Affairs, when I dared to complain about his overwhelming power in Brussels, which lasted over ten years.

Perhaps the poor knowledge of foreign languages by many Italian politicians has contributed to their escape from the corridors of the Union’s chambers of power. In all countries, the United States first and foremost, for electoral reasons, domestic policy is rewarded over foreign policy but for Italy the Union should not be considered “foreign”.

The consequences of the inadequate structure of the Union, and of the Italian lack of interest, have been very serious: the Italian rulers, and those of other member countries, often set themselves in a priori antithesis with the Union, and in order to excuse their ineptitude, they attribute to the Union their personal faults, accentuating its loneliness, inefficiency and disenchantment.

People are sensitive to the real or presumed shortcomings of a united Europe, and they forget the advantages of it. There is a complete lack of the “volume-effect” in relation to the other large population groups in the world, an effect which should be one of the main objectives of the Union, capable of reaching the “critical mass” in terms of money spent and people employed in research, defense and economy support, in order to compete with the rest of the world: 450 million Union inhabitants (not counting England any more) are to be compared with China (1,400 million), India (1,300 million), the USA (330 million) and Russia (150 million). The aircraft manufacturer Airbus, owned by Germany and France, is perhaps the only existing example of such continental synergy, able to compete on equal terms with Boeing, which is supported by the US enormous military and space orders.

3 – Germany is divided on the subject

The so called German oligarchy, those 2000 people, which it is said, – and I personally agree, actually run the Country is not in its majority anti-European. Nor it is anti-Italian. On the contrary, many members of the German intelligentsia love Italy. In addition to the cultural empathy, the German establishment is aware of the importance of the Italian market, and therefore, in favour of its welfare for the welfare of German industry.

Generally speaking, the German popular attitude on the Italians is colder, if not even hostile, also because our Country has often disseminated self-denigration and fed negative stereotypes, highlighted by the media. The Germans are constitutionally very careful to offer an image of efficiency, rationality and ethics. When I was chairman of the European Association Automobile Manufacturers (ACEA), only the German members took great care to read in advance every single line of each shared documents, even more of the press releases I prepared, in order to prevent that any possible slightest hint or suspicion of weakness or defect could have leak out. On the contrary, starting from 1969 and for a long while ahead, Italian political parties and media were busy on denigrating our national industry (for internal political reasons), with the result of making Italy the only country in the world that both prospered and spit on its own industry.

However, today, no German politician feels like going against the popular mood: Merkel is not Adenauer. This dichotomy causes the deadlock that recalls, back in the fourteenth century, the apologue made famous at the Sorbonne by the philosopher Buridan.

4 – Italy in reverse gear

Even with the best intention, Italy will never be able to pay back its public debt to its creditors. Not even reduce it. There is a perverse feedback: the more sacrifices are made to save, the less national surplus wealth will be produced. For decades Italy has not been able to generate cash free from budget commitments, for repayment: the “free cash” which companies generally use to remunerate shareholders; however, if there had been such cash, no political parties would have agreed to give it back to creditors due to the many internal appetites. As the years pass, the debt for late payments from State to suppliers has increased, as well  debts owed by public bodies (regions, cities, municipal companies, etc.). Aggregate figures are never published, in order to not frighten the international finance, in spite of the situation being well known or even it imagines worse figures than the real ones.

Since a long time, everybody knows that sooner or later our bankruptcy, euphemistically called default, is inevitable. So far it has been avoided because it would not play well with anyone in the world: no one would like a second Lehman case, or even worse. The waiting for default is measured by the spread, which, as is well known, measures the amount of interest that lenders want to collect from our treasury bonds more than from German bonds, facing the risk, sooner or later, of losing everything. If no one would ever expect default, the spread would be zero. On the contrary, waiting for default costs to us every year a couple of points on our State debt. A 2% spread recovers the full value of the treasury bonds in less than 50 years!

How would (will) the default occur? It would be good if it were “piloted”, meaning, the State would “consolidate” the public debt, refusing the repayment at each expiring tranche, deferring them all over for a very long period, with a few percent per year of repayment installments, without additional interest. In this way the creditors’ banks would not have to write off all the credit in their balance sheets, which would turn them in crisis, even if they could not avoid devaluations, because the market would appreciate less than half of the subordinated credit value, at the least looking on what has happened in the past to other countries. Obviously, the State could not afford new debts, and therefore would have to set fire to the wood it has, i.e. paying wages and supplies from the money collected from taxes only. It would turn forcibly into a “virtuous” system. Most probably it has to resort to an initial enforced levy on personal assets in order to meet its short-term expenses. Nevertheless, there is a serious problem within this seemingly simple operation. Much of the country’s wealth is, as they say in Naples, “under the sun”, meaning, in the real estate market. In addition to the unpopular one-shoot-tax on real estate, there would be the problem for owners to find the money to pay the bounce, and the need to find the needed liquidity would lead to selling part of the properties themselves, reducing the property value. On the other hand, an asset tax that is  limited to liquid investments would not only be unfair but also insufficient, if not disproportionate in size.

In fact, in an unexpressed but implicit way of the collective behaviors, it is expected that the trigger for default will sooner or later be caused by an external agent: a world crisis, a war… A pandemic?

A Pandemic. A completely new circumstance of key importance, which can disrupt the international balance. I have never been a fan of GDP figures, the “Gross Domestic Product”, which I consider a difficult to use academic measure, because it also takes into account transfers of value within countries, which do not mean generation of net wealth. In addition, despite the opinion of economic statistics’ experts, I do not believe that it is possible to measure with the precision of a tenth on a percentage point, the variations of a national economy, like ours, that lives, or survives, on the “submerged” that, by definition, shuns real measurements. What really counts, according to my experience as a ‘man of industry’, is the “Production and Sale of Goods and Services” index, which corresponds to the “creation” of real wealth. Well, in order to evaluate the historical evolution in relations between different countries, the statistics to be taken into consideration should be those of the OECD, although, sometimes (in 2010 and 2015), they have changed the reference base, making it difficult to go back and assess what happened over a long term. Putting a little effort into it, we can understand that between 2000 and 2020 Italy lost between a third and a quarter of its production capacity, compared to Germany and the United States, and a lot also compared to all the other countries, including the “emerging”. If you count, that lost percentage corresponds to about 10 million jobs: the current unemployed rate.

In modern industry, in the normal conditions of very tough international competition in every sector, the differential turnover between countries will never recover. No one will reopen the hundreds of factories that have been closed here in the past twenty years. Will there still be a further differential loss, further closures, due to the pandemic? Most probably, yes. We, rightly, have given priority to safeguarding human lives over production. Government intervention and aid, in the form of international loans, would push the prospect of default to longer terms, however by increasing public debt anyway, it would make it more likely to happen over time. Debts, for whatever reason they are incurred, are then to be repaid.

5 – How will this turn out?

In times of discontinuity it is difficult to predict what will happen. Perhaps, faced with the catastrophic possibility of an Italian bankruptcy, followed by the Spanish one and maybe others, Germany will finally choose to take initiative for the European construction. And the saved states, in return, will recognize the leadership of Berlin, and Frankfurt, more easily after the escape of the United Kingdom and London, which should certainly facilitates the Unification of Europe. After all, already now, some German Lander are annually financing others, and, as the president of Bavaria told me one day, these rich Lander, almost all in southern Germany, are culturally and economically closer to Northern Italy and France rather than Prussia.

6 – A different scenario

But there is an alternative scenario.

And there is also a concrete model to refer that I remember very well: Italy in 1945. The mountain village where I lived with my family was destroyed on the first day of August 1944 by the German fire for retaliation – and with it our house was completely burned; inflation had cancelled the purchasing power of the lira, as well as of my mother’s primary school teacher’s salary (which remained at pre-war values), on which my family could count to survive; bridges and roads were destroyed – in Piedmont some rivers were crossed by ferries; the railways were torn to pieces – in Turin the Porta Nuova station was demolished, the trains stopped in the middle of no-where and the ticket offices were in wooden shacks; unemployment was enormous – re-watch the movie “Ladri di biciclette”; the Polytechnic was reduced to a pile of ruins, like many houses and almost all the factories…

The catastrophe of war had grafted on to a miserable pre-existing situation. Post-war Italy could have ended up as an underdeveloped Third World country and no one would have been surprised. The Alps, the Apennines and almost the entire South of the country were already part of the Third World. The official culture was on that wavelength, describing, perhaps with some complacency the misery, the sacrifice and the emigration, from Verga’s verism to neorealism, through the fascist “strapaese”.

Then, all of a sudden, everything changed unexpectedly. And Italy qualified itself among the first-rate world industrial powers.

Somebody attributed the “economic miracle” to the success of the Marshall plan, somebody else to the intuition of enlightened entrepreneurs, some others to the capitalist accumulation based on the exploitation of a cheap labour. Just some examples based on different theories, some obviously true, but partial and insufficient to explain the facts. I was a boy, but I already knew and shared the desolate world of the mountains and the very poor world of the countryside, the modest village life-style in which my family participated, and that of the richest clans I attended once at the secondary school and then at university, and also, at least a little, the entrepreneurial thought of “commendatore” Mr. Ariodante Erba, a Milanese gentleman who owned the textile factory in my village, and I think I’m not wrong if I state that: the “economic miracle” was a great collective saga, an extraordinary epic that would have deserved to be sung by rhapsods as in the times of the Ionian and Doric migrations, and illustrated with the same pride that the Americans put into mythicizing “conquest” exploitation of the West. Millions of people emerged from the war with the desire to get action. Thousands of businessmen like Vittorio Valletta, Adriano Olivetti, Enrico Mattei, and Ariodante Erba emerged, with few similarities among them, certainly also with many faults, but united by the desire to act and to get things done. Young people from of all social condition were willing to spend their evenings reading books. A generation emerged of young people who wanted to apply themselves with passion to science and technology, and swarms of emigrants arrived from the North and South animated by the dream of a better life for themselves and their children, to be conquered not by “decree” but with the commitment of their shrewdness, or at least with the commitment of their hands. I listened then and I remember now what those who came down from the mountains to the cities were saying to each other, and what their intentions were, and I do not believe that those who came from the other side of Italy had different thoughts and intentions. And, in those days, the State counted for almost nothing, and no one expected that salvation should come from politicians, by law.

At the time of the “economic miracle” enormous wealth was accumulated by the Italians. All Italians. Even, the poor got better-off than the rich, because the latter were already rich before. The general enrichment was not based on debts contracted by the State to give fictitious money to the community: the public debt always remained very low as evidence that real wealth was produced. It was a very different phenomenon from what would have been the “bubble” of the 1980s and 1990s, when the State would have taken in debt a sea of money to give to the Italians, who immediately transferred it to foreign bank accounts (the rich) or squandered it on voluptuous expenses for goods largely imported from abroad, perhaps from Germany (the less rich).

Why the Italians, who have found firmness and unity in fighting the virus, could not afford an “Italian 2.0 miracle”? This is the goal we should set ourselves. In the past, as guarantors we had De Gasperi, Pella, Einaudi, now we could  call for Draghi on the field… 

However, at the time of the 1950s and 1960s “epic”, we did not have the ballast of past public debt, a debt that had been wiped out by the war and the savage devaluation of the lira. Today, in order to allow the miracle to happen again, a new “Marshall plan” should somehow “Europeanize” the public debt. Trying to make preparations for “consolidation” to the partners could help to pass the concept of a “strong” European Union, i.e. with a common budget, equal economic and fiscal rules and a prosperous Italy once again. If the idea of a German participation in a complete union of the European economy may seem naively unrealistic, maybe the prospect across Europe of a generalized default, which at the end will probably also drag Germany down, might not sound so unsustainable to the German public opinion, or at least to the 2.000 who, as I have said, decide every single aspect of national matters.

7 – A small unitary step

 Popular sentiment is certainly an indispensable ingredient for any advancement for an effective European unity. Governments should think about it. After so many “cold” economic considerations, why not thinking about something sentimentally collective? Why not starting with sport, where the unitary impact would be more immediate? For example, a European “national team” could be launched for the 2021 Japanese Olympic Games, where Europe would largely surpass China, USA and Russia in medal counting.

United European golf has won more editions of the famous biennial “Ryder cup” than the United States, the last time in 2018 in Paris: the 2022 competition will be played in Rome.

The maximum cohesion would come from a unique national football team to the World Cup: Forza Europa!

A new section

Among the many doubts that plague my mind, just like yours these days, I have only one certainty: when we return to everyday life, nothing will be the same as before. We are facing a challenge that is reductive to call it organizational, it is a philosophical challenge, it is the vision of the world that will change and on which we will have to build the new. And if tomorrow… and I stress “if” is a new column (the title is taken from the verses of a song very popular in Italy) that is open to contributions from intellectuals, scientists, artists, from all over Europe. Follow us and send us your impressions which we will publish periodically with the intention of creating an anthology of ideas.

Giampaolo Sodano

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