There is no need to bother John Nash, the great American mathematician and economist who studies non-cooperative equilibrium models. But it is increasingly clear that the crisis that has gripped the Eurozone and the whole of Europe for over a year is largely the result of a lack of cooperation and foresight. Resolving the deadly "prisoner's dilemma" in which the North and South of the European Monetary Union have more or less consciously become trapped is a task as arduous as it is necessary. Important steps have been taken in recent weeks.
In the prisoner's dilemma, as in other models of non-cooperative interaction, each party in the game pursues a strategy that it considers optimal for itself regardless of what the reactions of the counterparts may be. What takes place is a dialogue between the deaf. Everyone looks to their own profit. He speaks his own language. He tries to impose his own interpretative paradigm, without taking into account the evidence that gradually becomes available. The resulting equilibrium is sub-optimal. Because of bias and cacophony, everyone is ultimately worse off than they could be by pursuing higher levels of knowledge and coordination.
In recent weeks, data on the European economy have further highlighted how the eurozone's "governance" crisis is damaging all members of the monetary union and producing negative effects even outside the area. Some examples. In the first half of 2012, German growth more than halved compared to what was recorded in the same period a year ago. The compound rate of change in GDP fell in Germany from about two to less than one percentage point on a six-monthly basis. On a quarterly basis, the increase was reduced to just three tenths of a point. In addition to the final balances, the leading indicators are also worsening.
In July, the PMI manufacturing index fell in Germany to 47,5, well below the 50 mark which separates the expectation of a phase of expansion from the perception of a prospect of economic contraction. This is the third consecutive monthly drop, which brings the level of expectations on the German economy back to the levels of June 2009. In addition to Germany, other countries in the north of the Eurozone are also lagging behind. Finland, for example, saw its gross domestic product drop by a full percentage point in real terms in the second quarter. It is a reduction that exceeds the minus 0,7 percent recorded by Italy. A minus sign appears in front of the change in GDP recorded by virtuous Belgium. Outside the Eurozone, but within Europe, Hungary enters a recession. The United Kingdom, despite the happy Olympic season, is aggravating the extent of its already full-blown recession.
The prisoner's dilemma that grips the Eurozone determines a growth deficit that derives from the defects of an incomplete monetary, but not also fiscal, banking, political unification. Safeguarding individual interests and points of view creates the risk of suffocating common growth. The cost of this unsolved dilemma is difficult to quantify. However, to give ourselves points of reference, a comparison can be attempted with the United States, a country where monetary union goes hand in hand with fiscal, banking and political union.
Taking one hundred the value of the first quarter of 2008 – the start of the long economic and financial crisis – in the second quarter of 2012, the American GDP rose to 102. That of the euro area appears to have dropped to 98. Today, the USA is two points percentages above pre-crisis values. The Eurozone is, however, two points below. Saying the same thing in billions of euros, if the Euro area had behaved like the United States of America, in the second quarter of 2012 the real volume of product generated by the 17 countries of the monetary union would have been one hundred billion euro higher than it was.
One hundred billion euros per quarter, net of inflation, that's a lot. Multiplied by four, on an annual basis, they add up to an amount of resources equal, in nominal terms, to the GDP of a country the size of Belgium. One hundred billion euros per quarter is certainly an overestimate of the cost of the European dilemma. In addition to enjoying the advantages of a full fiscal and political union, the USA in fact practice a public finance policy that is certainly less virtuous than the European one.
Nonetheless, even eliminating the "delta" between the USA and Europe from the American inclination to "deficit spending", the burden imposed by the problems of "moral hazard", by litigation and by insufficient intra-European cooperation still appears very high. Breaking it down means restoring a growth perspective to the Old Continent at a time when growth is becoming a more scarce commodity at a global level, given the signs of a "global slowdown" that are becoming more and more evident from China to India to the same countries United.
The August issue of the economic forecasts surveyed by Consensus forecasts a half-point drop in global economic growth this year compared to 2011. In July, the IMF's updated projections certified a significant slowdown in growth in emerging economies . In this context, the cost of the European dilemma, of "governance" deficits and partial visions, is a luxury that 330 million residents of the monetary union can no longer afford. We need to try to look further and deeper. It is a cultural leap, a change of pace which, fortunately, someone has already initiated in an important and authoritative way. This is what the President and the Executive Committee of the European Central Bank have done.
"Exceptionally high risk premiums are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk rewards that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible”.
More than the thermometer of the state of progress of the consolidation of the public finances of individual countries, in recent months the spreads between the yields of European public bonds have given voice to an irrational bet on the future of the single European currency. The merit of the top management of the ECB is to have openly denounced this fallacious and costly "convention".
In a monetary union there is no room for karst returns of "open parities" between interest rates. Beyond the coherence of economists, the protection of the single European currency represents today for everyone, from Germany to Greece, a necessary condition to overcome the European dilemmas and face the autumn of "global slowdown" of growth.
