Italy's exit from the excessive deficit procedure, albeit accompanied by conditionality, the granting of more time for adjustment to countries with budgetary difficulties, such as France and Spain, and, more generally, the change of tone of the recommendations of the European Commission, signal an attenuation of the austerity line. If they can be read as an initial cautious acknowledgment of the damage that synchronized fiscal austerity policies are inflicting on the entire European construction, they are however still far from a disavowal of the economic philosophy that underpinned the construction of the EMU. Alongside the tiring and exhausting negotiations for political and institutional reform, the idea continues to prevail that the sustainability of the euro is based on a readjustment of wages and relative prices, to be obtained through reductions in deficit countries or increases in in surplus, or a combination of both.
However, if systemic interactions are taken into account when analyzing the problems of a country (or a group of countries), it becomes clear that the persistent deficits of the periphery countries cannot be explained by standard price competitiveness indicators alone. The analysis of the structural causes underlying the crisis of the euro and of the peripheral countries cannot neglect the examination of the changes in the economic model of the hegemonic country and of the circumstances which have accompanied the structural evolution of the peripheral countries. Among these, in particular: the effects exerted by the eastward expansion of German industry on German trade with southern Europe; the changes in the model of specialization and the impoverishment of the productive matrix of the peripheral countries; the change in the qualitative composition of German trade, with particular reference to the relationship between imports and income distribution.
These changes have led to a growing asymmetry of trade within the euro, with an increase in the weight of central-periphery trade to the detriment of multilateral trade between countries of the same periphery. The analysis of these changes has important implications for identifying the policies needed to trigger euro area growth that is sustainable beyond the short term if, as will be argued below, differences in price competitiveness are only part of the history, and a German expansion, while necessary, is not sufficient to ensure an increase in exports and income of the southern countries large enough to eliminate the imbalances and ensure sustainable growth in the long run.
The reorganization of the German economic system, conducted on two fronts - reforms of the labor market at home and decentralization of production phases (offshoring) to the east - has led to a strong segmentation of the labor market. In Germany, the integration of a dual domestic labor market (divided between workers in export industries and workers in services, more penalized by the Hartz reforms), with a third labor market created by offshoring operations, has helped to provide intermediate goods at low wages and prices. A notable growth in wage inequality and in the share of low-wage workers has been accompanied by a compression of domestic demand for consumption and investment. The change in the division of labor between the various areas of the enlarged EU has also led to a reduction in the driving effects exerted by German demand on the income of the countries of the southern periphery. In fact, if driven by exports, a German expansion favors more the countries of Central-Eastern Europe, specialized in the production of intermediate goods for German industry, and much less the Mediterranean countries (partly excluding Italy), specialized in consumer goods.
In the latter, the degree of diversification of the production structure is still too low to be able to fully benefit from development driven exclusively by foreign demand: unlike Germany, which has a large number of specialized sectors, the peripheral countries are in fact characterized by few sectors of specialization, with very high indices. More than unit costs, the economic development of a country is therefore associated with a process of specialization and diversification, capable of expanding and integrating its production base. The low growth of the euro area, combined with measures suggested by an economic theory that interprets development policy solely in terms of price competition policy, has not helped southern Europe to diversify its production structure, contrary to what it happened instead to the countries of the East. But if the composition of southern European exports is very different from that of Germany, it is doubtful that a reduction in relative prices will have significant knock-on effects.
However, there is another risk that derives from an exclusive attention to costs. In Germany, the reforms of the labor market and welfare and the compressed level of domestic demand have led to growing inequality and poverty. High unemployment and low incomes have forced households to change the consumption basket, which has resulted in the need to resort to imported consumer goods of lower quality (downgrading of imports). While domestic demand thus activates imports of consumer goods from a much broader geographical base, synchronized austerity measures at the European level set in motion new negative effects, as higher imports of lower quality products translate into less of spillovers among European countries (in addition to a reduction in the standard of living which is hidden by the reduction in prices connected to the worsening of quality) and a new spiral of cumulative reduction of incomes in the Eurozone.
Lastly, the high degree of asymmetry in trade (and balances) within the Eurozone implies that, in the event of a recession, adjustment can only take place through the reduction of imports from deficit countries, and consequently of trade total. If a German expansion, although necessary, is not sufficient to ensure long-term sustainability, and if a change in price competitiveness, obtained through a change in unit costs, would not be sufficient to achieve the rebalancing of the accounts within the eurozone, the alternative is an intensification of trade between the countries in deficit, the only one capable of obtaining a rebalancing of trade flows without having to resort to a compression of demand. But the experience of this first decade has shown us that the market mechanism alone is not capable of ensuring the diversification process necessary for the recovery of long-term sustainable growth.
For this we need a "fiscal" policy capable of favoring - through investments - the removal of bottlenecks to development and the renewal of the production base necessary to reduce differences in development. To this end, industrial and trade policies are needed to support import substitution, export upgrading and expansion, as well as the search for areas of complementarity in the production structures of southern European countries capable of ensuring a rebalancing of commercial exchanges. The acquisition of a greater degree of multilateralism in the foreign trade of the countries of the European periphery could also be obtained by promoting relations with countries not belonging to the European Union and, among these, in particular, with the countries of the Mediterranean basin.
