More than eight years have passed since the bankruptcy of Lehman Brothers and seven since the start of the European sovereign debt and banking sector crisis, but the sustainability of the euro area is still in doubt. With the exception of recent months, the average growth rate of this area continues to remain below that of the United States mainly due to the divergent performance of some of its more fragile countries.
Italy, the third largest economy in the EMU, appears as the main defendant. Its persistent macroeconomic recession now resulting in too weak a recovery, the stagnation of its various forms of productivity and the vulnerability of its financial sector pose a threat not only to its stability but to that of the monetary union, making monetary policy problematic common and push away the construction of risk sharing mechanisms. This fuels tensions between member states and conditions the initiatives of central institutions.
The divergence between European economies is also reflected in citizens' opinions. In fact, opposing visions of the EMU are asserting themselves: the most fragile countries, especially Italy, increasingly perceive the European rules as a cage and resist requests to reduce their own risks; the most competitive countries, in particular Germany, perceive any form of risk sharing in the Euro-area as the 'Trojan horse' to impose on them costs of others. This conflict puts the sustainability of the monetary union at risk.
In our study, we introduce an explanation of the dynamics of the crisis which focuses on institutional shocks, caused by an uncertainty that cannot be reduced to probabilistic calculations, primarily with respect to the possible breakup of the euro. We define this uncertainty as 'radical uncertainty'. Our analysis maintains that this uncertainty mainly affects investment and savings decisions. Moreover, the effects of institutional shocks are persistent: they survive the absorption of their short-term unbalancing impact and, even, the removal of their causes.
The member states of the euro area are thus affected by a form of hysteresis – that is, the persistence of the effects of a phenomenon even after the disappearance of the factors that caused it. This form of hysteresis explains the changed dynamics of investments and savings in many euro-area countries, which has suffocated the capital formation process. The centrality of institutional shocks and the connected hysteresis signals the inadequacy of the current EMU economic governance system, which is based on the principles of the optimal monetary area and examines the impact of shocks (idiosyncratic and systemic) above all on imbalances in the consumer demand and supply inefficiencies.
While having to deal with its own specific anomalies (first and foremost, the inefficient allocation of resources) and while therefore having to use some of the conventional adjustment recipes, Italy cannot correct its position of fragility in the EMU without new intervention strategies European. Since the uncertainty concerns the institutional resilience of the euro area, the solution must also be institutional in nature. It is a question of designing a reform program for the country that is voluntary but agreed with the European institutions. The main feature of this agreement lies in delegating to the European institutions the function of monitoring the national measures that implement the agreed reform programme.
The ascertained implementation of the agreement must then be accompanied by a flow of investments, financed by European resources, which meet efficiency criteria and which are also subjected to supranational checks over a five-year period.
