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The economic and social consequences of the war on Europe and Italy

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Sergio Cesaratto – The economic and social consequences of the war on Europe and Italy Brave New Europe, May 12, 2022 Political realism offers useful keys to interpreting the international political economy, which has never been more endangered than today by the military escalation in Ukraine. The EU and Italy risk to be the pots and pans in the unprecedented economic crisis looming ahead. Sergio Cesaratto teaches European monetary and fiscal policies at the University of Siena. He is author of Heterodox Challenges in Economics – Theoretical Issues and the Crisis of the Eurozone, Springer, 2020 (reviewed by BNE here). Adapted from the Italian version of the article that appeared in fuori collana With a certain pride I remember having

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Sergio Cesaratto – The economic and social consequences of the war on Europe and Italy

Political realism offers useful keys to interpreting the international political economy, which has never been more endangered than today by the military escalation in Ukraine. The EU and Italy risk to be the pots and pans in the unprecedented economic crisis looming ahead.

Sergio Cesaratto teaches European monetary and fiscal policies at the University of Siena. He is author of Heterodox Challenges in Economics – Theoretical Issues and the Crisis of the Eurozone, Springer, 2020 (reviewed by BNE here).

Adapted from the Italian version of the article that appeared in fuori collana

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With a certain pride I remember having already mentioned for some years, within the framework of my economic courses, political realism in international relations and International Political Economy. I did so in academic contexts in which an uncritical Europeanism based on liberal thinking prevailed (and prevails) according to which the world is divided into good and bad. The book, which I suggested for reading to my students (Sorensen 2005), published in Italian by Bocconi University Press (Egea), had some pages dedicated to the enlargement of NATO to the East, dutifully presenting the opposite thesis. In particular, an important letter addressed in 1997 to President Clinton by 50 eminent personalities opposed to such an enlargement was cited (McGuire 1998). Since those years the signs of growing Western aggression and mounting Russian anger have been evident. I had approached Political Realism at the suggestion of a book in which a profound Italian jurist and philosopher of law, the late Danilo Zolo (see e.g. Zolo 2009) expressed his scepticism about humanitarian wars. My interest as an economist was naturally directed towards the debate in the field of International Political Economy between, on the one hand, liberal and Marxists supporters of cosmopolitanism (albeit for different reasons) and, on the other, supporters of economic nationalism à la Robert Gilpin. A scholar, the latter, of liberal faith, but who did not confuse ideals with crude economic reality. As I find myself teaching International Economics again next year, I will not fail to make students think about these issues.

The effects of the war on the global economy

The effects of the war on the Italian economy will be devastating, and the country would do well to face them by making use of political realism not only to analyse the international situation, but also to assume a perspective of defence of national economic interests. From both points of view, Italy’s interest is in restoring stability and peaceful coexistence in Europe while respecting the right to independence of all peoples in mutual security. If we do not start to think about the reasons that led to the current situation, it will not be possible to rebuild a path of peace and coexistence. Of course, there has been an aggression with certainly brutal traits (although only naivety or bad faith can make us believe that in a conflict the good guys are all on one side and the bad guys are all on the other). Now it is a matter, however, of avoiding not only further mourning for those poor populations, first and foremost the Ukrainian one, to whom our full solidarity goes, but other terrifying and lasting consequences.

Leaving aside the unprecedented probability of a nuclear holocaust, and in any case of a future of geo-political upheaval marked by fear and uncertainty, further suffering will derive from the economic consequences of the crisis. These include the disruption of grain supplies-particularly to poorer countries-of which Ukraine is a primary producer, compounded by fertilizer supplies from Russia and a globally widespread drought; rising energy and raw material costs; a worsening crisis in international supplies of manufactured goods already undermined by the pandemic and its recent resurgence in China; and more generally, an overall uncertainty in international economic relations and likely global industrial restructuring. Let’s not forget that the United States talks to daughter-in-law (Russia) so that mother-in-law can hear (China).

The worsening effects of the environmental crisis are evident, from the fuel depots set on fire in the conflict, to the scarcity of rainfall, to the reopening of coal-fired power plants, to the downsizing and loss of centrality of ecological conversion. The consequences for the standard of living of the working classes, even in the richest countries, will be just as devastating, both in terms of the collapse of their purchasing power as a result of the increase in the price of basic necessities and energy, and in terms of the unemployment that will result from industrial restructuring and the drop in demand caused by the collapse in purchasing power. The indirect human costs of the war and the future of geo-political instability that is being prepared will be severe, in addition to the direct losses.

On a global level, the West is living the imperialist syndrome of “there is fog in the Channel, the continent is isolated from Great Britain”. That is, it doesn’t realize that the bulk of the emerging world that includes the emerging powers is at least equidistant in the conflict: it is the West that is isolated, and it could become so economically as well as politically.

Among the advanced areas, Europe will be the first victim of this instability since it does not have, unlike the United States, a federal economic governance, in particular a federal budget, which would enable it to face shocks through solidarity among citizens and regions. Of course, unlike the financial and fiscal crisis of the beginning of last decade, in the face of the pandemic crisis something more the EU did (the Commission with the Next Generation EU programme and the ECB with a new quantitative easing called PEPP). But now the shock is even greater and longer lasting, and nothing but more rigidity is on the horizon. Political realism, we always come back to, suggests that even at this juncture, or perhaps even more so at this juncture, political solidarity, and therefore economic solidarity, among the various nations that make up the EU will not be there.

The crock pot of Italy

In all of this, Italy is particularly exposed to an economic, social and financial crisis of the first magnitude. As an exporting country, it will lose out from the rift with Russia – a market that is not as irrelevant as it is said to be – and from the crisis in the European and global economy; as an importing country of energy and intermediate goods, it will suffer from the decline in household purchasing power and the increase in production costs. Inflation, impoverishment and rising unemployment are the prospect. But it is on the public debt that the crisis will reverberate through the increase in interest rates already underway, not only preventing policies to support families and businesses, but even returning the Belpaese to the infamous years 2011-2012 in which budget cuts were accompanied by the collapse of GDP. But now it will be worse.

With the precarious situation in Italy in particular in mind, even more than the other central banks, the ECB is torn between raising interest rates in an anti-inflationary key and the danger that this will worsen the recession and, more specifically, lead to the collapse of Italian public finances. Moreover, the increase in interest rates is ineffective with respect to the origin of inflation which is entirely due to external factors (increase in energy prices, grains, and industrial supplies). Rates are raised in order to cut off in advance any requests for nominal wage adjustments to inflation (the so-called “second round effects”) so as to prevent a price-wage spiral. It is a horrible prospect that of increasing unemployment even more in order to control wages, instead of pursuing a social solidarity that redistributes the costs of the crisis between classes. But then again, the EU has acted in recent decades in the direction of demolishing rather than strengthening the structures of social-political solidarity by pursuing ordoliberalism (hypocritically called social market economy) instead of the social-democratic model. The perversity of the current situation can also be seen in the fact that, being of external origin, inflation does not contribute to decreasing the debt/GDP ratio. In simple terms, inflation generally benefits debtors to the detriment of creditors, but if it comes from abroad (increase in import costs) the entire country loses. Faced with a collapse of Italian public finances, and taking advantage of the war emergency, Europe will finally have the opportunity to put an end to the structural instability that Italian weakness introduces into the single currency. The solution will be a new “whatever it takes” that, mind you, this time will not be a salvific announcement whereby spreads magically fall as it seemed in 2012, at the time of Draghi as president of the ECB. It will in fact entail a bit of arsenic and therefore the participation of the dreaded European Stability Mechanism (ESM) and Troika (European Commission, ECB, IMF) as required should the ECB intervene to specifically support Italian government bonds. This means restructuring of the Italian public debt to the detriment of savers and handing over the keys of Italian economic policy to the Troika. A quick end to the conflict and the re-establishment of European and global peaceful coexistence is therefore a crucial issue for Rome. The government cannot and must not align itself with the bellicose perspective of the United States, while being firm in guaranteeing the independence and neutrality of Ukraine in the context of a compromise with Russia, perhaps inspired by the unimplemented Treaty of Minsk.

Conclusion

To those who criticize us of cynicism in the face of an aggression that, in their view, would only call revenge, the charge backfires: you are the ones advocating that the feud continue and become global. The path indicated by Pope Francis, that of understanding, is certainly hard, very hard, but some form of compromise is the only way to peace. I am not a believer, but always be peace to men and women of good will.

References

McGuire, M. (1998). NATO Expansion: “A Policy Error of Historic Importance.” Review of International Studies, 24(1), 23–42.

Sorensen, J. (2005) Introduction to International Relations, Oxford University Press.

Zolo, D. (2009) Victors’ Justice: From Nuremberg to Baghdad, New York, Verso Books.

Sergio Cesaratto
Sergio Cesaratto (Rome, 1955) studied at Sapienza, where he graduated under the direction of Garegnani in 1981 and received his doctorate in 1988. He obtained a Master's degree in Manchester in 1986. He worked as a researcher at CNR where he was of Innovation Economics. In 1992 he became a researcher at La Sapienza, and then associate professor in Siena where he teaches Economic Policy and Development Economics.

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