By Roberto Marinucci
Italy is going through the second austerity package in 4 months- Greece has had countless of those, France has done some light versions, but ultimately the question is: will it work? Unfortunately, the answer is no. No matter how many austerity moves will be done, there is no way that any of these is going to take the EU out of the crisis. There will be more social unrest, recession and potentially depression in several countries and an acceleration of wealth moving out of EU. There is consensus that ,in fact, these tough measures will only have a positive impact if they are followed by growth stimulus. The conventional wisdom is that EU needs to fix the debt before it tackles growth. For example, Italy is going through a “tears and blood” budget, where the Government is trying to collect some €30bn to be able to use part to cut the public debt and part to fund growth. Unfortunately, the odds are that after some relief to the spread – behind the brief market celebration at the Italian plan—the spread will be back up and the money originally foreseen for the growth will be used to cover higher interest rates. So, a second budget correction will be necessary, and so it goes.
Italy is going through the second austerity package in 4 months- Greece has had countless of those, France has done some light versions, but ultimately the question is: will it work? Unfortunately, the answer is no. No matter how many austerity moves will be done, there is no way that any of these is going to take the EU out of the crisis. There will be more social unrest, recession and potentially depression in several countries and an acceleration of wealth moving out of EU. There is consensus that ,in fact, these tough measures will only have a positive impact if they are followed by growth stimulus. The conventional wisdom is that EU needs to fix the debt before it tackles growth. For example, Italy is going through a “tears and blood” budget, where the Government is trying to collect some €30bn to be able to use part to cut the public debt and part to fund growth. Unfortunately, the odds are that after some relief to the spread – behind the brief market celebration at the Italian plan—the spread will be back up and the money originally foreseen for the growth will be used to cover higher interest rates. So, a second budget correction will be necessary, and so it goes.This situation reminds me of the “strategy” of many companies when they are in a bad financial situation: to soften the blow with Wall Street, they announce massive layoffs. For a week Wall Street rewards them with higher stock value, but ultimately the analysts realize that these measures are not sufficient in absence of a credible plan to grow sales profitably. No company has ever become rich only through cost savings, and no country has ever grown out of austerity packages.
The critical issue for EU countries, particularly those at the periphery, is how to create the conditions for growth. Here I just would like to offer a few considerations:
- We need to eliminate the conditions to speculate on EU interest rates. Currently, the swing in interest rates for countries like Italy is similar to the fluctuations of stocks. This cannot be right. A country needs to have stable access to credit, and to have a Central Bank which could use its ability to create liquidity as a way to balance the effect of different forces. So far, the ECB can only be the defence against inflation. But it can’t intervene to buy countries’ debt, like all the other central banks, like in US, China, Britain etc. This leaves weaker countries totally unprotected from speculation. The first condition for growth is to give the power to the ECB to buy public debt at 1% rate.
- The above will also have the effect of easing liquidity. The lack of growth in peripheral countries is also driven by the credit crunch.
- Countries need to foresee a significant investment in infrastructures. This is a major opportunity to modernize Europe and to increase its competitiveness within the global market.
- Last but not least, the EU needs to exercise a central drive and control on at least three major areas. The first is to use a central commission to control that the public funds are well spent. Unfortunately, we have witnessed in the past the bad use of money in several countries, and the EU needs to ensure that this won’t happen again. This is particularly important in countries with high level of corruption. The second is to create a pan-EU policy on liberalizations and common ground for competition law. The third is to have the same fiscal policy. The fiscal rules needs to be much simpler than today but need to apply for the whole of the EU.
Unfortunately, right now, Germany and France are trying to exercise their leadership only on the budget deficit, no matter how this is obtained, and are missing the much bigger picture. We are missing an opportunity to turn this crisis into what EU was meant to be: the drive towards the United States of Europe.
