Letta in Europe

The dialogue between the new prime minister Enrico Letta and Angela Merkel can be summarized as follows:
Letta: "The austerity is killing us, please grant us a little more in deficit to grow";
Merkel: "Austerity and growth are not in conflict; few tenths of a point, yes, but staying within 3%."

To understand the problem, we should start from the forecasts made in the last Document of the Monti government. The paper estimates a decline in GDP of 1, 3 per cent in 2013 and a recovery in economic activity over the next three years: 1.3 per cent in 2014, 1.5 in 2015, 1.3 in 2016. But IMF and OECD estimate -1.5 in 2013 and only 0.5 in 2014.
The difference depends on the fact that the prediction of the Monti Document takes into account the effects of the measure of the payments of debts of the general government to the enterprises, which would help to mitigate the decline of GDP in 2013 (for 2 tenths of a point) and would provide a non-negligible contribution to the recovery in economic activity in 2014 (0.7 percentage points) and in the following year.

It is hard to believe the Document. It should be noted that in late 2011 the Monti government forecasted, for the next year, only -0.4 decrease of Gdp in 2012, while the decrease is -2.4, two points less. The 2012 deficit was expected at 1.2, and the primary surplus to 4.6. In fact, the 2012 deficit is 3 (OECD says 3.3) and the primary surplus 2.9. As a result of the fall of Gdp and the consequent increase of the deficit, the debt-to-GDP rose to 127 percent in 2012, and will reach 130 this year.

It is clear that the prospect of growth implies a mix between expenditures increases and reductions of taxes for at least one point of Gdp, and this would, at least temporarily, rise the deficit over 3%. But the effect on the debt-to-Gdp would be positive, due to the greater growth of the denominator, that is the Gdp. But this will not be the way of the new government. The new Minister of the Treasury, Fabrizio Saccomanni, said that the government wants to contain the deficit by 3 percent. Having spent his life as a central banker, his intention is not surprising. Moreover the same Letta reiterated this position.

To be fair, one can think that the Government's argument sounds like this: "we have to ask for some more margin, but we have to respect the commitments made by Monti, otherwise in Berlin (and thus in Brussels) get angry, the spread goes up and the debt burden (interests) on gdp goes up again (in 2012 it was 5.5 percent). So we have to sort out from the excess deficit procedure. Furthermore, the fact that Berlusconi claims to have the government's golden share in his hand introduces a strong element of uncertainty. And a government with uncertain life is a weak government.

There is some margin? Probably the European Commission may exclude, from the calculation of the deficit, public expenditures for the completion of European projects involving highways (Helsinki-Valletta) and railways (Lyon-Kiev, Genoa-Rotterdam). It is about twenty billions spread over five years or more. It is a very small thing for a country that in 2016, according to the document of Monti, will still be below 4 percent of Gpd 2007.

In a nutshell, the Letta government will not do anything very different from what would have done the Monti government. Hard times for young Italians.