"Gattopardo" comes back

Jean-Baptiste Karr, in the January 1849 issue of his journal Les Guêpes (The Wasps), wrote: "Plus ça change, plus c'est la même chose" (literally, “The more it changes, the more it’s the same thing.”). In Il Gattopardo (by Tomasi di Lampedusa) the nephew Tancredi tries to convince his uncle saying "if we want things to stay as they are, every thing must change." The Eurozone seems to be the proof of this philosophy.

The results of the second quarter of 2014 were disappointing. The IMF noted that the economic recovery proceeds everywhere, but is particularly weak in the Eurozone. Just two months ago, the European Commission included the following growth rates, inflation, deficit and public debt forecast:

                                       Rates of change                           Ratio to GDP

Well, these data are out-dated. Certainly in Italy, where probably the GDP will grow (so to speak) of 0.2%. Probably also in France and Spain there will be a slowdown, while perhaps Germany will get its 1.8%. It should be noted that even with the May data, a part Germany, other countries are increasing the debt-to-GDP ratio, because the nominal growth is too low compared to the level of the deficit. To see this, just add the data for growth and inflation, and compare with the data of the deficit. The result is that while in 2008 the French debt was almost equal to that of German, this year the difference will be in the order of twenty-three percentage points.

The political dialogue between the supporters of flexibility and those of rigor looks like the typical dialogue  among deaf: "We want to respect the rules but we ask flexibility"; "The rules are already flexible." Claude Junker tried to square the circle, promising three hundred billion in three years (starting from next year anyway). Those are not new and additional resources, but simply the resources already available to the Commission, a part some possible other additional and uncertain resources. It should be remembered, however, that immediately after his election, Hollande had proposed an investment program at Community level without any objection, but then just nothing had happened. 

The point is that the European right cannot accept a truth that has now made ​​its way among economists. That is, an increase in the absolute volume of debt leads to a reduction, not an increase, of the debt-GDP ratio. That is, in some countries with high debt, an increase in the absolute volume of debt leads to a reduction, not to an increase, of the debt-GDP ratio. If an expenditure of a billion results in an increase in GDP of more than a billion (say 1.3 -1.4) the numerator of the debt-GDP ratio increases less than the denominator. More technically, this occurs when the spending multiplier is greater than the inverse of the debt-GDP ratio. This is certainly true for countries such as Greece, Italy, Portugal and Ireland, but most likely also for Spain and France, where now the debt-to-GDP ratio is 100%.

France and Spain have already been allowed to delay the return of the deficit compared to the medium-term program. Italy is asking the same, without getting, at least for now, a positive answer by the Commission. If fiscal policy will continue to seek to comply with the European constraints, the result will be a growing gap between Germany on the one hand, and the other three countries on the other.

Even the more expansionary monetary policy promised by Draghi will not be able to produce, by itself, a sufficient stimulus to bring back the European economies on a path of growth such to reabsorb the unsustainable level of unemployment. The banks of many countries, particularly those of the euro-south, will face on one side the generous loans that the ECB will grant with TLTRO, but on the other with capital constraints posed by Basel and verified by the stress tests of the ECB itself. In addition there is the classic problem of expansionary monetary policy, summed up in the expression "the horse does not drink."

We then return to the usual point: the fiscal compact that would serve the Eurozone is summed up in two simple rules: a) the countries with higher debt should aim to not make it grow further, delaying a tight fiscal policy until when the economy will return to a normal path, and unemployment will drop; b) the countries with the lowest debt must increase it, thus stimulating the overall production. Germany, for example, would bring the deficit up to 3%. This is, would have said Keynes, a fiscal policy truly virtuous.

The mantra Community instead is "make reforms." Of course every country has something on which to intervene. In Italy we have record levels of corruption and tax evasion. Justice, in particular civil justice. Is too slowly; the government at all levels seems to enjoy creating catch 22. But everyone knows that "make reforms" means to dismantle the rules of labour protection. Maybe because in this way the occupation will magically grow? No, the real goal is the reduction of labour costs. In a recent paper of the IMF (A. Tiffin, 2014. European Productivity, Innovation and Competitiveness: The Case of Italy IMF WP May 2014), the author discusses the so-called "productivity puzzle" of Italian; compared to a cost of labour per unit of output higher than the EU average, the question is why Italy has managed to maintain substantial shares in the international export market.

The European right has, however, no doubt that we must reduce wages to make sure that all of Europe become export-led economy like Germany. The only result of this position will be to sink the euro, and nothing will serve Draghi’s efforts.