The lack of growth is the most threatening aspect of the Italian crisis, and of the eurozone. The solution depends on the ECB and on the (post-Berlusconi) Italian Government.
The G-20 has not decided anything useful to counter the global crisis and, in particular, the Eurozone , but has produced a historic decision, that of putting Italy under the supervision of the International Monetary Fund, “an humiliation – according to The Economist - for the third largest economy in the eurozone and a founding member of the European Union”. The IMF will supervise the application of a policy which, for what we know, will worsen the economic crisis, increase unemployment and, paradoxically, intensify the rush of speculative financial markets.
To get an idea of the situation in which Italy is now , because of the ineptitude of the Berlusconi’s government , we may consider the analysis just delivered by the Bank of Italy in the November Financial Stability Report.
Introducing the Report, Ignazio Visco, the new Governor, succeeded to Mario Draghi writes: “The worsening of the outlook for the growth of the world economy has heightened fears for the soundness of heavily indebted borrowers, public and private alike… These tensions have affected Italy, inducing a significant increase of its sovereign spreads. In the judgment of investors, the Italian economy suffers from high public debt and low growth. But Italy can also count on a series of strengths, which are reviewed in this Report: the trend towards the consolidation of the public accounts , the low level of private sector debt, the absence of imbalances in the real-estate market, and limited foreign debt”.
So, the Governor’s statement maintains the Italian debt is a problem as, indeed, it has been in the past, but the ongoing reduction of the deficit and the prospect of a balanced budget within two years, have put the debt on a declining trajectory.
Everything right ,then ? No, there is the second critical aspect evoked by Ignazio Visco and analyzed in more detail in the Financial Stability Report, with the following assessment: " Within the euro area sovereign debt crisis has spread to Italy and Spain… In investors' assessments Italy is penalized by its high public debt and above all by slow growth. (mine italics )".
In other words, not the debt in itself, but the lack of growth is the most threatening aspect of the Italian crisis (as well as in Spain) and, at the same time, it is the "justification" of the assault of the financial markets. But here arises a simple but inescapable question. How the requirements of the "letter" ( Jean-Claude Trichet and Mario Draghi on Italian Sovereign Debt [1] ) sent to the Italian Government by the ECB, which now make up the object of the supervision by IMF, are related with the central problem of growth? The answer is that there is no relationship.
Let’s go back to the two main points of the “letter” of the ECB and of the Declaration of intents sent to the European Commission by the Italian Government: labor market deregulation and pensions overhaul. As the first issue, the suggestion is freeing layoffs by replacing temporary layoff with definitive dismissals: a proposal that in the midst of the crisis, does not make any economic sense and is socially , and economically, devastating.
As pensions are concerned it is worth to remember that the European Commission has repeatedly declared that the reformed Italian system has been stabilized over the coming decades. And the State Accounting Office has calculated that, from 2014, the trend of spending is down for the next fifteen years, and after a short time increase, it will resume a down trend until 2050. These measures are not a therapy to fight the crisis, but old and ineffective prescriptions stemming from the neoconservative ideological arsenal. They are bound to deepen the economic stagnation, which in turn feeds the attack of speculation in financial markets, which is in fact happening now.
Is there an alternative to this crazy policy? According to many economists and economic commentators, such as Martin Wolf, Paul Krugman and also the editors of the Economist, the ECB - after the failed attempt to implement an effective Eurobonds system - should act as a lender of last resort aiming at protecting the sovereign debt from the assaults of financial speculation, and, in so doing, to avert the possible collapse of the banks (especially French and German) overburdened by public securities. “An ECB pledge of unlimited backing for solvent Governments - The Economist wrote - would have had a better chance to solving the crisis of months ago, and today remains the best option”.
According to this point of view, a bold action of Mario Draghi, the new appointed ECB President, would be fully justified in such an emergency, given the ECB institutional commitment to adopt any necessary measure to stabilize the Eurosystem. He could challenge the German opposition, which counts for a minority of votes in the Directory. As a result, interest rates would be kept within tolerable limits, the risk of default of Italy or Spain would be averted, and the eurozone would exit the tunnel of a possible breakup.
There's more. If the EU central authorities would adopt a rational anti-crisis strategy, then we could also think of a different "letter" of the ECB addressed to the Italian government (hopefully, after Berlusconi downfall, perhaps Monti, an economist and old European Commissioner or, after the next elections, perhaps Bersani, head of the Democratic Party) – a letter which would recommend to Italy two radical and effective measures: the imposition of a tax on wealth and an all-out attack on tax evasion, which together would give the resources to revive investment, growth and employment, and , therefore, to reduce the debt.
Is this policy impossible? If it is not, but just ignored by the neoconservative and myopic European authorities, will the Italian leftwing parties assume it in their national and European strategy, and fight for its implementation? In the current agony of the Berlusconi government, the question remains open.