When the euro was first created, Europhile economic liberals – who were not a completely extinct breed ten years ago – believed that the rigours of being in a single currency would force eurozone members to liberalise their economies. The reasoning was that the consequences of keeping illiberal labour laws and other regulations would be so great, if currency adjustments were not able to deal with shocks, that politicians and bureaucrats would have to respond. They could not live, it was argued, with the popular discontent that would arise in some countries if policies to promote economic growth and employment were not adopted.
Of course, things have not worked out like that. Politicians are impervious to public opinion. This is especially true at the European Union level, where public opinion is more or less irrelevant when it comes to determining the prospects for advancement. Instead, we have had more and more regulation and some economies have become more and more sclerotic – Germany being the notable exception. This provides the backdrop to the problems facing Italy today. Italy does not have to default on its debt; it is not Greece.
Italy has an urgent need to reduce its debt rapidly and then a long-term need to bring about economic growth so that the debt burden falls in the future. The policies needed to restore economic growth are exactly the same as the policies Italy needs to be more flexible in the face of future economic shocks, given that it has no exchange rate flexibility. As such, Italy’s creditors should stand firm. They should demand repayment and demand the policy action that will ensure that they get repayment. This is not markets taking over from democracies – it is creditors ensuring that governments meet the promises that they have made.
The excellent Alberto Mingardi has pointed out that the state in Italy owns assets more or less equal in value to its debt. Some 10 per cent of these could be sold very quickly and a long-term privatisation programme could take Italy’s debt to a new, sustainable, level. If this is done the prospects would be quite bright. Furthermore, Italy is bogged down with regulation and restrictive practices as well as generous pension provisions – in the face of an ageing population. This is all reflected in an extremely high level of youth unemployment. Rapid change here could considerably improve the prospects for economic growth and employment and potentially turn Italy into a powerhouse. The other path is somewhat more likely. There could be inaction and the debt will gradually grow.
As I suggested at the beginning of the crisis some time ago, the whole future of the eurozone could hang on the prospects for Italy. Most pundits are just saying that the EU leaders should have the political will to put up the cash to save the countries that cannot service their debt. But, there is no cash. Nearly one third of the guarantees of the European Financial Stability Facility are provided by the countries whose debt it is likely to be guaranteeing-nearly one half if France comes into the equation. Many are calling for the European Central Bank to behave as a lender of last resort to countries. However, the sovereign nations do not have a liquidity problem – they have a credit risk problem. Who provides nearly half of the financial guarantees for the ECB? You’ve guessed it: Italy, Spain, Portugal, Greece, Franceand Ireland. The fingers are pointing at Germany – but that country should not commit any more resources to states that do not wish to reform.
There are ways to wind up the euro in an orderly fashion, but there are also ways to avoid this prospect. The governments of Italy and Spain – and others – have a responsibility to their creditors and to their people to take the action that is necessary. Economies cannot survive in a single currency zone unless there are huge fiscal transfers – rightly, resisted by Germany – or they are highly flexible and dynamic. The EU has much to answer for in this respect, but Italy could – if its new government wished – lead the way and save itself from ignominy. Mario Monti has the technical ability to deliver much needed privatisation and liberalisation, but whether he is able to survive the rigours of democratic politics is another matter. A useful by-product-for those who believe in the euro project – is that a radical programme of economic reform in Italy and elsewhere could save the euro too. For more reasons than one, it is to be hoped that the road to liberalisation leads to Rome.
First published by Public Service Europe here.