So we have established that money can’t save us from this crisis. Not the ECB (Eurobonds, EFSF and the likes even less), that is. It would be wonderful if by simply printing money, sheets of colored paper, we would be able to save ourselves from a moral, ideal, real crisis, wouldn’t it? Sorry ….
So. Are there other alternatives? Some are offering the quick shift to a fiscal union. Crazy idea not only because it would take time but because it would simply replicate the mistake – a deflationary fiscal policy – at a higher , more centralized level, leaving no escape for anyone. In addition it would eliminate the last remaining tool to deal with asymmetric shocks or structures (in external account or public deficit) that we have in Europe.
My friend and colleague Roberto Tamborini wrote an interesting piece on Nouriel Roubini’s site. It has the merit of pointing out to the craziness of Italy adopting an ultra restrictive fiscal stance that kills growth. His proposal for Mr. Monti, our PM, besides reforms: “Monti might therefore opt for …. taking in the immediate stricter fiscal correction measures. I think that this unpalatable ingredient is necessary, and that it should be aimed not to nullify the current deficit but to obtain an immediate cut in the debt stock, which we badly need in order to make the subsequent path of primary surpluses less prohibitive.” I disagree with this proposal. It is little ambitious in its solutions compared to the gravity of the moment. More than that, he seems to argue that a once and for all wealth tax that were to cut the level of debt (but how much at most? 4? 5% of GDP? it’s nothing) would be capable of saving Europe and Italy. He has some Europe-level policy proposal, but it circles around eurobonds, and we have already dismissed those in previous posts. I agree with him that we should avoid reducing the deficit. But much more can and must be done. And to prove it, I take his gloomy scenario – when he says: Consider the case of Italy: if it alone implements a fiscal restriction of 1 point of GDP, it loses 1 point of GDP, but if all countries together implement the same restriction, Italy will lose almost 2 points of GDP (the same more or less happens with all the other countries) – and I turn its logic on its head. Let me thus state: “Consider the case of Italy: if it alone implements a fiscal expansion of 1 point of GDP, it gains 1 point of GDP, but if all countries together implement the same expansion, Italy will gain almost 2 points of GDP (the same more or less happens with all the other countries)”. Now, wouldn’t this be something?
Roberto, the truth is self-evident to all: only expansionary fiscal policy (and I fear it might be too late!) can save Europe from this crisis and from the end of the euro as we know it. So why not say it? Are we scared that Germany will scream at this proposal? Beside the fact that we are economists and we can say whatever we want, I remind you that Germany would anyway scream also (a bit less, I agree) at your moderate proposal! But I think I know your answer: Italy can’t do more public spending, it can’t allow higher public deficits. I did not say to operate this spending in deficit. Use your plan of taxation to finance this expenditure, the Keynesian fiscal multiplier that we teach in Economics 101 would still work (a bit less than with a deficit) to expand aggregate demand and GDP! Furthermore what really would matter in this proposal is that other countries should do it as well, Germany in the first place. As you correctly say, only a coordinated policy can make it, but not any coordination is good for the euro area, only one involving expansion of public spending. So let’s propose it before it is too late!
To my foreign readers I usually spare Italian readings. But I should warn them that in the Italian version of this post I quote an interesting article by a somewhat well known Italian journalist who I usually read with interest. I will translate his arguments so that you can understand where the current environment is leading the debate toward, i.e. the euro’s death, for lack of logic.
He starts by citing the Italian problem: growth. That’s a good start. He then goes on to say: “This lack of growth is a true sickness, because a country needs to grow, to provide employment opportunities to the young people, to build bridges, roads, hospitals, adapt rivers, invest to make cities more livable”. Wouldn’t you agree? I would, if it were not for this small logical mistake that unravels the (wrong) direction of the following argumentation. What bothers me here is that he says that it is growth that creates bridges. True enough, growth creates resources with which states can then build bridges but, wait a second, the reverse also is often true, i.e. that it is by building bridges, livable cities, hospitals that growth can occur and be sustained. Don’t you agree? So by this small distraction we have confined to an eternal ban in hell one powerful tool of intervention in the economy to generate growth: public spending.
He then goes on to say that growth is lacking because of the high level of public debt (strangely he does not say we had this same level 30 and 10 years ago without this mess occurring and that Japan has a much higher debt than us without having our problems). But, mostly, and I couldn’t agree more with him on this one, he argues that bad quality of public spending is what really has hampered Italian growth in this past decade and is at the root of the crisis. I like that opinion and I share it. I would take it as an indication that we need a better State to get out of this mess. No, his final solution is one and the one only, the one favored by the European Commission and Mrs. Merkel apparently: more taxes, less spending, i.e. let the state continue to neglect citizens.
A fabulous non sequitur, a lack of logic in arguing that can only be explained by this desire to follow the dominant line of thinking. Yes, that one line that is driving the euro to its last stop.