Southern Europe Has No Economic Growth Strategy – Italy Is In A Recession, Market Liberalization Reforms Are Not Popular – Monti Does Not Do Miracles
By Paolo von Schirach
May 15, 2012
WASHINGTON – If you leave out Germany and the northern countries, Europe does not grow and belonging to the Eurozone right now does not help growth for those southern members (Greece, Italy, Spain and Portugal) that are doing so poorly. Being in the Euro they cannot devalue, while they are now committed to austerity policies that are strangling them, as they are unable to restart the growth engine. But what I find bizarre is that instead of rethinking their failed economic growth models, the leaders of the laggard states keep saying that “Europe” should lead in promoting pro-growth policies. This is amazing. Since when the fundamentals of domestic economic growth are delivered from abroad?
A variation of this way of trying to change the subject is French president Hollande insistence that the stringent (Germany inspired) austerity diet included in the recently approved EU Fiscal Compact be diluted to allow for pro-growth spending measures, even though this would imply exceeding spending limits. Fine, let’s assume for a moment that the Germans say yes to this. And then what? The only pro-growth public policy the Europeans (and most other leaders for that matter) know is stimulus produced with (borrowed) government funds that supports more consumption. Yes, the magic formula is more of the same stuff that produced no real upgrade in productive capacity, while simply adding to the deficit and the debt. So, basically Hollande and the others want an authorization to circumvent the new rules without any real plan that would eventually generate genuine growth while re-balancing the books.
Real market reforms, anyone?
The only pro-growth public policies that may actually stimulate genuine new economic activities consist in lower corporate taxes, R&D tax credits, labor market liberalization, regulatory simplification, improvement in the delivery of basic public services. Indeed, it does not help “growth” if it takes 25 permits and two years to open up a store or to obtain any operating licence. Sure, the state could help by investing in critical infrastructure, such as transportation nodes. Yet even an inspired public investment program takes time.
But I do not see any of that happening. I do not see any aggressive plans to simplify national bureaucracies. I do not see anybody embracing labor markets liberalization. In fact people riot against them. Therefore, hobbled by all these constraints, it is no wonder that the Southern Europeans do not grow. In fact, they contract.
Professor Monti does not do miracle
Look at Italy. When it changed management at the end of last year it looked like a new awakening. Out went discredited Silvio Berlusconi. Unelected Professor Mario Monti, distinguished economist, took the helm with the help of a team of first class technocrats and the tacit support of the weakened political parties. This was a good development. And yet the crazy idea soon took roots that a new unelected leader in Rome, with no popular mandate, would have the magic powers to transform Italy –all by himself. Well, he did not. Sure enough, he managed to force the Italians to swallow more austerity. He cut spending and greatly improved the fiscal picture. This much he did.
Italy is in a recession
And now? Well, after three consecutive negative quarters Italy is in a recession. And the fruits of the vaunted fiscal success have evaporated. Blame Greece if you want easy scape goats, but Italy’s 10 year bonds are almost back to 6%, (Spain does just a little worse), with a 4.4% spread against the German bonds. And, by the way, Moody’s just downgraded 26 Italian banks. Their response? Indignation and an official request that the EU from now should disregard these (offensive?) downgrades. Now, that would no doubt help.
No commitment to real reforms
In fairness to Monti, he did try to reform Italian labor laws, and a lot more. The problem is, as the unelected technocrat discovered, the Italians do not want real reforms. Sure they want growth. But they also want to keep every possible rent niche that may exist, while every profession and every labor union wants to keep its privileges and perks. In other words, overall the Italians are not committed to a radical plan that would make their economy and society really nimble and competitive. And without that, invoking Brussels delivered “growth” has the same policy impact of a rain dance.
For a long time the standard joke about Italy was that “The situation is dramatic…but not serious”. Sadly, this still applies. Mario Monti is a serious man; but most of his fellow Italians are not.Print This Post