Bill Mitchell-en I hope the Italian government holds its nerve against Brussels
(http://bilbo.economicoutlook.net/blog/?p=40451)
… today’s post, is a brief reflection on the latest crisis that is about to engulf the Eurozone. I am referring to the announcement by the Italian government that it will target a fiscal deficit of 2.4 per cent of GDP. The elites are up in arms. I hope that Italy holds its nerve.
(i) Italiako egoera fiskala1
So wherever we take the assessment from, the Eurozone has been a disaster for Italy.
The next graph shows unemployment rates for the same nations since the March-quarter 2000. Germany is the outlier.2
So what would a responsible government do in this situation?
Answer: totally unambiguously, increase its fiscal deficit to stimulate new growth, particularly in employment rich sectors.
(ii) The Financial Times3
(iii) SGP: Stability and Growth Pact4
Zein da zein?
(1) The financial markets, aided and abetted by Brussels, want things on their terms, which are clearly detrimental to the interests of the Italian people.
(2) The Italian government has a responsibility to defend the interests of the Italian people.
(3) The Eurozone is structured to advance the aspirations of capital and undermine the responsibility of the elected Member State governments.
(4) That violates democracy and is a recipe for long-term failure.
(5) I will write more about this as the drama unfolds.
I hope the Italian government holds its nerve.
1 Ingelesez: “Italy’s fiscal position
(…) I thought the reaction by the press to the Italian governments release of its new fiscal plans was crazy.
Essentially, the new Italian coalition government (Five Star/Lega) announced that it would deliver a fiscal deficit of the order of 2.4 per cent of GDP in the coming year.
With Italy in a downward social spiral and degenerating infrastructure after years of austerity, the new government announced modest increases in spending.
The outgoing government had committed to a fiscal position of 0.8 per cent of GDP this year (that is, more austerity) and a surplus by 2020.
The first graph shows GDP growth indexes (March-quarter 2000 = 100) for the major Eurozone nations.
Italy was more or less growing proportionately with the Eurozone aggregate up until the GFC. Thereafter, it has falling into stagnation and is only 4.7 per cent larger than it was at the time the common currency became law.
Since the peak before the GFC, Italy’s economy has slumped by 5.3 per cent. The Eurozone overall has only grown by 6.7 per cent since the GFC onset (March-quarter 2008), Germany by 12.7 per cent, France by 8.3 per cent, and Spain by 3.3 per cent.
So wherever we take the assessment from, the Eurozone has been a disaster for Italy.”
2 Ingelesez: “The other major Eurozone nations have failed to reduce their unemployment rates by any significant degree relative to where they were before the crisis began.Italy still has 10.6 per cent of its active labour force without work (and it is worse when we consider broader concepts of labour underutilisation.”
3 Ingelesez: “The Financial Times editorial (October 1, 2018) – Italy’s political leaders are playing a dangerous game – is representative of the hysteria that has accompanied last week’s announcement by the Italian government that it was increasing the fiscal deficit target to 2.4 per cent of GDP.
It carried a sub-heading “Fiscal irresponsibility and defiance could deepen Rome’s troubles”.
We read that:
There are real and serious risks, stemming as much from Rome’s attitude and behaviour as from the actual economic targets. Italy’s previous government committed last year to bring down its fiscal deficit to 0.8 per cent of gross domestic product by next year and gradually turn it into a surplus in the two years after that.
While few thought this target was credible, the 2.4 per cent deficit the government signalled late on Thursday is way above the kind of figure the EU or the markets could reasonably live with. That ratio, moreover, would be sustained, not decreased, over the two following years. Rather than helping reduce Italy’s public debt — the eurozone’s largest, as a percentage of GDP, after Greece — the draft budget calls for potentially unsustainable spending. By the time these plans reach Brussels for formal approval, the targets may have grown looser still.
Which makes you wonder what the Stability and Growth Pact (SGP) is all about.”
4 Ingelesez: “The allowable threshold is 3 per cent of GDP. And Italy has been in breach of the 60 per cent debt target for years so it is ridiculous to start imposing sanctions as a result of that on-going departure from the rules.
Once could argue that a 2.4 per cent deficit is way below what is needed. Way below, given the sort of economic performance summarised in the two graphs above.
The Financial Times claims that if the European Commission (and the Finance Ministers) were to accept Italy’s new fiscal plan they:
… would be condoning truculent behaviour and economically misguided objectives.
And that is why the Eurozone is so dysfunctional.
Truculence is now defined in terms of trying to grow an economy that is already around 6 per cent smaller than it was 10 years ago.
While the bond markets were pushing up yields on Italian government debt this morning, the reality facing the Eurozone is that the ECB will have to entere the markets and buy up Italian government debt, just as they did in 2012.
If they don’t then there will be a major financial crisis which will threaten the Eurozone viability.
I hope the Italian government doesn’t buckle under the pressure and pushes their national interests and ignores the pressure from Brussels.
That will force the ECB to intervene and use its currency-issuing capacity to stabilise Italian government yields.
It has the bargaining power here. Whereas Greece was too small and succumbed to the bullying by the Troika, Italy is such a significant part of the Eurozone economy that it can call the shots if only it dares.
As the Financial Times editorial noted, the planned additional spending by the Italian government will:
… undoubtedly be a boon to struggling Italians …
And that says it all really.”
