If country [Italy] fails to bounce back from recession, it is hard to see how it can stay in the eurozone.
This is the way FT summarises the opinion piece by Wolfgang Münchau on today’s edition. Welcome M. Lapalisse, would Italy fail to bounce back from recession the issue won’t be about remaining in the eurozone, rather rising unemployment, desperation of the poorest, permanent destruction of production capabilities.
According to the author, the 2.4 per cent deficit to GDP ratio forecast (in fact, it is 2.2 per cent) “could easily turn into 3.4 per cent or 4.4 per cent”. Now, in order to turn the deficit to GDP ratio from 2.4 into 3.4 a contraction in the economy by 0.6 per cent instead of the forecast growth by 1.6 should occur. Is that “easy” or likely to happen?
Münchau is worried about the global economy slowdown. The Italian government is wary of global risks (even if our export is performing positively so far), but we also share the viewpoint that at present the lack of growth primarily depends on weak demand. This analysis pushes us to policies that boost domestic demand. Many commentators are ignoring or underestimating that we are supporting growth in two ways: promoting competitiveness in the long run through structural reforms, while boosting domestic demand in the short term.
During the recent G20 meetings, one of the most credible leaders of the world stated that every government should undertake “active policy responses”, “sustain demand” and “put money into the pockets of workers”. It wasn’t Mr. Renzi, but the recipe seems the one the Italian government is currently adopting.
However, a number of assumptions in the recurrent criticism by Mr Munchau are surprisingly uninformed. For example:
Instead of reforming the public administration or the judiciary, he [Mr. Renzi] has opted for a cut in the housing tax.
What motivates the use of the word “Instead”? The Italian government has already passed many radical reforms (in the labour market, in the banking sector, in the judiciary, in the tax administration, in the institutions) and is now undertaking a major public administration reform: a so-called “delegation act” approved by the Parliament provides the Government with criteria and the authority to implement the reform over the next few months. It’s worth spending a little time reading the report on reform implementation which the Italian Treasury regularly updates: there’s plenty of details. Furthermore is worth noting that the tax cuts are across the board so to support offer as well as demand.
Italy is succeeding to implement an ambitious structural reform program intended to increase competitiveness while consolidating public finances (the deficit to GDP ratio was 3.0 in 2014, is 2.6 in 2015 and will be 2.2 in 2016) while sustaining domestic demand in order to avoid the vicious circle experienced in the recent past (increase in taxation, contraction in disposable incomes, unemployment, and so forth). Such an outcome may surprise commentators but surprise doesn’t justify uninformed criticism based on old cliché. There’s no complacency among Italian government officials but it’s time to recognise that times are changing even if this requires to overcome intellectual laziness.