Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

This brief was prepared by Administrator and is available in category
Italy
01 March 2013

Carlo Bastasin: Italy's post-election chaos isn't what you think


Writing for Bloomberg, Bastasin disagrees with those who are saying that Italy could bring down the whole euro project.

Italians remain pro-European, and fewer people than you would suppose are seriously thinking of relinquishing either the euro or the economic-policy commitments that come with it.

Discontent is focused, above all, on taxes. They are among the highest in the euro area. Taxes on business are the highest of any euro member, and they are severely hurting a weakened economy. Italians see excessive taxes mainly as the consequence of bad political management. It’s not that they object to Europe and austerity. Rather, they are angry about the tax increases introduced under the banner of Europe and austerity.

If austerity means fiscal discipline, Italians actually want more of it. This is why New York Times columnist Paul Krugman is wrong to say Italians shunned an intelligent and credible man such as Prime Minister Mario Monti because he was “the proconsul installed by Germany to enforce fiscal austerity on an already ailing economy".

In Italy’s case, however, the argument about fiscal stimulus just misses the point. A bigger budget deficit wouldn’t do much to stimulate demand, because the real problem is the breakdown in Italy’s supply of credit. From the beginning of the euro crisis three years ago, Italy has seen a faster shrinkage in total credit supply than most euro area countries, as foreign banks have repatriated their loans. This widespread lack of credit has crushed the private economy. Businesses and households can’t get loans and are cutting investments and consumption at an unprecedented rate.

Reviving the market for credit is the first job. This would be far more effective than delivering a new fiscal stimulus. In fact, continued budget discipline is vital in ending the credit crunch. The new government must negotiate a deal with the European Union and with the European Central Bank, so that the ECB can support the Italian banks. But this can’t happen unless the ECB is sure that it has a reliable partner in the Italian state and that Italy will remain as fiscally stable as possible.

Italians understand this, and so the political crisis may be a little easier to resolve than many think. Under the pressure of markets, Italian parties are likely to close ranks behind another technical prime minister, just as they did in November 2011 behind Monti. They will nominate someone familiar with financial issues -- some high official at the Bank of Italy, or maybe even Monti himself. They will call it an “institutional government” and ask it to make the political system more honest and functional, reining in the anger and recrimination of the citizens.

Full article



© Bloomberg


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment