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Italy
28 April 2013

Wolfgang Münchau: Enrico Letta needs to push banking union


Writing in his FT column, Münchau looks at what exactly the job of Letta and his new government will be, and says the new prime minister will need all the help he can get.

Mr Letta has already announced that his priority will be to end austerity. He has signalled willingness to implement People of Liberty’s pledge to abolish a primary residence property tax, one of the main elements of the outgoing government’s austerity programme. The problem with austerity is not merely that it is socially unfair and politically hard to do. With interest rates close to zero, it also becomes self-defeating. So Mr Letta is right to prioritise an end to austerity. But he will require good diplomatic skills to win European assent for his promised regime shift.

The second priority should be to fix the banks. As long as small companies pay interest rates of 10 per cent to their zombie banks, the economy cannot recover. With a public sector debt ratio nearing 130 per cent of gross domestic product, the state does not have the resources to fix the problems in the banking sector. Unless the European Central Bank is ready for some extreme action – which does not seem to be the case now – the only solution to this problem would be a genuine and retroactive European banking union. By “genuine”, I mean a banking union that accepts the principle of a joint ultimate backstop. And by “retroactive”, I mean a backstop that applies to existing assets as well. I cannot see how one can fix Italy’s banks otherwise.

Unfortunately, this is not an issue Mr Letta can sort out unilaterally. He will need to find a way to persuade the leaders of the so-called creditor countries to open up to such a union. I can see only one scenario under which that can happen. They will need to be confronted with a straight choice between a common backstop or a break-up of the euro...

What about structural reforms? They are important, too, in the way that third-order priorities are. They matter once the two big issues – end of austerity and bank resolution – have been sorted. Good structural reforms are targeted at specific goals. If Italy wants to remain in an asymmetric monetary union with Germany at the centre, it should focus on a reform programme that facilitates adjustment...

In terms of the three priorities – ending austerity, standing up to German Chancellor Angela Merkel and structural reforms, I would expect Mr Letta to pretend trying the first, get scared of the second, and become stuck in the molasses of the third. The ultimate goal of attaining default-free sustainability in the eurozone may be beyond human reach even with the greatest efforts. For that view to turn out to be too pessimistic, Mr Letta will have to surprise us all. I wish him luck.

Full article (FT subscription required)



© Financial Times


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