05 May 2013

Wolfgang Münchau: Italy's change from austerity is all talk

There is a big buzz in Europe that austerity may soon be ending. The Italian elections have scared politicians in other parts of southern Europe. The European Commission seems sympathetic, too. As a consequence, I would expect to see minor small-print policy shifts. However, the main change will not be about policy itself, but the way it is sold...

If the eurozone were serious about a U-turn on austerity, the only effective way to accomplish this would be for the creditor countries to expand their fiscal positions during the recession. The opposite is happening. Germany, a country with a lot more fiscal space than Italy, undertook a fiscal adjustment of almost similar scale. Between 2010 and 2012 the accumulated net improvement of the structural balance was 2.5 per cent of GDP. Italy and Germany are both projected to record structural balance, more or less, this year and in 2014.

There is no way that Germany in particular will accept a fiscal stimulus for the sake of the southern European countries. This is because Germany restrained itself by passing a balanced budget law that requires the government to run near-zero structural deficits indefinitely.

The European fiscal compact, an inter-governmental treaty that came into effect in January, provides far less flexibility to countries as they try to meet their deficit-cutting targets than they had under previous agreements. Under the fiscal compact, Italy will be required to pay back debt worth more than 2 per cent of GDP each year. To achieve that goal, Italy will need to run very large structural surpluses for almost a generation.

So if you want austerity to end, you need to start by repealing the fiscal pact and amending some of the secondary legislation governing fiscal policy co-ordination. I do not think this is going to happen. My conclusion is that austerity is here to stay, but will simply be presented with warmer words.

And it will last for as long as the euro exists.

Full article (FT subscription required)

© Financial Times