Eurobasket: Marcello Messori’s three plays for the common currency

April 27, 2017
Editorial Europe
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An article from Europa sfida per l’Italia (Europe: a challenge for Italy), published by LUISS University Press

For those who study the Economic and Monetary union of the European Union, a close look at basketball strategy can offer illuminating metaphors. The alley-oop, which seems like an improvised two-person play in which one team member outside of the “painted” area (normally the playmaker or guard) makes a soft, curving shot while his “strong wing” corrects the shot by slamming the ball into the hoop. In reality, every alley-oop is based on careful preparation and complex coordination involving all five players on the court. The player that makes the pass relies on the movements of the other three players who do not seem to be involved in the two-person play, but – in reality – are crucial in forcing the adversaries defense to another part of the court and creating space for the fifth player to make his way to the net.

If successful, the play scores two points, just as every other shot made within 6.75 meters from the hoop. However, with respect to a game’s inertia, an alley-oop has a much greater weight, especially if it is made by the trailing team. The slam into the net is the crowning move on a spectacular play that is difficult to execute as it requires perfect timing and synergy. In this sense, the play instills trust in both the team in difficulty and its supporters while diminishing certainty of victory for its adversaries who may have even taken a win for granted.

Italy’s current position in the EMU and, generally speaking, in the European Union, would require a number of alley-oops on the political economy court and political-institutional assets in order to emerge from its difficulties.

Over the past twenty years, our country has registered, compared to other EMU and EU countries, one of the lowest growth rates as well as one of the highest public debts. Such a situation, definable as “unsustainable  stagnation” has even worsened – in relative terms – over the past four years. In April 2013, the entire Euro area emerged from six trimesters of recession and progressively strengthened its growth rate, managing to exceed the positively-growing United States in 2016. Italy transformed its recession into stagnation in 2014 alone and reported less than 1% growth in 2015-2016. Furthermore, due to this disappointing macroeconomic situation, Italy did not take advantage of the exceptional drop in interest rates triggered by the BCE’s non-conventional and expansive monetary policy to adjust its imbalances in the fall of 2014. The consequent drastic fall of borrowing costs onto our public debt has in fact accompanied a moderate but persistent increase in the relationship between this debt and the GDP which has violated constraints imposed by European medium-term objectives. Finally, there were no appreciable improvements in two crucial factors for growth: despite selection process in the Italian industrial sector, various forms of productivity continued to show stagnant average dynamics; our banking sector, which saw significant weaknesses in the checks carried out by the European Supervisory Authority in 2014 (the Comprehensive Assessment), continued to represent a serious element of instability in the European financial market.

Until the beginning of December 2016, Italy could at least deceive itself about  having a comparative advantage in terms of political-institutional stability: a government capable of opposing sovereigntist and xenophobic forces that threatened other EMU member states. The outcome of the constitutional referendum and the subsequent major-party crisis has turned this perceived advantage in a further element of fragility: in contrast to the other major euro-area countries, there is now a high probability that the upcoming Italian elections will produce a government  coalition hostile to the monetary union.

To overcome the economic weaknesses and the political-institutional instability that currently make Italy the main threat to the Euro’s progress, it must stop the inertia through various alley-oop plays. Such plays require identification of the problem and preparation of necessary tools, authoritative leaders that know how to cooperate in order to seize the window of opportunity and reverse unfavorable inertia, and implementation of a team-sport mentality based on willingness to pursue common objectives through risky but shared choices. The objective is to boost macroeconomic growth and pursue social and political-institutional stability in Italy by recreating the necessary conditions to increase  various forms of productivity, improve the financial sector’s operations, and make the future dynamics of public debt sustainable , reduce inequality and rebuild governable margins. Moreover, these initiatives must have made credible progress by the end of 2017, before the new German big coalition and the new president of the French Republic relaunch a European governance project . To stay in the metaphor of basketball, if it did not succeed in completing several alley-oops during the qualifying phase of the 2018 UEM championships, the Italian team would risk not being admitted to the tournament or – more likely – to be paired with tough competitors during preliminary elimination rounds, thus prohibiting their access to decisive final phases.

In the following,  I do not aim to provide an exhaustive list of the many initiatives that Italy should put in place by the end of 2017 to play an active role in the institutional recovery of the Euro area. I will only look at three types of actions similar to alley-oops in the field of Economics that are necessary to avoid being benched during games played by other European countries.

The first type of alley-oop aims to launch public and private investment incentive plans that are compatible with constraints on the state budget and which lead to efficient allocations of financial and productive resources. The stagnating dynamics of the various forms of productivity, which has weighed on the Italian economy since the beginning of the new millennium, may be attributed to at least two reasons: (i) excessive bank financing and the large but inefficient gross fixed capital formation that has marked our country since the mid-1990s at the outbreak of the international financial crisis; (ii) the sharp decline in investments recorded in 2008-09 and in 2011-13 due to the accumulation of pervasive uncertainty. The Italian government should propose a “contractual agreement”  based on the initial European funding of this national investment plan to the European institutions in exchange for a delegation of efficiency checks at the European Commission and implementation of a reform package. In this way, the player smashing the ball into the net would translate into the launch of innovation processes and – above all – the spread of innovations that are a necessary condition for stable and lasting macroeconomic growth.

The second type of alley-oop regards the need to nourish and select these processes over time, once initial funding of European institutions has ceased (for example, through the European Stability Mechanism – ESM). It is thus necessary to overcome not only the current and serious fragility of the Italian banking sector, but also the peculiar bank-centrism of our financial market. The obsolete organizational and ownership models in addition to low profitability, which today are characterized by the majority of Italian banking groups, indicate that, although essential, liquidation of excessive problem loans compared to the euro area average is not enough to achieve quantitatively adequate allocations and qualitatively efficient financial resources. To strengthen the diffusion of innovative investments in Italy, financial intermediaries will have to offer forms of debt other than traditional bank credit, modify borrower selection criteria, currently based predominantly on pure accounting or relational approaches, expand their range of financial services, and encourage successful small businesses into the next dimension and to opening the capital structure. This requires more nationally-structured and integrated European financial markets. The Italian government must therefore support the European Capital Markets Union process and set up internal institutional conditions for non-financial companies to benefit from the results of this process.

The third type of alley-oop concerns the management of the public budget and the associated redesign of welfare. Rather than announcing improbable tax cuts based on future attempts to prevent tax evasion , the Italian government must start redefining public spending and revenue while drawing up new forms of public debt issuance that meet two objectives and two constraints. A first objective is to implement policies to support innovation and dissemination, so as to strengthen the first type of alley-oop and push the Italian productive apparatus to recover delays in competitiveness towards the core of the EMU. The second, and related, objective is to reduce current inequalities and, above all, to introduce active inclusion policies for those who are penalized by the diffusion of innovation or have no access to a transforming labor market. The two constraints, on the other hand, require: (i) to align the dynamics of the Italian deficit and the Italian public debt relative to GDP with European rules; (ii) to meet this result even in the presence of a rise in interest rates and therefore financial burdens on public debt, driven by the gradual but predictable reduction in the unconventional monetary expansion currently implemented by the ECB so that non-financial firms will be able to make use of the process’s results.

In addition to requiring a profound redistribution of public expenditure flows, the two objectives mentioned above become compatible with the two constraints (i) and (ii) only if extensive reorganization of public administration takes place including the elimination of privileged conditions for certain categories of citizens, which have long been a part of the Italian economy and society, but are becoming more and more pervasive. This requires, among other things, to make the rules governing public transfers to public and private undertakings more cogent, to change institutional arrangements of the nation’s government and related local business system, to restore social and fiscal legality, to remodel the management of the European structural funds and other resources for Southern Italy, to manage public assets (state and non-state) in an efficient manner, to address demographic dynamics and the aging population, and to separate welfare expenditure and social security expenditure.

As with a basketball team, to maximize the chances of success, these three types of alley-oops in economic and social policy cannot be improvised, but require preparation and perfect timing. It should therefore rest on at least four fixed points. First of all, Italy should have executive, economic and political leaders pursuing joint, or at least compatible, strategic projects that work with a medium to long-term perspective to turn these projects into a coherent set of possible actions. Secondly, the national must be convinced that these alley-oops are necessary tools for Italy to prosper in the Euro-area; therefore significant part of the community should be involved to ensure the success of alley-oops becomes a common goal for the population and elites. Thirdly, Italian economic policy makers should select priority projects and actions, choose the timing of their implementation and carry out the resulting actions. Finally, harmony between the different actors should make it clear that the success of alley-oops would be beneficial to everyone.

It may be superfluous to point out that in Italy, as in most other EMU countries, these four points are not satisfied. Hindering the success of alley-oops are: the detachment between the population and the elite and the shortage of shared general objectives, the resulting lack of cooperation between different social components, lack of trust in political parties and governments, the prevalence of particular interests and a short-term perspective. Yet the obvious difficulty, which characterizes Italy’s present position in EMU, does not offer alternatives. From this moment until the end of 2017, each team of players who is in one of the fields examined above must take responsibility for taking risky actions that move from a soft curved passage to allow the final player in the alley-oop to smash the ball through the net. If successful, each of these actions will bring Italy closer to the appointment with the reopening of the European project after the German elections.