Debt recovery and growth for a newly prominent Italy in Europe

July 31, 2017
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Italy has been losing its place in the European governance landscape. The political and financial uncertainty that characterizes the country, along with a certain mistrust in its ability to recover (as noted by Daniel Gros in the first of his columns for LUISS Open), seems to have squeezed it out of the new Franco-German axis that’s shaping up after the victory in the elections by Emmanuel Macron and the much-anticipated one by Angela Merkel. Nevertheless, it is crucial for our country to return to a central role in Europe, in order to promote the general interests of the European economic and monetary union, but also to ensure the protection of its most fragile members.

A strategy to attain this result is offered in the new policy brief by the LUISS School of European Political Economy, as compiled by  Carlo BastasinLorenzo Bini SmaghiMarcello MessoriStefano MicossiFranco PassacantandoFabrizio Saccomanni and Gianni Toniolo. The solution, according to these scholars, consists into trying to strike a balance between stability and growth, by streamlining public spending, by pursuing a tax reform that redistributes the burden of taxation and by implementing public investment projects to be funded, as far as possible, with European resources and through incentives to private investors.

The consolidation of public debt is a prerequisite for a credible implementation of these initiatives, but it comes with enormous difficulties. The authors point out that we must not deceive ourselves: the political-institutional instability, with the added expected rise in the structure for the nominal market interest rates makes the objective extremely problematic. Yet, there is no alternative to ensuring growth in the medium term and to avoid being the weakest link of the European governance. A window of opportunity is available thanks to the (temporary) continuation of ECB’s quantitative easing, but courageous political choices are needed and the Italian government has to start a credible process for reducing the debt/GDP ratio. Renzi’s proposal to increase public deficit, bringing it for five years just below the threshold of the old “Stability and Growth Pact” (ie., the 2.9% of GDP) seems therefore unenforceable to the authors’ eyes.

This policy brief consciously poses a difficult challenge, especially during a pre-election season. However, only a consolidation of public debt would allow a more robust growth in the medium-term, which in turn would allow Italy to gain a significant position in the prospects for European governance outlined by France and Germany. As emphasized by Francesco Saraceno in the latest issue of his column for LUISS Open, European budget policies will become increasingly important; The authors of the policy brief point out the possibility of appointing a European finance minister, of strengthened centralised forms of control of national public budgets and structural macroeconomic and macro-fiscal adjustments.

Economic Growth and European Bargain: Why Italy Should Decrease its Government Debt