The need of the old “golden rule”, according which a country may finance public investment expenditures issuing bonds, while only current account expenditures have to be balanced.
In the last quarter of 2012 the Eurozone had the worst result of the year: -0,9%. A part the Greek case (-6%) the (negative) growth rates go from -2,7% (Italy) to -0,3% (France). The news are that even Germany get a -0,6%. A growing number of economists shares the opinion that the main cause of the European recession is the fiscal austerity that German and Nordic followers forced all over Eurozone. Olivier Blanchard, IMF chief economist, and Carlo Cottarelli, IMF director of fiscal affairs department, maintain that the fiscal cuts decided in Europe are too strong and too fast, and, above all, have an impact greater than that estimate by orthodox econometric models.
Commissioner Olli Rehn (economic and monetary affairs), vice President of the European Commission, gave a Speech at IIF-G20 Conference, Moscow, 15 February 2013: “Lessons learnt the hard way: The euro area, post-crisis”. At the beginning he said: “I am convinced that in order to achieve sustainable and balanced growth, G20 members should focus more on structural reforms than on short-term fiscal and monetary stimulus. The way forward should be sought in the creation of the conditions for private demand to take over from public demand”. It is true that the unemployment has reached an historic high 12%, but such level “speaks not only of the major cyclical correction, but also of deep structural issues. This is a matter of growth and competitiveness”.
But growth and competitiveness are hindered by “the high debt levels, the rapid population ageing and the fact that more than half of social spending of the whole world today takes place in Europe”. In other words the European social model is a burden that the European productive economy has to carry over; all we need are mythical “structural reforms”, a disguised expression for abolishing labor protection and cutting social expenditures. This is the meaning of “reforming and modernising the European model of social market economy”.
Rehn welcomes the turnaround of countries with current account deficits: “in Ireland, relative unit labour costs have fallen by almost 20% since the peak of the crisis, exports are growing and companies are creating jobs. In Spain, exports grew by 20% in real terms between 2009 and 2011”. Actually, the same export increase happened in Italy, even if statistics of relative unit labor costs do not show relevant variations. Anyway the main point is that the export-Gdp ratio is 106% in Ireland, while it is 32% in Spain and 30% in Italy (Eurozone countries got 46%, mainly determined by the 52% of Germany).
So the wages cut in Ireland has an effect quite different from that in Italy and Spain, where the decrease of private consumptions is greater than the increase of export (and this explains the current account turnaround). After all, Gdp is made by consumptions and investments (private and public) and by export less import.
Gdp Eurostat growth forecasts for this year are gloomy: 0,1% for Eurozone, but one could bet that the sign will be negative. According Bundesbank German growth will be 0,4%, not 0,8%, and France probably will perform even less, while Italy and Spain will remain negative with -1% and -1,4%. Okay, says Olli Rehn, “if growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed fiscal effort. Such decisions were taken last year for Spain, Portugal and Greece”. This a message to Francois Hollande, since France deficit will remain well above 3%. Europe (that is Germany) will allow more time, providing that “each country's consolidation effort is specified in so-called "structural terms", which means removing the effects of the business cycle and one-off measures on the budget”.
Structural balanced budgets and wage devaluations are the means in which, according to the European Commission, the Piigs countries may rebalance their economy. In the meanwhile Hollande decided a fiscal devaluation, cutting by 20 billion the taxes on enterprises, with a special allowance based on the wage payroll. The tax cut is compensated half by an increase of a percentage point of Vat and half by cut of various public expenditures. The aim is to increase the export (but the French export-Gdp ratio is 28%).
Will also Italy have more time? Probably not, or at least not yet. We must remember, says Rehn, “that public debt in the EU has risen from around 60% of GDP before the crisis to around 90% of GDP. And, we know that when public debt levels rise above 90% they tend to have a negative impact on economic dynamism, which translates into low growth for many years”. Since Italian debt-Gdp ratio is 127%, Italy has a long way of cutting at least three percent of debt each year before arriving at 90%. This is the reason way, few days ago, Alberto Quadrio Curzio, a well known and absolutely moderate Italian economist, wrote an article on the more important economic newspaper concluding that the next Italian government “must bargain toughly” with the European institutions in order to apply the old “golden rule”, according which a country may finance public investment expenditures issuing bonds, while only current account expenditures have to be balanced.