Credit for production should be given to companies that have a production structure, and do not work fully, for lack of resources to pay the raw materials or extra working hours.
Up to now, the people who called the tight monetary policy as wrong and negative were considered as dangerous leftists, o as simply ignorant. Recently, however, the extra orthodox magazine The Economist, has clearly changed its position, and writes that in the present situation it is necessary to increase investments, in three possible ways. First, the Central Bank must use its instruments to invest in new assets, beyond their habits. The Economist approves the decision of the Bank of England to concentrate on industry rather than the housing market.
Second, the politicians must reduce the administrative obstacles and the distortions, which limit the investment capacity of industrial companies. Third, and most important, the Government must increase public investments, especially for public transport. Why not take the opportunity to invest in necessary infrastructures when the cost of debt is so low? This is the conclusion of the Economist. And it is worth to observe on the same line a member of the ECB - Executive Board, Mr. Praet, who, in a recent interview with the Financial Times (December,12) says that "the ECB would Ensure any liquidity was used to spur lending to the real economy ..... this would Encourage banks to use any additional liquidity to lend to business and household ". If we wanted to apply this model to the Italian situation, we would get a simple answer: start with financing the small and medium size companies.
Today, the attempt to solve the Italian economic problems by selling companies is an illusion rather than an opportunity. A large part of Italian industry is already on foreign hands. For example, the oil refining industry is largely in the hands of Russian shareholders. We have therefore one instrument only that may promise to take us out of the present stagnation. First, we must accept that the problem is not financial, but economic; that is, we can get out of the present financial difficulties only by increasing industrial production, and, if possible, exports. The companies must find the resources to increase production, that is, to buy more raw materials, or more machinery, or to pay extra working hours, or to improve processes and products. Not ever the strict believers in the European economics “ABC” could easily condemn such a strategy.
To produce more, and, if possible, to export more, would not create inflation, which is not a serious danger now, would not increase the country’s debt or worsen its international position. Such a policy could reduce unemployment, which is not an objective of the technocrats of the European Commission .Not even their religious faith on the advantages of deflation could induce them to deny the utility of increasing industrial production. Could such a strategy really be implemented? Banks would be able to supply some resources to the industrial companies willing to increase and improve their product? It should not be so difficult, if the requests of producers could be presented in a clear way, and with the demonstration of their feasibility.
This could in fact be the key point of a Government with the project of leading Italy out of the present stagnation. Banks could not deny easily their support, as the European Bank offers money to anybody asking for it, although it did not follow the economic situation like the USA did. Up to now, the Italian companies were not able to increase production. Credit for production should be given to companies that have a production structure, and do not work fully, for lack of resources to pay the raw materials or to pay extra working hours, and possibly lacking the courage to “risk the market” .The primary objective of the State should be to foster an increase in production and perhaps hire extra workers, all these being non inflationary instruments. Some “European” would object that the activity of the Government to create the conditions for a pickup of the economy would be against the rules that prevent the Government to influence the economy.
According to the believers in deflation, the State must operate in the economy only to keep up the famous “open field for everybody, and well levelled ” a similitude that fits the modern economy like a ploughing horse compared with a tractor. It is just when the economy does not improve, or stagnates, that the Government must guarantee the “operational credit” to the companies that want to increase production. If a Government does not take such decisions that are not contrary to the “rhetoric of deflation”, what else can a Government do in such a situation? Our American friends have answered years ago, and seriously reduced the damages of the great financial crisis. Perhaps, now would be the moment for a serious attempt.