The stand off between @EU_Commission and the Italian government on its fiscal stance is so intractable because it tests and threatens Europe's identity, the core sense of what European leaders believe they stand for: frugality and discipline. prospectmagazine.co.uk/economics-and-…. @prospect_uk
The frugality identity runs deep. @SenatoreMonti said in January 2012, the "precious" German virtues of fiscal discipline have been "marvellously exported." ft.com/content/4385a5….
Those virtues are embodied in the fiscal rules. Chancellor Merkel calls them the guard rails.
Those virtues are embodied in the fiscal rules. Chancellor Merkel calls them the guard rails.
@pierremoscovici echoes Merkel's language. Its all about framing. The eurozone, he says, is a condominium. He, as administrator, must enforce rules so no one touches the supporting walls. .
But, of course, as Romano Prodi insisted , the rules are stupid.
But, of course, as Romano Prodi insisted , the rules are stupid.
It is really quite simple: if a country is in or near a recession, the rules require more austerity, which deepens the recession and makes the debt burden larger. The rules then require more austerity. Lest anyone has forgotten, that is the Greek tragedy and the story of 2011-13.
Even for countries where the sovereign is under stress because of high debt, it is still true that austerity causes a sharp enough contraction that the debt-to-GDP ratio will very likely go up. So says Daniel Leigh, the brilliant IMF economist. onlinelibrary.wiley.com/doi/abs/10.111….
Alesina, Favero, Giavazzi say "expansionary austerity" is possible: cuts in public expenditure can raise growth rates. scholar.harvard.edu/files/alesina/…. But careful. Here is what they find:
If public expenditure is cut when an economy is NOT in recession, output MAY increase. That is like saying if you are healthy, your body can handle (possibly benefit from) running a marathon. But what doctor would recommend even a brisk walk to someone coming down with a fever?
Italian growth has come to a halt. The economy is on the threshold of a recession. But, no matter, the frugality identity lives on. Even a bad rule is better than no rule, the legend says. The @FT sternly warns the Italian government to follow the rules. ft.com/content/4619f4…
The thrift identity is intertwined with the eurozone's primordial flaw: a single monetary policy with no fiscal transfers. Deutsche Bank's David Folkerts-Landau understands that: he calls for surreptitious transfers through the @ESM_Press. ft.com/content/a8d572…. Good luck.
The frugality-thrift identity is so precious that, rather than give it up, the @EU_Commission is willing to let an Italian recession morph into an unmanageable crisis. Today, with Europeans so divided, sensible compromise remains tragically elusive.
