Thread by @FabioGhironi

@RobinBrooksIIF I agree with you on everything except I think transfers would not be the solution. I think Germany should invest because this would be beneficial for Germans, not transferring resources to Southern Europe to compensate a perceived imbalance in how beneficial the euro was. 1/n

@RobinBrooksIIF And I think Germany’s expansion would generate positive spillovers for its partners, including Italy. But I most definitely do not blame Germany for Italy’s problems. We are in a mess of our own doing, and we’ve been in it for a long time. 2/n

@RobinBrooksIIF As for transfers, I think the debate focuses too much on risk sharing and transfers as an insurance mechanism over the business cycle, and not enough on “structural” differences in the conduct of fiscal policy that play out over longer horizons, across multiple cycles. 3/n

@RobinBrooksIIF The mismanagement of Italian fiscal policy is a problem that’s been around a long time, and one that transfers from the North would not solve. 4/n

@RobinBrooksIIF The figure below is from an excellent ebook by @c_bakkian and @federdaniele for @italiadati that you can find here: italiadati.com/libro 5/n

@RobinBrooksIIF @c_bakkian @federdaniele @italiadati The book, on diagnosing the Italian economic malaise, is in Italian, but the figures sing loud enough. The path of Italian government spending in the figure (per capita on the left and percentage of GDP on the right) is net of interest payments, and it speaks volumes. 6/n

@RobinBrooksIIF You also look at the path of the categories of spending, and you see the disaster of a country that throws away its future. 7/n

@RobinBrooksIIF As long as Italian government finances continue to be managed as they have been since at least the 1980s, there’s no way Northern Europe would and should accept a mechanism of transfers that would run the risk of constantly financing bad Southern policy habits. 8/n

@RobinBrooksIIF Italy benefited *a lot* from the euro and had a massive opportunity to take care of its long-term problem during the 2000s, before the crisis. Yet, Italian governments wasted the opportunity. Then the proverbial s**t hit the fan. 9/n

@RobinBrooksIIF But awful mistakes committed by Italian governments when they had the chance to act cannot be pinned on Germany and not even on any measure of the output gap. 10/n

@RobinBrooksIIF Sadly, I do not see change in the long-established habits of our governments coming any time soon (if they ever do), and therefore I doubt we’ll ever see a transfer union materialize for the fiscal policy side of EMU. 11/n

@RobinBrooksIIF My own preference would be to move from the rules-based approach to fiscal policy that has so far characterized the euro area to the institutions-based approach that Draghi talks about here: ecb.europa.eu/press/key/date… 12/n

@RobinBrooksIIF I think it would be more consistent with actual policy coordination than the rules-based harmonization we have been pursuing (which may well be very different from the truly cooperative outcome). 13/n

@RobinBrooksIIF But, as Draghi put it, “the transition to an institutions-based approach requires trust between countries,” and trust is as low as ever these days. So, fat chance also of my preferred scenario happening…

Sigh. 14/n

@RobinBrooksIIF Oh well. Meanwhile, let’s focus on getting at least the measurement of output gaps right and trying to prevent the crackpots from leading Italy to disaster. 😄😉 n/n