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Tuesday, September 03, 2002


The lack of serious about economic numbers, which seems to be a permanent feature of how economic policy is conducted over there, is again making its presence felt.

The economic reform programme of Italy's ruling centre-right coalition suffered a setback on Monday when official figures showed a sharp rise in the public sector budget deficit in the first eight months of this year. According to data from the finance ministry, the deficit rose by more than 60 per cent from €22.2bn to €34.1bn (£14.1bn to £21.6bn) in the same period of 2001. The ministry blamed the increase largely on slower economic growth, which had depressed tax receipts. The figures represent a potentially damaging blow to the European Union's stability and growth pact, a cornerstone of Europe's monetary union. Like France, Germany and Portugal, Italy may find it impossible to meet deficit reduction targets agreed with the European Commission for this year and 2003 under the pact's terms.

Luigi Buttiglione, an economist at Barclays Capital, said there was a clear risk that Italy's deficit would next year overshoot the limit of 3 per cent of gross domestic product set by the EU's Maastricht Treaty. Almost as worrying, Italy's public sector debt, which stood at 109.4 per cent of GDP last year, could rise this year to 110 per cent or higher, recording its first increase since 1994. Although this would not disqualify Italy from eurozone membership, an increase in debt would go in the opposite direction to that stipulated by the Maastricht Treaty as a condition for eurozone entry in the 1990s.
Source: Financial Times

So let's get this clear, not only is the stability pact about to become what the Spanish call 'papel mojado' (in plain English find itself in tatters) as France and Germany are also queueing up to get permission to go outside the limits, but the whole Maastricht Treaty process is about, in the case of Italy, to be put in reverse gear. The agreement to bring down debt to GDP ratios was not simply justified by aesthetic values, Italy has a spiraling demographic process which is going to make the present public finance structure unsustainable if something major isn't done. And far from doing anything they're letting things get worse. Of course a certain amount of counter cyclical juggling would be in order if that was all this represented, but as I've said Italy's problem is as much structural as it is cyclical. At the same time if the Euro zone finance system is about to fail at its first test. What is this going to mean for the Euro?

Morgan Stanley's Eric Chaney is asking the same set of questions. The politicians are under pressure from electorates who have never really understood (because no-one has ever really taken the time out to explain the details to them) the Maastricht process, hence they are under real pressure to make light of the dilemena. Institutional Europe can take more distance. In today's post he states:

As the first real test of the Stability Pact occurs, it is crucial that governments take action to reduce their deficits, regardless of the short-term consequences on growth and employment. Since these institutions (the Commission, the ECB EH) are not directly accountable to EMU electorates, they can afford to give greater place to long-term credibility, vis-à-vis financial markets, in particular. Quite correctly, they stress that governments confronted with aging populations and large unfunded pension liabilities will be punished sooner or later if they give up pursuing rigorous fiscal policies when encountering their first post-EMU difficulties.

The Single Market and its logical postscript, the Monetary Union, were based on the forward-looking view that a deeper integration of European economies was critical for Europe's long-term political stability and constituted a convenient constraint to push through structural reforms. However, it was not sold as such to European electorates; instead, the EMU and the euro were presented to the layman as warranting more prosperity, stronger growth, lower unemployment and a more influential Europe. In other words, the implementation of the Stability Pact is as much a political issue as it is aan economic one.

Finally, one last point. Italy has just introduced an extremely draconian law to discourage all manner of immigration. The question could be asked as to whether a country where there is such a shortage of young people, and where there is such an acute problem of finding the resources to fund the long term retirement and health systems was in any position to implement such a law, even were it not totally ethically reprehensible?

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