He sits at the Eurogroup table a stone guest which is called "aggregate demand", what entrepreneurs, with more effective and direct words, call turnover, orders, sales.
The Italian government has agreed with Europe on a list of structural reforms that are certainly desirable—provided they really manage to ensure that market rules facilitate, and do not hinder, job and business opportunities. But to return to growth in GDP and employment, he relies on the effects that the reforms will have on the potential product of our economy.
Now if it's true that potential GDP matters because that's what an economy is is able to produce with one's own capital and with one's own work, it is equally true that one emerges from the recession with an increase of actual product - or of the GDP that firms find it convenient to produce. And here, as entrepreneurs well know, the prime mover is the question: if the restaurant is full and there is not enough staff, the owner hires (perhaps complaining about rules and bureaucracy), but if the restaurant is empty even the best reforms remain dead letter.
It is therefore quite surprising that the topic of the effects of austerity on the demand for consumption and investment is completely absent from the Eurogroup agenda and appears only occasionally in the debate on how to save the euro.
To bring back the domestic demand issue in the growth debate the report The long crisis: last call for Europe by the Confindustria Study Center has taken care of it, which dedicates a box to the Expansive policies to get out of the crisis, same title as a separate note signed by Alessandro Fontana, Luca Paolazzi and Lorena Scaperrotta. The authors explain that restrictive fiscal policies compress domestic demand, especially if they are implemented simultaneously by several integrated countries. The authors highlight the fact that since 2011 austerity policies in the euro area have become highly pro-cyclical, that is, they accentuate the recession already underway.
This is an important reminder of reality for the economic policy in place in Italy and in Europe, which instead relies on relaunching demand two ineffective elements: future, hypothetical productivity gains to relaunch our exports in a global context in which foreign demand is languishing, and a generic "confidence" effect that should arise from the provisions and declarations of the ECB and the Eurogroup. In fact, betraying a key objective of the Economic and Monetary Union, that of consolidating the single market.
In other words, it has become urgent for Europe to understand the mess it has gotten itself into by imposing spending cuts and tax increases aimed at reducing the debt/GDP ratio, and which are not only incompatible with growth, but are also destined to miss the goal of debt reduction. And yet, it should no longer be a mystery: in the global crisis, the countries that have been able to let public deficits run with the recession are also those that today record growth rates higher than those of the Eurozone, where the constraint of the common currency bites instead .
The reason is simple. In a given economic system, for every individual or sector that spends less than its income, there must be another that spends more than its income if we do not want to cause a drop in GDP. Typically, households spend less than their income, if only as a result of pension contributions which compress domestic demand, and businesses, above all when, seeing the horizon dark, they prefer to accumulate reserves rather than invest. The instrument that compensates for the 'outgoing' flows of income is the public deficit, which is in the accounts identical to the overall surplus of the other sectors of the economy. Squeezing it when the economy is weak will deepen the recession.
On the other hand, already in the course of this crisis, the hopes entrusted to expansionary monetary policies proved to be ephemeral, and the reason is clear: monetary policy modifies interest rates, but it cannot increase savings and the profits of the private sector. It is an elementary principle of macroeconomics, forgotten for too long, now rediscovered in the light of the crisis. And which, with some approximation, can be summarized as follows: fiscal expansion creates income, monetary expansion only liquidity.
What to do then, under the constraints of the single currency? It would already be a lot to be able to include the question of the dynamics of European aggregate demand among the emergencies of the next Eurogroup. Extraordinary tax reductions, agreed and coordinated in Europe, better if aimed at consumption and medium-low incomes, would boost demand by increasing taxable income and producing the effect (only apparently counter-intuitive) of reduce debt/GDP ratios and spreads. Other solutions are technically possible, provided that the stone guest is recognized at the table.
To sound the last alarm is the International Labor Organization which in the July report estimates that if Europe stubbornly insists on the policy of austerity we will see further destruction of four and a half million of jobs over the next four years, with unemployment in the Eurozone alone of 22 million people. Today, China is avoiding a hard landing of its economy with a fiscal policy that stimulates domestic demand. If China is ready to abandon the model of export-led growth and stimulate domestic demand, why couldn't Europe do the same? The near future European decline is not fatal: if there is, it will be the result of an intellectual and political failure of the old continent.
