If an economist returns after a two-year stay on the moon, unaware of the events of recent years, and wants to get an idea of what is happening in the euro area, he could form very different opinions depending on the data he comes across . Looking at the stock market rally in recent months, or at the trend in consumer confidence, one would be led to conclude that a brilliant recovery is about to begin, definitively overcoming the long crisis we have been going through. Looking at the long rates and the inflation data, one would be led to believe that the eurozone is about to descend into a tragic deflationary spiral.
This is the summary of a serious situation that triggered a belated but decisive reaction on the part of European monetary policy. We will only find out if the strategy will be successful in a few quarters; for now, the ECB's Qe brings interest rates to a minimum and supports the stock markets, and can realistically produce some effect on the real economy, also because it is assisted by the "deus ex-machina" of 2015: the fall in oil prices. There is no shortage of risks. In particular, the world economy shows very different trends, with emerging countries decelerating, against indications of an improvement in the cycle in advanced economies.
The differences in growth rates go hand in hand with large fluctuations in exchange rates and this contributes to modifying the orientation of international trade flows. The uncertainties mainly reflect the change in US monetary policy. As we get closer to the path of raising interest rates, uncertainties emerge about the consequences this would have for financial markets.
The most controversial aspect is constituted by the evaluation of the cyclical conditions of the US economy and by the consistency with respect to them of the monetary policy stance. The debate is between those who argue that with unemployment close to 5 percent we are heading towards two years of continuous increases in US interest rates, and those who bet on a very gradual approach. For now, US rates are still at zero, but the flight of capital from emerging countries towards the dollar is enough to give us an idea of the upheavals that would result from a decisive change in Fed policy. In a context of this type, the trends in individual eurozone countries, such as Italy, appear like boats carried by the waves in a stormy sea: for now it seems that we have caught the right wave, and we need it.
We are the country whose public finances benefit more than others from the fall in interest rates (given the higher level of public debt); between the fall in yields on the German benchmark and the closure of the spread, Italian ten-year bonds have literally collapsed since mid-2012. Adding to this the effect of the drop in oil prices, at other times we would have said that this may be enough to trigger a robust cycle of domestic demand.
This time the intensity of the recovery will have to be verified: it will reflect the transmission of lower interest rates to aggregate demand via the credit channel, and the understandable prudence of consumers, which may not immediately translate the increase in power 'purchase in higher consumption. Enthusiasm about exports should be treated with some caution, both due to the bad economic situation in emerging countries and because the gain in competitiveness for our exports is less than what one might assume based on the trend in the dollar/euro exchange rate . The scenario described affects the public finance framework.
The effect of the decrease in interest rates frees up resources, but it may not be enough for us to achieve our objectives without further interventions, as early as 2016. The point is that the uncertainty relates to achieving break-even in a few years, but if we Apart from the objectives indicated by the European authorities, even the most cautious scenarios show a situation of Italian public finances that is completely under control, with very low deficit levels. Hence, on closer inspection, the task of Italian economic policy for the coming months is not so much to implement the measures suitable for guaranteeing the objectives, but rather to find a way not to implement them. In other words, it is a question of letting these first timid shoots of recovery take root without further downward pressure on demand linked to new public finance consolidation measures.
Forecasts at a glance. In just a few months, the international economic picture has changed. Oil prices have fallen; the US monetary policy reversal is approaching; many currencies have collapsed against the dollar; economic indicators show a phase of growth in advanced economies, but many problems remain in emerging economies. The turnaround of the ECB, with the consequent drop in interest rates and the strengthening of the dollar against the euro, together with the fall in the price of oil, lays the foundations for an improvement in the European economy.
For now, the signs of recovery are more evident in some countries, such as Germany or Spain, than in others, such as France and Italy. At the end of 2014, the Italian economy limited itself to stagnating, while at the beginning of 2015 it reported modest growth. Possible strengthening during the year, such as to allow us a change in GDP of 0.7 percent this year and 1.1 the next. We need to exploit the opportunities that arise from a more favorable international framework. The task of budgetary policy is to avoid new measures to correct the accounts, even at the price of a deviation from the path of constant reduction of the deficit agreed with the European authorities.
