Cristine Lagarde is not wrong in believing that once again Germany could be the engine of the long-awaited European recovery but the problem, this new one, is that this time the German engine is stuck. If the GDP trend in the second quarter of 2014 had already launched an alarm signal on the state of the German economy, yesterday's drastic drop in the confidence index (Ifo) is proof that not only the economic fundamentals but also German sentiment is now moving towards the horizon of stagnation.
It is now difficult to understand whether the worsening of its economy will induce Chancellor Merkel and the German government to broaden their intentions to favor a wage growth policy internally but also - at the European level - a strategy which, without denying the rigor and that derive from the Treaties, interpret austerity in a softer way, leaving room for a more sensitive reduction in taxes with a corresponding cut in unproductive spending, as recommended by Mario Draghi at the Jackson Hole meeting of central bankers.
What is certain is that against the nightmare of deflation the ECB can also be asked to do more and accelerate the launch of European-style quantitative easing, but governments cannot escape – both internally and on the continental level – to their responsibilities that they must know how to attack and relaunch both foreign and domestic demand.
Surely Draghi's bet to facilitate the progressive devaluation of the euro against the dollar - at least up to an exchange rate of 1,30 or even 1,28 dollars for one euro - will contribute to making European economies more competitive and therefore to favor the recovery of their exports in various areas of the world and in America in particular, although a greater push in this direction could come when the Fed increases US rates considering the recovery in wages adequate, according to the well-known paradigm of Yellen.
A recovery in exports is welcome for Germany but also for Italy, but it is on domestic demand that national governments and the European Union with them can and must do more, both in terms of consumption and those of investments. On the consumption front, the situations of the various European countries are different and the recipes may not always coincide but there is no doubt that, as far as Italy is concerned and beyond the beneficial operation of 80 euros for the benefit of less well-off employees , a sharp cut in the tax wedge offset by a similar reduction in unproductive public spending with a drop in taxes on both businesses and labor remains the high road and has very few alternatives. We will see in the Stability Law what margins the Renzi government will be able to find on this terrain, but as of now it is time to raise the voice on the third leg of the relaunch and that is on the all too neglected one of investments.
It is useless to think of unrealistic leaps forward that clash with the paradigms of productivity and competitiveness of every market economy and it is completely clear that the corporate strategies implemented by most Italian entrepreneurs have not so far shined for foresight and for courage. However, it goes without saying that an entrepreneur invests if he sees, at least in the medium term, a hope of profitability and a return to a level of profits that repays the investment. From this point of view, cutting the tax wedge can help, just as the effects of the planned reforms (from bureaucracy to education and justice) on the so-called immaterial infrastructures which are no less essential than those materials. A void remains, if we really want to hope for private investment to take off, and it is the one, already mentioned several times, of the relaunch of special credit and the creation of a sort of new IMI capable of assessing medium and long-term industrial projects by agreeing to those deserving the credit they need.
But it is on the recovery of public investments that it is urgent to start a new reflection. The heaviness of the third largest public debt in the world and the general limited public resources are unavoidable realities but cannot be an alibi to justify stagnation. Beyond the sometimes somewhat emphatic announcements, we will see concretely on Friday what the Council of Ministers will be able to put in place with the so-called Sblocca Italia decree. And yet, in addition to the Renzi government's obligation to throw its heart over the obstacle, in terms of public investment it is Europe that can no longer fail to make an appeal. Draghi also mentioned it in Jackson Hole but it is the president of the European Commission Jean-Claude Juncker who must, and soon, pay his bills to those who elected him. His presidency is not blindfolded and Italy has supported him so that he can lend a hand in defeating – in practice – stagnation. In July Juncker promised the European Parliament in Strasbourg a 300 billion European investment plan. It's not cheap and it can be a good idea but the devil, as we know, is hidden in the details and a lot will depend on how that plan is implemented. And also from the times of realization. Whether or not it is right to entrust a leading role in that plan to the EIB can be debated, but what matters most now is that the European investment plan does not end up in quicksand or get lost in the mists of autumn. Juncker is the first to be under scrutiny but Italy, which holds the presidency of the European semester, must also assert itself.
Europe, if you're there, now is the time to strike.
