It's now a deafening chorus. Everyone blames Mrs. Merkel's rigidity for the Euro crisis and rushes to condemn Berlin for its lack of solidarity with the most indebted countries, and for having imposed drastic austerity measures on all cicada countries, thus pushing the economy in recession and bringing the populations, starting with the Greeks, to the brink of starvation. After Hollande's victory, the watchword is "growth", an objective in itself just and desirable, but which is generally pursued through the request for a relaxation of the public expenditure constraints of each country or with the request to make part of the public debt of the individual states European.
But the Germans resist. For them, growth passes through the consolidation of public finances and through reforms capable of restoring competitiveness to countries currently in crisis. If today we rapidly widened the purse strings, they say in Berlin, who can assure us that the governments of the less disciplined countries will not resume their old habits, abandoning the path of recovery and reforms? In short, the question is this: by loosening the constraints, how can we ensure that governments do not fall again into short-term policies, indulging in that moral hazard which in the past has already led to dissipating the advantages that had arrived with the introduction of the EUR? For example, when Italy joined the euro, it benefited for over a decade from interest rates similar to those in Germany, with cumulative savings on state accounts of at least 800 billion euros. Well, this money has not been used either to reduce the public debt, or to make investments capable of increasing the country's competitiveness, but has been spent to increase current expenditure, i.e. in generous salaries for the public administration and above all to increase purchases of goods and services without paying too much attention to prices. In addition, the statements of many politicians and the orientation of public opinion (conveyed above all by TV debates) are not at all reassuring for suspicious Germans. When representatives of all the Italian parties, from the grillini to the Northern League, call for an easing of budget constraints to support growth with social spending, their worst fears are confirmed in Berlin. And that is that an easing of financial constraints would lead to the abandonment of restructuring and structural reforms (which also include privatizations and the sale of public real estate assets) which could make growth sustainable in the medium term.
Not, however, that the Germans have every reason. In Berlin they have to understand that a currency cannot survive for long with competitiveness imbalances as strong as those that lead Germany to have a huge balance of payments surplus and all other countries a deficit of almost the same amount. This means that the euro for Germans is undervalued while for all other countries it is overvalued. In the past these imbalances tended to be filled by automatic mechanisms which led to an increase in demand and inflation in the surplus countries and therefore to reduce their competitiveness to the advantage of the deficit countries which instead had to compress their domestic demand. Today these mechanisms are not automatic, but political decisions are needed to activate them. This is why it is important that Berlin now looks more favorably at an increase in domestic wages and puts aside its obsession with containing inflation.
It is a first step, but it is not enough. The problem now is that of bridging the time gap between the manifestation of the effects of the recovery policies and the current situation which risks a recessionary spin with negative consequences on the banks and therefore on the very life of the Euro. The baroque European governance with the consequent difficulty in making decisions, throws the markets into the most absolute uncertainty and therefore the behavior of the operators dictated by the need to avoid any risk, end up aggravating the financial crisis and pushing the economies of the weaker countries towards further recessions deeper than those deriving from the austerity measures adopted.
The central point that the informal summit of heads of state will have to address tomorrow in Brussels is precisely this: how to create a protection system so credible as to convince the markets of the survival of the euro and at the same time how to keep the tension of all the countries high towards those structural reforms that can convince investors from all over the world to look with confidence at a lasting growth of Europe. Surely instruments capable of favoring infrastructural investments could be needed, but what would really convince the markets would be an announcement of a strengthening of the EFSF and ESM funds (with the possibility of their direct intervention also on banks) a possible Community guarantee on deposits to avoid the rush of savers to bank branches, and above all a covert policy to widen the ECB's powers of intervention both to increase the supply of liquidity to the financial system and to buy government bonds directly (also in agreement with the ESM) and on the market and directly at auction. And this should be done for all those countries that have serious and credible recovery programs. It is probable that the mere announcement of these measures will be sufficient to overcome the mistrust of the market and therefore to initiate a decisive reduction in spreads, therefore without the need for massive interventions by the ECB and the Fund to save States. In this way, steps are not taken for pooling the debts of the various countries through Eurobonds which Germany considers premature, but action is mainly taken on the liquidity of the system with some exceptions regarding government bonds which would end up in the belly of the ECB and ESM. But since at the moment we buy at low prices, these two institutions could also find themselves in some time with good capital gains!
But there is an indispensable condition on which Merkel will put her foot down: all this will only be possible if at the same time the will of the weaker countries to continue on the road to recovery is strengthened. And this consists of two parts. Public budget balancing and reforms to make economies more competitive. In this sense, instead of advising Monti to bang the table, the Italian parties should, more usefully, give clear signals of wanting to proceed along the path of reducing public spending (perhaps by making some proposals for cuts to help the work of Bondi), the sale of state assets and local authorities, as well as obviously quickly approving the reforms currently in Parliament such as that of the labor market. But this is just the exact opposite of what the Italian parties are doing.
