The OECD autumn forecasts, released on Monday, reopen the game of European economic policy, in particular of fiscal expansion that the Fiscal Compact seemed to have buried under an immovable tombstone. The OECD relies on an impressive study it has conducted in recent years on the increase in fiscal space induced by expansionary monetary policy. Interest rates close to zero have reduced interest payments in the public budget, creating such a gap even in countries with higher debt-to-GDP ratios. More savings will materialize as the old debt with higher interest rates matures.
Since the peak in 2011/12, savings on interest payments in Italy have already reached €15bn, or 1% of GDP. The OECD expects up to 2% of GDP budgetary space if 15% of the debt is refinanced each year, up to 3,5% of GDP if 25% of the debt is refinanced. There is therefore room for the necessary anti-seismic investments, for education, innovation, infrastructure, active labor market policies and anti-poverty initiatives. That is, to revive productivity growth without increasing the debt-to-GDP ratio.
In all southern European countries and in France, the economic slowdown has also weakened the potential product, and therefore the long-term growth opportunities, undermining the hopes of young people and the solidity of the social fabric. Thanks to monetary policy and the continuation of reforms, an efficient selection and monitoring of expenditure could allow for higher growth in the cost of financing, so as to reduce the debt-to-GDP ratio. But if in Italy the old political habits - those who have accumulated 2 trillion in debt with clientele expenses - managed to get their hands on these savings, the headwinds of banks in difficulty and problem loans would prevail in the perception by the financial markets.
It is good news that the OECD presents us with a realistically feasible policy: an efficient fiscal expansion could finance the recovery of productivity for 3-4 years throughout the OECD without increasing the debt-to-GDP ratio; it would boost growth by a further 0,7%, and if the expansion were coordinated across countries the increase would be 0,9% after one year. For individual countries, this window of opportunity ranges from 5 years for Italy to 4 for Germany and one for Korea.
It is interesting that the European Commission also declares the need for an expansionary fiscal policy – you read that correctly – in the Eurozone. Indeed, the Commission's autumn forecast shows anemic growth and underutilization of labor and capital. With sluggish exports, the effect will be a fall into the low-inflation, low-growth trap – resulting in rising debt-to-GDP ratio – experienced by Japan over the past 20 years.
But the Commission admits that “the fiscal requirements contained in the Council's country recommendations will lead to a moderately restrictive fiscal policy for 2017 and 2018”. In fact, the fiscal rules of the Eurozone to reduce deficits and public debt require austerity until the medium-term objective is achieved in each country. On the other hand, there are no tools for a European fiscal policy that complements monetary policy. So an appropriate result could only be achieved by chance. Certainly, in the coming years the result will be the opposite of what is necessary.
So far the analysis of the Commission, fully acceptable. But what is the Commission's conclusion? We hope for new institutions in the more or less distant future and we resign ourselves to the paradox that, with the existing rules, "those who want an expansive fiscal policy cannot do it and those who could do it don't want to do it!". To get out of the low-growth trap, it's better to turn to the research of OECD economists and forget the schizophrenia of the guardians of the rules.
