The Greek debt crisis will continue to play a role during the next European Council on 24 June. Containment of the contagion and plans to recover from the deficit will be on the agenda. Many governments, starting with the Italian one, are studying corrective measures to bring the public finances back in order. And at the same time boost growth. With Professor Giacomo Vaciago of the Catholic University of Milan, we talk about Greece and austerity. But also of Italy and the fiscal maneuver that awaits us in the autumn.
Professor, Greece is on the verge of bankruptcy. But a country doesn't become insolvent overnight, what happened to get to this?
In November 2009 we discovered a situation that we might have guessed or perhaps not everyone wanted to see. For a decade, Greeks borrowed as if they were Germans and spent as if they were Americans. What I mean: the great advantage of the euro has been that the markets have valued the government bonds of peripheral countries in the same way as German bunds. The implicit bet was that, within ten years of the launch of the single currency, the productivity gaps between the various countries would close. Financial integration with stronger economies allowed for an increase in productive investment in countries such as Greece. Too bad it didn't happen that way. The peripherals have followed an American model of development: investments have inflated bubbles and financed an increase in current expenditure. More generally, it was a growth based on consumption. It was inevitable that sooner or later the accumulation of debt would become unsustainable.
So it's not just an accounting fraud by Athens.
The Greek governments have rigged the accounts, without this they would still be out of the euro. But that the accounts did not add up must already be under the eyes of the markets. Let me just point out that in 2007 the Greek current account deficit amounted to 14% of GDP! The problem is that the markets always know everything. But after. For the record, I would call it the "Strauss-Kahn effect": now that his sexual appetite is in the public domain, we say we are shocked but also that we have always known it.
The Papandreou government has just launched new austerity measures requested by the EU-IMF-ECB troika. Will it be enough to stabilize the country or is it just a way to delay the default?
This is not the crucial point. The Greek economy is small, irrelevant, the cost of the rescue would be low after all. Let us remember that in a debt crisis, the crisis is above all for the creditor, who risks losing his capital. We could therefore say: all right, let's freeze the Greek debt for a certain number of years, it's forbidden to talk about it. Let's lock the issue up in a drawer until Athens gets back on the road to growth. But does Greece have a plan to return to growth? This is the priority. Austerity is fine if it means going ahead with privatizations and carrying out a careful review of public spending, with the goal of productivity. But if Greece fails to grow like Germany, perhaps it might be time to consider an exit from the euro. An evacuation route.
The ECB strongly opposes this, as well as the restructuring of the debt of a member state.
Trichet, the president of the ECB, trusted the 2010 governments of the euro area in May 17. They had promised to bring the Greek crisis back. The ECB thus decided to circumvent the 'no-bailout' clause of the EU Treaties and continued to buy Greek bonds, accepting them as collateral. Governments have not kept their promises, citizens be warned! A default would be a major blow not only to Frankfurt's reputation. It would turn those bonds into waste paper, triggering a liquidity crisis on the European interbank market. We are then in the hands of the rating agencies, because they are the ones who determine from a technical point of view what a default is, whether a restructuring, a haircut or a reprofiling. The default is an atomic bomb: you use it on the enemy, you don't detonate it at home.
Could 'Eurobonds' or 'brady bonds' be a solution to extinguish the risk of contagion?
It seems to me a difficult road to travel. There is a sovereignty problem: someone issues new healthy debt to replace the infected one. But the Eurobond risks being a fragile construction. It requires consensus and presupposes an institutional reform that leads to a sharing of budgetary policies. Can you imagine an Italian maneuver over which Berlin has a veto? The joint issuance of Eurobonds could be interesting if it financed the infrastructures and investments we were talking about. But today the public discourse is different: we are not talking about financing virtues, but vices.
Let's come to Italy. The government is discussing a 46 billion euro manoeuvre. Economy Minister Giulio Tremonti is in favor of linear spending cuts. In his recent Final Considerations, the governor of the Bank of Italy Mario Draghi instead called for selective cuts. How to orient yourself?
What Draghi is proposing is a 'spending review', a chapter-by-chapter spending review. As Padoa-Schioppa began to do in his time. The cuts are therefore made following medium-long term political objectives. It is a tiring but indispensable approach. Linear cuts are more practical, but highly inaccurate. They make no friends or enemies, that's their virtue. However, they are an intellectual and administrative error. A renunciation of politics.
The maneuver requires the new "pact for the euro" decided by the EU governments in March. But isn't there the risk of stifling the economic recovery in the bud?
Precisely for this reason the spending review is the only way! If the goal is to return to growth, it is possible to surgically cut where there is waste and instead encourage those sectors where an increase in productivity is within reach. For example, funding innovation saves money and pays for itself. Imagine the gains in terms of efficiency and productivity if paper disappeared from the courts and from the Public Administration. With a click from home or from the company, transparency and the culture of legality would also grow. Law is growth. Unfortunately, this is not the justice reform we are talking about…
In this situation, can we afford the tax reform that has been talked about so much in recent days?
The experiences of Thatcher and Reagan, and Cameron's current one, show that serious reforms are made during the first year of government, because the political costs are paid immediately, while the economic benefits arrive later. We now need to redistribute wealth from the world of income to that of work. Reduce the tax burden on businesses and tax the urban bourgeoisie by proposing the ICI on first homes. Companies that don't evade pay too much. I find it hard to believe that this Government can act in this direction, considering that it has its electoral base above all in the services sector. Given the international situation, lowering taxes in a populist key now means finding yourself with skyrocketing rates. And with an unchanged public deficit, if not worse. Tremonti knows this.
Selective cuts, we give you carte blanche. A budget item on which you would intervene?
Italians are sick of being told they live beyond their means. If anything, the costs of politics are exorbitant! Politicians must give citizens a strong message of honesty and a good example. The provinces cost us billions of euros every year and their responsibilities can be merged with municipalities and regions. The abolition of the provinces and a review of expenditure for the functioning of local authorities do not have a high social cost, if not, precisely, for the politicians.
