Why Draghi and Franco have to dish up a reform of the Stability and Growth Pact in Brussels
The Draghi government must take the devil by the horns and elaborate a proposal for the reform of the Stability and Growth Pact. Discussion which, in the European Commission, has already begun. And certainly not under the best auspices. Gianfranco Polillo's comment
This time it is forbidden to make mistakes. No hesitation or journeys of hope, such as Romano Prodi's in the land of Spain, are admissible to convince José Aznar to delay entry into the euro by one year. With all the subsequent controversy that accompanied that attempt. This time, the government must take the devil by the horns and come up with its own proposal for the reform of the Stability and Growth Pact (SGP). Discussion that, at the European Commission, has already begun. And certainly not under the best auspices.
Are there the conditions for doing so? Of course yes. The Draghi government has, at the same time, the highest political representation and, in key posts, the best that Italian society can offer. This has a twofold advantage. On the one hand, a management team capable of dealing with the complexity of the problems, without giving in to the immediate needs of the electoral workshop. On the other, a representation of the Italian political forces, which cannot be larger. So no one will be able to back down, with the excuse of not having been part of the government team. And therefore to be world of possible faults.
To understand what to do, we need to start from European legislation. Not limited to the Stability and Growth Pact (SGP). Much less the Fiscal compact, whose inclusion in the European legal system was blocked by a vote against the Parliament. As proof, if nothing else, of its low popularity. It is all the legislation that must be reconsidered: especially that part less known to the general public, because it is eccentric compared to the single thought of austerity for ever.
Therefore, one must start from Article 120 of the Treaty on the Functioning of the EU (TFEU). That also from one point of its textual collocation comes before the rules of the PSC (art. 126). This is a set of rules that concerns the development of economic policy, considered "a matter of common interest" (art. 121 (1)) for the entire EU. The relative control, according to the provisions of regulation 1176/2011, is entrusted to a procedure that is more or less identical to that, more known, of the PSC. Naturally, the parameters are different: a battery of indicators that concern the main aspects of the economic and financial situation. Which find their synthesis in the alert mechanism: an alarm bell, which sounds at the first occurrence of any macroeconomic imbalances.
The examination, however, this is the paradox, not only is not combined with that relating to the PSC, but the two procedures run in parallel without ever meeting. And the relative judgments neither relate nor overlap. As if the public finance aspects were independent of the performance of the real economy. And viceversa. It is therefore as if the economic system were not a whole. But made up of two independent and separate layers. Power of an orthodoxy, which has never digested Keynes and his possible recipes.
The most surprising thing is that this asymmetry is recomposed only when it comes to intervening with the Mes (European Stability Mechanism ). When countries in crisis need to be financed. It is then that "enhanced conditionality" (Enhanced Conditions Credit Line, ECCL) is triggered, which can lead to the commissioner of the debtor country, imposing on it an economic policy aimed precisely at healing those macroeconomic imbalances, which are at the origin of the crisis. With all due respect: the logic of bankers rather than economists. Otherwise, fundamental analysis would be a constant. In the good and bad luck.
When the Commission will have to discuss the reform of the PSC, the relationships between these different interpretative schemes will have to be reconsidered, in order to no longer split but systemic diagnosis. The aspects of a financial nature (deficit, debt, public spending, etc.) must be related to the other economic variables: growth rate, unemployment, relations with foreign countries and so on. In order to reach a truthful diagnosis and, therefore, an adequate therapy.
The existence of a macroeconomic imbalance, for example a large deficit in the balance of payments, legitimizes stricter budgetary policies, to reduce the excess of domestic demand, compared to the development potential. In order to absorb the relative gap. But if the balance of payments is in surplus, as in Italy, then it should be possible to create a larger public deficit, in order to avoid excess savings, which have no counterpart in investment levels and therefore take the path of abroad. It would be the way to have a greater pace of development, higher inflation and, therefore, a reduction in the debt / GDP ratio.
As we can see, the perspective can change rapidly and legitimize opposing policies, which a simple algorithm (a 3 percent deficit or a debt / GDP ratio of 60 percent) is hardly able to capture. Naturally, Italy would have everything to gain in formulating a more articulated and less Manichaean judgment. Fortunately, the new Minister of Economy, Daniele Franco , knows very well the problems of public finance. A nothing will therefore be enough to connect the various pieces of a puzzle, which, as experience teaches, has its actual center of gravity in the real economy.
(2. end: the first part of the analysis can be read here )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-draghi-e-franco-devono-scodellare-a-bruxelles-una-riforma-del-patto-di-stabilita-e-crescita/ on Sun, 14 Feb 2021 10:08:42 +0000.