RR As Italy’s Prime Minister, you introduced in 1992 a dramatic austerity plan, in preparation for the euro...
GA Not actually because of the euro, which came into play some years later, but it certainly was a step in that direction.
…do you ever ask yourself, when you observe the state of the eurozone, whether it was a mistake to believe that the Monetary Union alone could bring together countries with such diverse economic and financial structures? In past weeks, Romani Prodi has written that further measures, which we are now forced to introduce ‘hurriedly and painfully’, should have been adopted at the time.
This is, essentially, true. But we must bear in mind what had come before. The single currency was formally approved in 1992, in the immediate aftermath of the Maastricht Treaty and after a long gestation period in the 1980s, during which European currencies were allowed to fluctuate within a band - called “the snake” – defining the limits of their ups and downs. Such a system was at the root of much turbulence, as financial markets, perceiving the weak points of each country, launched pointed attacks on particular currencies, as happened to the lira, the pound, the French franc. Moving to the single currency was the only defence against this system. Moreover, we were moving towards the single market, with the loss of all barriers; without a common currency each country could easily have made itself more competitive by devaluing its currency, thus changing the price of its products on the European market.
But with the common currency, the strongest countries would have emerged as winners in European markets. Was it truly impossible to conceive of a broader set of policies?
In the European Commission led by Jacques Delors a conclusion had been reached: let us introduce the single currency, and there will be no need for further rules because the cooperation among governments will be enough to guarantee the convergence of national economies. I argued more than once that we pretended to believe that, so as not to have to go beyond this cooperation. Thus we wished upon ourselves a single currency without a common economic policy. For a while the markets seemed to fall for it because the magical aura of the euro worked for several years. Meaning that the markets granted the same interest rates to every country that had adopted the euro, with a spread – which is not something you put on toast, but the difference between European base rates that apply to German bonds and those of other public bonds – which was modest in the early years of the euro. This is something which proved particularly advantageous to countries such as Italy. In fact, the Italian comeback after the euro was adopted, including the reduction of the cost of servicing debt, is entirely down to this. Yet after the great crisis of 2008, and leaving aside for now the factors that caused it, markets have become more wary, more cautious, more unrelenting. The euro ceased to be a shield; markets began to look at the conditions of individual countries, to do as they had previously done with regards to the public bonds of each state. This means that what we had done did not work. It has, at this point, become obvious to everyone that without greater economic and political integration it is next to impossible to have a functioning single currency without paying an extremely high price.
You say that everyone is aware of this, but as far as I can tell European governments do not share your view.
That is precisely the problem with Europe. It has always set itself targets which required more commitment to integration than it was effectively prepared to undertake. Europe’s problem is not that we have too much integration; is that we have too little of it.
In both France and Italy I came across a Left which, conversely, argues that only leaving the euro would set individual countries on the road to recovery. How do you feel about this?
That could, indeed, be another way out of a difficult situation, but it would provide a solution that is purely temporary. So far we have spoken broadly of Europe and markets, but what has occurred in recent years is that financial capitalism has expanded hugely, breaking down any barriers in the global market. The European market is a small part of the whole. Financial markets are now much bigger than the real economy, we are dealing with a gigantic system which sends out a series of impulses, some of which can send me into meltdown, and what can I do? Should I keep governments even further apart, fencing each one off, or try to create government networks that are, as far as is possible, on a level with the market? I need to be stronger, also in light of the substantial failure of government in regulating markets, policies were always lagging behind. I understand that this may be utopian, but what we really need is the impossible: a global government. But if I cannot even get the European government up and running what can I do? San Marino – a city state - against the world?
But how can you hope to achieve a stronger European government, faced with this degree of weakness in individual economies?
The problem with the financial crisis is that it affects the real economy. If you have a high debt, and this debt is affected by the damned spread, and the damned spread affects not only bonds but also the financing of companies and exports insurance, getting rid of the spread can be beneficial for the economy but you will lack the resources for investment and growth. This is precisely what is missing in Europe.
How long have we been discussing Eurobonds, European public bonds that can guarantee public debt and fund investments? But on this point we come up against Germany, at least for the time being… I have to admit, I am not a pessimist. We have elections coming up and the polls suggest that in Germany a Social Democratic-Green coalition may win, and that in France the Socialists are in the lead. Both are in favour of Eurobonds, of political integration. The problem is not Germany so much as its government. So if I think forward to Europe in 2013, with the same Franco-German axis, the outlook could be radically different.
It does seem likely that in a year’s time Sarkozy and Merkel, who held meetings a few weeks ago, will no longer be in their positions.
This is exactly the point. When I’m asked to comment on it I say: if we manage to buckle up and make it through till then, we will probably emerge with a vastly improved Europe. But we might crash and burn before then. This is the real issue.
May I remind you that social-democratic or centre-left governments were those responsible for creating this Europe left unfinished?
Exactly. I have to admit that left-wing or centre-left governments themselves encountered and thus expressed some resistance. Take, for instance, the famous Lisbon Strategy. Its aim was not “ to create the most competitive knowledge-based economy in the world”, rather – if you read that paragraph in the conclusion of the European Council of December 2000 in Lisbon, when there were 13 socialist and social-democrat prime ministers – “to create the most competitive knowledge-based economy in the world capable of greater social cohesion”. That was the gamble – to become more competitive without sacrificing social institutions. Instead, perhaps not surprisingly, it ended up being interpreted in that truncated version, because, in a market affected by globalisation, in social institutions could only be protected by social policies at the European level, which in fact never materialised. Opposition came mainly from the German federal government, which had to deal with the more conservative Laender, which made the claim: this is our policy field, let’s leave Europe out of it.
Now Germany also has a zero growth rate.
They also have a zero growth rate. But this is yet another reason to build a government network and discuss future prospects more frequently. The collapse of growth is, in part, affected by mimetic behaviour, amplified in turn by financial markets and automated trading. Thus it sends off bear market signals – the stock market drops, treasury bonds drop – and this has a widespread impact, businessmen who wanted to invest ask: why risk it? Consumers stop buying, and everything grinds to a halt. But governments also exist to change the economic climate. They do not need to delve deep into economic matters, but they do need to provide a perspective.
You stress the lack of political willingness on the part of national governments, but do they not also come up against an obstacle? What are these markets? Are they an automatic mechanism or is there someone pulling their strings?
Both are true. The great players in financial markets are investment funds, mostly American, that simply work to maximise profit and reduce risk. They were already selling off Italian bonds four months ago because they had understood that Italy, with such a low growth rate, would have trouble paying off an already huge debt. Then there are the authorities, the Central Banks, that intervene on markets. But they keep reserves of various stocks in order to guarantee the liquidity they circulate, and they think twice before letting fail a financial company, whose shares in case of bankruptcy would become worthless. If one of the large French or German banks has lots of assets, public and private, which it believes it will not be able to collect, it falls back on its government and they act in unison. There are close ties, and governments seem more heavily influenced by these forces than by a broader perspective and by the ability to tell their economies to grow and multiply without giving way to fear. Nobody is taking steps in this direction. And, in the end, these steps should be taken on a European level.
Do you see debt restructuring for troubled countries by the ECB as possible?
For the moment, I see only small steps being taken. In September we will have the EFSF – European Financial Stability Facility - they decided to create in July and which will be able to buy bonds on the secondary market, issue loans and so on. Its rules and regulations are being drawn up. The problem is that Sarkozy and Merkel should be thinking about increasing its funding levels, but for now they are saying ‘first let us get it up and running’. The signals being sent out – an optimist would avow – are moves in the right direction, but at a pace much slower than that of the waves bearing down on us.
Do you think the tax on financial transactions will ever be implemented?
The idea itself is an excellent one, because it is a small tax – 0.05% on each transaction – that after several transactions can produce large revenues and, in one way or another, contribute towards a redistribution which today’s world is particularly in need of. The gap between profits (particularly financial rents) and the other sources of income has become enormous. I see in it a problem that is purely political: if you cannot introduce the levy in the part of the world which is more active in finance, you risk seeing transactions move away to other parts of the world.
Yes, those who speak for the markets predict that capitals will move to countries where the levy is not applied…
If Europe is serious about this, the various G8 and G20 are supposedly established in order to coordinate these government manoeuvres on a global scale.
We are already a very large economic area.
As far as financial transactions are concerned we are a strong player, and if there were an agreement between Europe, United States, Japan and China, well, the levy would become an effective measure. Let me refer to something I read – years ago they claimed that the Tobin tax would prove hugely complicated to enforce; yet Nobel prize winner Joseph Stiglitz maintains that with the technology available today, there should be no such difficulties, and he may be right. Adding this stuff should be technically simple for computers able to register thousands of transactions per second. Politically, there will always be a Lichtenstein that says no.
Do markets fear that the financial transactions tax may involve a heightened control over their movements?
Not much more than is in fact in place now, because these movements are all recorded by Central Banks. A tax would involve this higher price. It is possible that Paris is emphasising the importance of a proposal that comes from France, and not from Germany. The stock exchange falls of recent days is more connected – according to the press reports I have seen - to the lowered forecasts for world GDP, to the expectation of lower growth rates.
In whose name did France and Germany take this step?
For their own sake. They are, at this point in time, occupying a position that should be filled by European institutions. There has, to tell the truth, always been a Franco-German alliance in European affairs, but with strongly pro-EU leaders such as Kohl and Mitterrand it was a way of speeding up the process and bypassing obstacles. Whether there will be an effort to bring this initiative back within European institutions will depend on who is to be entrusted with the implementation of the conclusions of the bilateral talks…
The ‘golden rule’ of the obligation to balance public budgets?
I hope there will be careful deliberation before the rule on balancing public budgets will be forced into Constitutions. Such a rule can prevent any long- or short-term policy, particularly in those systems that calculate the entire debt you take on, for example for an investment, in the first year of expenditure. Hopefully, they’ll think long and hard. In Germany this is already written into the Constitution; thus a possible future introduction of Eurobonds will be brought before the German Constitutional Court, based on the suspicion that this would involve taking on part of the safeguard for the debt of others, with a future burden on Germany’s budget, which would be anti-constitutional. You see what a judicial trap it becomes?
France has not taken austerity measures quite as fierce as ours, but has nonetheless introduced harsh spending cuts…
It’s happening everywhere, and thus we return to our starting point: if national budgets are trimmed down, resources for welfare and investment will be low. This is where Europe should come in and say: what can we do to support growth?
They’re just afraid of inflation…
Hardly, with inflation between 0 and 0.3%. Italy was where prices were rising more, at 0.3%. No, the problem is: what kind of Europe can we move forward with?
(Translated from the Italian by Clara Marshall)
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