A double step forward


A man looks through the window of a store announcing a closing down sale in central Madrid September 24, 2012.

Article Highlights

  • The past few weeks have marked a turning point for the Eurozone economic future.

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  • The problem is not the spread itself, but the lack of competitiveness of countries at risk. #EUcrisis

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  • The ECB’s open-ended government bond buying program is far from providing a final solution.

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The past few weeks have marked a turning point for the Eurozone economic future: the spread has significantly dropped and speculation seems to have slowed down its deadly grip. A change of pace certainly due to a new development of European monetary policy and the ruling of the German Federal Constitutional Court that, while setting some restrictions, approved the European Stability Mechanism (ESM). At this point, however, one wonders if this will be enough to revive the European economy or whether politics should do more.

"In order to avoid mixing causes with effects, it should be underlined that the problem is not the spread itself, but the lack of competitiveness of countries at risk," -Flavio Felice and Fabio AngeliniIn order to avoid mixing causes with effects, it should be underlined that the problem is not the spread itself, but the lack of competitiveness of countries at risk, such as Italy and Spain and, therefore, the need to readjust their costs and prices in the context of the European Monetary Union. Consequently, the ECB's open-ended government bond buying program, aiming to avoid the possible failure of liquidity, is far from providing a final solution; on the contrary, it is a necessary but not sufficient condition to solve our problems.

The austerity policies on public finances, if not supported by a monetary policy characterized by a healthy dose of pragmatism and a serious policy for competitiveness, could do very little in terms of both speculation and growth. However, the speculative attacks to which we have been subjected forced us to open our eyes to a number of long drawn problems that Italy has not yet solved, a policy that now largely appears irresponsible and lacking of an authentic European vision. In this regard, market regulation shall continue to be a warning to governments and to the entire political class of the Eurozone countries.

Not surprisingly, the purchase of government bonds announced by the ECB (which, however, will not directly finance the deficits of several countries) will be unlimited, but subject to a number of conditions which observance will be ensured by European governments. In other words, it will be a "conditioned" intervention for the adoption of policies that would enable to overcome the problems of lack of competitiveness and poor productivity: problems that we have repeatedly denounced in this paper and that we consider to be our main enemy.

In this new context, the new development of the European monetary policy has many merits and, in particular, the one to eliminate any false alibi to politics. In fact, market regulation should be associated as soon as possible to harmonization between budgets and, ultimately, to a union among people. Most of the financial turmoil of these recent years came from a monetary union which has not been supported by a harmonization of fiscal policies. It is for such a reason that the European project treasured by the fathers of the social market economy, i.e. Adenauer (German), Schumann (French) and  De Gasperi (Italian), should be resumed: three Roman Catholics, with roots in regions close to their countries' borders, which they saw not as limits  but as doors wide open: that was the key to a successful operation with Germany and Italy engaged in the front line.

We have to be, at the same time, optimistic and realistic because the problems of competitiveness are still there and they can only be resolved by European policy through the establishment of a new governance capable of guaranteeing greater political integration and fiscal discipline and by a national policy that — in line with the fundamental choices of Monti's government — will have to promote several structural reforms able to ensure the realignment of costs and prices through greater flexibility, mobility of labor, liberalization of broad sectors of the economy, strong competition policies and an industrial policy geared to the challenges of globalization, focused on increasing the productivity and competitiveness of our industrial system.

Flavio Felice is an Adjunct Fellow at the American Enterprise Institute and President of Tocqueville-Acton Centre Studies (Milan-Roma)

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