Comments 5

Un nouveau modèle d’Europe

Aug 1, 2013 Enrico Letta

ROME – Il est de plus en plus évident que si l’Europe veut surmonter sa crise, la conduite habituelle des affaires ne suffira pas. Nous avons besoin d’une Europe plus concrète, et mieux adaptée à l’économie globale d’aujourd’hui. Il faut non seulement nous concentrer sur les politiques spécifiques de l’Union Européenne, mais aussi sur la manière de modifier son « cap politique » - une évolution qui doit placer la croissance économique en priorité sur son ordre du jour.

L’Europe n’a nul besoin d’un débat entre austérité et croissance ; elle se doit d’être pragmatique. Un bon exemple serait le dernier Conseil Européen au cours duquel ont été discutés les deux principaux problèmes de l’Europe : des marchés du travail dysfonctionnels, comme l’indique le chiffre record du chômage des jeunes, et des marchés du crédit dysfonctionnels, dans lesquels l’accès au financement est difficile et les taux d’intérêt varient considérablement d’une partie à l’autre du marché unique.

L’issue du Conseil du mois de juin dernier fut encourageant, et nous devons poursuivre dans cette voie dans les mois à venir pour progresser sur deux domaines de même importance : comment promouvoir l’innovation et l’économie numérique, et comment assurer la compétitivité de l’industrie européenne.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

Featured

Poland’s Dictatorship of Myth

Aug 13, 2018 Sławomir Sierakowski
Why the Bank of England Should Target Growth

Aug 10, 2018 Linda Yueh
Trump’s Victorious Retreats

Aug 9, 2018 Anatole Kaletsky
No to Academic Normalization of Trump

Aug 7, 2018 Dani Rodrik
The Need for a Global Patent Market

Aug 6, 2018 Edmund S. Phelps & Eskil Ullberg

0 Comments on this paragraph, 5 in all 5 Comments on this article

Carol Maczinsky Aug 9, 2013

"Next year will mark the 100th anniversary of the outbreak of that war."

Let's start with undoing the injustice as the continuous occupation of South Tyrol by the Italian state. It is about time to sell Tyrol back to Austria.
rüdiger westland Aug 4, 2013

"We have achieved important results on the way to a banking union, notably on supervision. Now we need to work on the second pillar, resolution of the banking crisis."

This crisis is about the lack of competitiveness in Southern Europe.

Without the Germans putting pressure on the periphery, nothing in that crisis would have been resolved.

The crisis has calmed down and Italy, Spain, Portugal, Greece (and France!) have already stopped reforming.
Luigi Barretta Aug 4, 2013

President Letta's vision is strong and convincing, but I'm not sure actions Europe is taking lead where President Letta dreams to land. There is a key pillar in the current European construction: the King is the single Country financial rating. There is not an intra-European fiscal mechanism to support States running fiscal deficits; the debt issued to finance the deficit is denominated in a currency that the domestic Central Bank cannot print, so to finance the public debt each European Country has to attract investors. The three ways to attract investors, in a world where capital can move freely, are growth, yield and rating. A Country can attract investors, if its fiscal deficit can be explained by expenses targeted to improve the productivity of domestic workforce (healthcare, education, infrastructural investments, etc…), because the future higher economic growth rate will repay the debt, but unfortunately such it is not the case for European debt laden Countries. A Country can offer high yields, but it depresses its economy by being forced to run a large primary budget surplus to both pay interests on the debt and to keep deficit inside European limits. The third way is to have an high financial rating to keep the cost of debt low. Notwithstanding high level of public spending, Italian workforce productivity is not improving enough to generate the nominal economic growth needed to refinance past deficits and, in order to keep deficit inside European limit, the tax burden is rising. It is more than 20 years that Italy is suffering of declining growth rates because the economic growth generated by the public spending has been lower than the economic growth destroyed because of taxes levied to finance it. Such a decline in growth is leading to a deterioration of the Italian financial rating that in turn is increasing the yield required by investors to buy Italian debt. It’s now time to realize that high financial rating is a pre-condition for a Country to live in the current Euro Area legal framework. An high financial rating is the intermediate target that a Country has to achieve in order to achieve the targets President Letta aims to hit. High unemployment is due to the losses in labor productivity caused by high taxes on labor and capital not compensated by productivity gains generated by the public spending. Lower the Country financial rating, higher the amount of taxes needed to be collected, lower the labor productivity and employment. We can say very much the same about “malfunctioning” of the credit market. A borrower resident in a low rating Country is riskier than a borrower, operating in the same sector with exactly the same financial ratios, resident in a high rating Country simply because the lender is a subordinated creditor of a money eager senior creditor that has the power to increase the size of its credit by imposing taxes. Therefore, I fear President Letta's optimism on banking Union as way to solve credit crunch in Italy is misplaced. Banking Union and banking crises resolution agreements are designed to insulate States from bank crises, but they do not insulate resident banks, corporate and households from the weaknesses of the States where they live and work. The rationale behind the resolution agreements is that now banks resident in a high rating European Country receive a cost of funding subsidy, via an implicit State guarantee based on the belief that in case of problems the bank will be bailed out by the State, and such advantage creates credit market malfunctioning. Banking crises resolution agreements will not taper the credit crunch in European low rating Countries. The default risk of a borrower resident in a low rating Country is higher than the default risk of an identical borrower resident in a high rating Country, such fact is even more hard if 50% of the low rating Country GDP is produced by the Public Sector, as it has been proved by the private companies defaults due to delays in payments of Public Sector arrears in Italy. Banks will be let go bankrupt if they make wrong investments, to limit credit risk they have to limit lending to borrowers based in low rating Countries, what is called “malfunctioning” it’s the logical consequence of a financial system where banks have to operate without a lender of last resort able to eventually print money to bail them out: banks must keep limited exposure to risky low rating borrowers. The banking crises resolution agreements will probably worsen also the funding conditions of Italian resident banks. Each Italian bank is relatively small compared to Italian GDP and the balance sheet has very limited exposure to hedge fund like investment risk, it has domestic Government bond risk and domestic borrowers risk with a low degree of concentration, because clients are small-medium corporate and households, i.e. the bank can easily be bailed out by the State so the State implicit guarantee has a great value… a AAA like guarantee. In the future, a corporate treasurer in Italy has to consider that, in case of Italian State financial troubles, domestic banks can go burst, but if the house bank has problems the State will not protect the corporate deposits by bailing out the bank. Such asymmetry forces a treasurer to deposit the money into a high rating bank that by necessity has to be resident in a high rating Country. Italy is trying to dilute the importance of financial rating issued by Moody’s, S&P and Fitch both via moral suasion vis à vis domestic financial players and official proposals in the international financial arena, nonetheless investors will keep using tools to evaluate credit risk and for sure even a different tool will not turn a low quality borrower into a high quality one. The consequence of the banking Union will be very much the same of what happened in the past to the banks based in the Southern Italy. The basic preconditions to run a business, as efficiency of public services and infrastructures or security, in Southern Italy were poor, so borrowers based there were riskier than borrowers based in Northern Italy. Southern banks business model was to collect deposits from Southern households, traditionally very strong savers, and to invest into Italian government bonds, in few local borrowers and by the largest part into loans to Northern Italy borrowers, mostly via interbank lending to Northern Italy based banks. After years of low profit growth (bad loans generated by Southern borrowers, low interbank rates and low interest on government bonds), compared to high profit growth of Northern Italy banks, who could lend, by charging good interest spreads, to good Northern based borrowers, all Southern Italy based banks were bought by the Northern ones and because the credit risk of Southern borrowers didn’t improve, lending conditions, in amounts and costs, deteriorated for Southern borrowers. Once local Southern banks were gone, the gap in economic growth between North and South Italy grew larger than in the past. Is the Italian Government aware that what happened to Southern Italy it is what will happen to Italian borrowers and banks after Banking Union and banking crises resolution agreements will be in place? As it was the case for the birth of the Euro, where bright expectations of economic growth and prosperity turned into a reality of depression and poverty, the Banking Union and the banking crises resolution agreements are initiatives that look to lead to the very same sorry ending, unless Italy stops dodging reality and realizes that there is only one rule to keep in mind to play the European Game: the financial rating is the King. The Italian attempt to achieve higher rating by increasing the tax burden failed, because GPD growth collapsed. Now, it’s the time to try to improve the financial rating by stimulating economic growth via a massive increase in public sector productivity and by investing the public sector cost savings into lower taxes on households and corporate.
hari naidu Aug 2, 2013

As a political leader, you're surely putting the cart before the horse.

Intervention from Brussels would never have been required or necessary if sovereign nation-state governance was not lacking or, as some cases, almost non-existent.

As long as the periphery cannot get its national governance under sovereign control including reform of the labour market and duplicative centre-state administrative system and its budgetary costs, as in case of Italy, there is little or no political chance of reforming current Italian governance.
Zsolt Hermann Aug 1, 2013

I agree with most of the article.
I think the key is education in order to make both leaders and the public understand what it means to live in a global world that is fully interconnected and interdependent.
If people get an uncluttered, transparent, scientific picture about how a global, integral system, like our world today functions, they will willingly accept the need for full integration, moreover they will have a positive motivation to do so understanding that in today's world only mutually complementing each other instead of ruthless competition it is possible to build a sustainable society and economy that benefits everybody.
Thus my only objection about the article is the priority: instead of growth I would place the priority on integration, establishing proper, mutual, positive connections.
When such an integration becomes successful in Europe, and in between Europe and the rest of the global world, it will become clearer what kind of growth is possible in a closed, and finite global, natural system.