TO FIND A WAY OUT OF THE CRISIS

Rigidity, growth and more of Europe

by Corrado Passera - Il Sole 24 Ore July 13th 2011 The European Union must prove its ability to ride out its first big storm. The Greek crisis has long been raging, it has already spread across to Ireland, Portugal and is now hitting Spain and Italy. If it is not stopped in its tracks now, it will drag the whole of Europe down with it. The stakes are extremely high and comprise a series of public goods which Europe, from its constitution to date, has been able to guarantee to all its Member States: the free trade and free circulation area, monetary stability, three generations that have only ever known peace, civil development and economic prosperity. In order to safeguard this common wealth and overcome this situation, we must act with determination, acumen and a great sense of purpose, both at European level and at the level of each individual Member State. The crisis is still fairly contained and by all means manageable. The eurozone public debt is a little more than 85% of the GDP while it stands at 80% at EU level. The deficit of both aggregations stands at around 6%. These are fully sustainable ratios. The consolidated debt of Greece, Portugal and Ireland makes up less than 7% of the eurozone GDP and less than 9% of its total debt. The sheer fact that a few countries with an aggregate economic weight just shy of 5% could pose a threat to the remaining 95% is unthinkable. The first step is to resolve the Greek crisis to stop the outbreak. So far we have been unable to do so. The eurozone States' commitment to unequivocally supporting partners in difficulty is key. Such commitments have been reiterated on several occasions though clearly not convincingly enough, thus fuelling market scepticism. Therefore, even the latest declarations following the Eurogroup meeting have proven insufficient. All European governments must convince themselves that the cost of "rescuing" Greece is a great deal smaller than that of leaving it to its fate. Thus the priority is to convince the markets that a wager on Greece (or any other country) defaulting would not pay off.

Intra-government crisis management has so far proven to be far from effective. Delegating many of the tasks related to Greece's rescue operation to the European Central Bank has turned out to be equally ineffective. We need to put in place truly valid community mechanisms, we need the Commission to play a far more central role with the full backing of the Parliament and the European Council and, last but not least, of each individual Member State, starting from the strongest ones. The only way out of the crisis is with more of Europe. Concurrently, a mechanism will need to be put in place to ensure that the States receiving help will do their utmost to fulfil their past and future obligations and such commitment will need to be made credible and verifiable. All this is going to take time: in the meantime, what are the best instruments to set in motion? Many are already on the table, others can be surmised: direct financing, quantitative easing by the ECB (to be used with the utmost caution), eurobonds capable of consolidating, at least partly, the Member States' public debt thus creating a minimum amount of fiscal union, strengthening the European Stabilisation Fund and introducing a greater degree of flexibility such as to put it in a position to be able to operate as a market maker of last resort on the debt securities of the countries in difficulty, in the primary as well as the secondary market. The solution does not lie in the use of a single instrument, rather, it is necessary to prepare a battery of instruments with a mighty power fire. The international banks that have invested in Greek securities will need to play their part. It will take willpower and common sense by everyone, including the regulators, rating agencies, accounting authorities and auditors to prevent the occurrence of credit events with unpredictable consequences. Greece has striven to tidy up public finances and introduce changes which, up until a few months ago, were unthinkable. We must give Greek politicians and citizens a clear incentive to implement a highly committed and self-sacrificing programme. An instrument that appears to be of particular interest and merits being investigated further is the idea of creating a mechanism of reduction of the outstanding Greek debt based on the actual results of the Greek economy restructuring and redevelopment process. The European Stabilisation Fund could undertake to withdraw considerable amounts of Greek debt on the secondary market, showing its willingness to request the repayment of a price lower than the face value of the securities and commensurate with Greek public finance targets being met.

One of the main lessons taught by the current crisis regards the balance between rigidity and growth. If today we were to promise even Draconian measures on public expenditure cut-backs but we failed to convince markets that there would be enough growth to generate the resources necessary to repay the debt, all efforts would be to no avail and the market crisis would not be halted. It is also in this respect that Europe is called upon to make greater efforts. The crisis of the periphery countries will be resolved in a sustainable manner only once the productivity gaps have been dealt with and narrowed. Thus, anti-crisis instruments must be accompanied by incentive and development plans, along the same lines drawn by the Lisbon Strategy. In order to prevent difficulties, Italy must also seek to actively play its part on the dual front of regulating government finances and accelerating economic growth. The measure must be approved and enacted as swiftly as possible as evidence of the country's unanimous commitment to attaining a balanced national budget by 2014, if not sooner. It will then be possible to find room for improvement, keeping the balances unchanged of course, and working also on the two chapters left open, namely the spending review and the tax reform. In the short-term, however, it will be necessary to be more convincing as a country in terms of economic and employment growth. The sustainability of our public debt may only be guaranteed by an adequate growth rate. All the initiatives and actions oriented towards a sustainable growth will need to be organised within the scope of a short- and medium-term integrated plan aimed at creating a sentiment of confidence and sharing. There is ample room for growth for a country like Italy and globalisation is an opportunity not to be missed. As proven by so many Italian companies. The steps to be taken in order to accelerate the growth of our country both at the level of business competitiveness and of running the national economic system, as well as at the level of social cohesion and dynamism, are well known by now: the important thing is to do so starting from the reform of all reforms - at zero cost - which must put us in a position to unblock a decision-making process that has long been jammed. (Our infrastructures are being slowed down more by the procedures than by the lack of resources). The spending review and the tax reform can be instruments for rigidity as much as growth through an effort of requalification of the mix of public expenditure and a more efficient mix of fiscal pressure. Italian banks will continue to be a strong point in the national economic system, a

sound and healthy infrastructure on which to lay the foundations for boosting sustainable growth. The Italian banking system has pulled through the crisis by its own devices, without ever setting up hidden liabilities for government finances and without ever cutting off the flow of credit to businesses, families and public administrations, thanks to a business model strongly tied to the real economy and on building longstanding client relationships. It was crucial to anticipate this last crisis too with adequate capital interventions, which were definitely favoured by the Regulators' moral suasion. It is necessary to take advantage of the crisis in order to relaunch the European plan and Italy is ready to play its part, feeling its responsibilities as founding country. When it came to making sacrifices to accelerate the process of European integration, Italy never backed out. The process of building Europe is still incomplete and now the time has come to find the strength and sense of unity to reach the finishing line.