The Only Reforms That Are Worth Sacrificing For

Last week’s IMF spring meetings confirmed that the U.S. is as worried as international investors about the euro zone, a concern that was summarized by a recent New York Times editorial on the risks connected to “destructive austerity.”

Should the EU follow the example of the U.S. and adopt Keynesian measures in order to overcome the current crisis? Should we really try to convince Germany to be more Keynesian, thus increasing public debt and postpone the solution of the deficit issue?

As European Central Bank president Mario Draghi pointed out yesterday before the European Parliament, what we need is a shared political strategy, which requires a shared diagnosis of our problems. However, the impression is that this diagnosis doesn’t exist yet. We will therefore try to sketch out the problems Italy is facing, thus highlighting the issues on which our executive should focus.

First of all, it’s worth noting that Italy is affected by three problems: an “austerity recession” that started in the third trimester of 2011, the recession produced by the financial crisis and 15 years without growth.

In other words, we are in a recession, while the financial crisis is not over and we still aren’t growing. So what’s the solution? An old rule formulated by the Dutch economist Jan Tinbergen and shared by many other economists says that three problems need three solutions. And it’s not by chance that the representatives of Banca d’Italia, Italy’s central bank, insisted on the implementation of three policies during their April 23 hearing at the House of Representatives. Salvatore Rossi, the bank’s vice director, told the Parliament that the crisis should be addressed by adopting the following strategy: (1) more tools to enhance financial stability at the global and European levels, (2) the reduction of Italy’s public debt, (3) growth-oriented reforms.

The recession, which is likely to end in the next two trimesters, is thought to have been caused by a contraction of aggregate demand, which was produced by the consolidation of public finances and the reduction of public debt (also referred to as “deleveraging”), two factors that are nonetheless necessary and foreseeable in the coming years, and not only in Italy. It’s worth noting that Banca d’Italia has a positive view of almost everything the executive branch has done so far, as is clear from the last two lines of the letter read by Rossi: “There were important steps, some of which were more crucial than others.” But it’s also clear why the bank agrees with what the executive branch stated in its 2012 report on the country’s economy and finance: “There is still a lot to do.” This refers of course to growth. As far as this issue is concerned, is it really true, as the Times wrote, that our growth is killed by “destructive austerity”? Or was Schumpeter right when, 70 years ago, he claimed that growth was all about “creative destruction”?

I recall that the late Tommaso Padoa Schioppa, a renowned economist and banker and a former economy and finance minister, wrote a wonderful editorial called “Creative Destruction” that appeared in the daily Corriere della Sera on December 13, 2005. While Padoa Schioppa quoted Goethe and the Bible, rather than Schumpeter, he was convinced that good social market economies, such as those of Germany and Sweden are successful at protecting workers by allowing their transition to new production sectors promoted by free enterprise.

If we agree that that is the meaning of growth, then we can avoid confusing if it with a mere Keynesian support of demand, which can be summed up as “Dig some holes by using public resources, thus increasing the public debt our children will inherit.” The issues are instead competitiveness (privatizations and liberalizations) and rule of law; administrative efficiency and honesty; research and innovation. These are the reforms that matter and are worth some sacrifices. What we have done in recent months only prevented the situation from getting worse, but it’s not that exciting.

If we want to leave the fear of the past behind, we need the courage to build a better future. That’s the only thing that deserves our sacrifices.