Jim O’Neill writes: I’ve spent a good deal of my 35 years as an economic and financial analyst puzzling over Italy. Studying its economy was my first assignment in this business — as a matter of fact, Italy was the first foreign country I ever flew to. I’m just back from a vacation in Puglia and Basilicata. Over the decades, the question has never really changed: How can such a wonderful country find it such a perpetual struggle to succeed.
All the while, Italy has pitted weak government against a remarkably adaptable private sector and a particular prowess in small-scale manufacturing.
The rest of Europe had mixed feelings about this readiness to restore competitiveness through devaluation — meaning at their expense. When discussions began about locking Europe’s exchange rates and moving to a single currency, opinions divided among the other partners, notably Germany and France, on what would be in their own best interests. Many German conservatives, including some at the Bundesbank, doubted Italy’s commitment to low inflation.
In the end, of course, the decision was made to bring Italy in. The results haven’t been good. It’s ironic that between 2007 and 2014 Italy has done better than most in keeping its cyclically adjusted budget under control. The reason is persistent lack of growth in nominal GDP, itself partly due to an overvalued currency and tight budgetary restraint.
Italy is the euro area’s third-largest economy and its third-most populous country. Given this, the scale of its debts and everything we’ve learned about Europe’s priorities during the creation of the euro and since, I’ve always presumed that, in the end, Germany would do whatever was necessary to protect Italy from the kind of financial blow-up that hit Greece in 2010.
Italy needs growth in nominal GDP to stop its debt burden from rising any further.
This means it needs Germany’s help — not just through greater fiscal flexibility, which is essential, but also through a rise in euro-area inflation back to the European Central Bank’s target of “below, but close to, 2 percent
Perhaps German citizens should pay an extra tax each year the country experiences inflation that is below but not close to 2 percent — with the penalty increasing in proportion to the shortfall? The proceeds could be distributed to countries with a cyclically adjusted fiscal deficit of less than 3 percent and less-than-trend GDP growth. Perhaps Italy could impose a punitive tax on German tourists?
Crazy? I know. Not any crazier than insisting on an arbitrary fiscal-deficit rule, unadjusted for the economic cycle — or letting demand fall so low that Europe misses its inflation target by a mile, and in a way that condemns Italy and others to endless recession?
