Wednesday, 20 February 2013

Who can save Italy II

So I said that Italy needs a coordinated policy to promote innovation and investments to overhaul its economy. An obvious obstacle to this, a part from ideological ones, is that Italy has no money. Credit is hard to get as it is and an expansionary spending programme would almost certainly lead to another spike in interest rates. This is a tricky predicament, indeed. Yet, there may be ways out of it. One would be to lean more heavyly on Germany and other solvent northern European countries. (There is an acronym, GIPSIs, for the crisis countries. Why is there none for the others? Germany, Netherlands, Finland. Hmm, perhaps lack of vocals. And 'FinGerLands' sounds creepy.) They have access to very cheap credit and could easyly afford a stimulus package. Some of it could be spend in the FinGerLands and some in the GIPSIs.

Stimulus in the core would have several positive effects. (1) It would increase employment in Germany. (2) Since Germany and other core economies are already near full employment this would drive up wages in the core (3) This would lead to higher costs in the core economies and thus narrow the gap in competitiveness with the periphery. (Yes, I am saying Germany should become more like Greece.) (4) Higher wages and more employment would mean more domestic demand in Germany and hence more economic growth there. Also, Germany would become less reliant on export surpluses which may be unsustainable in the future anyway. (4) Higher costs in the core and increasing demand there would boost export prospects for the periphery country and hence get the back on a growth track. Some of the stimulus money should also be spent in the periphery countries to help with structural economic reform and improvement of infrastructure.

How would the core repay the debt incurred for the stimulus? Additional tax revenue that results from increased growth would go a long way. Perhaps one could also contemplate to bring tax rates on incomes and corporations back to where they were a few decades ago. And of course, if the core economies run a full capacity for a while this will produce some inflation that will help with paying off the debt.

Sounds too good to be true? Well, the prospect of increasing wages and rising costs will not be met with enthusiasm by employers in the core. So it would be an uphill struggle and, honestly, not one that looks winnable given the current political landscape in Germany and elsewhere.

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