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“It would be better to leave governments free to try the policies of their choice”

Jean Pisani-Ferry, the European Union

People have the right to make mistakes: According to the economist Jean Pisani-Ferry, the European Union must accept the legitimate aspirations for disparate policies, while guarding against the contagion of their corollary: the possibility of a sovereign bankruptcy .

The new Italian coalition was elected on a program for the least risky that combines the tax cuts promised by the League to small entrepreneurs in the North and social spending promised by the 5-star Movement to the poor in the South. On the basis of independent evaluations, the total of these commitments would exceed 100 billion euros per year, or more than 6% of GDP. For a country whose public debt already exceeds 130% of GDP, it would be at least adventurous.

Given its limited room for maneuver, the Conte government has already begun to revise its plans. But it is unlikely that it will do so to the extent necessary to avoid the infringement of European budgetary rules. If the anti-system parties are convinced of one thing, it is that they should not play the wise students.

We must therefore prepare for a showdown between what the rules prescribe and what has been promised to the people, between the legitimacy of law and that of the vote. It is not the first time. François Hollande in 2012 had said he wanted to revise the budget treaty, before settling for a compromise without content. Aléxis Tsípras in 2015 was elected on a program of radical change, but the financial dependence of Greece has been the reason for its resistance. If the confrontation is this time likely, it is first that the political climate has changed and what is called populism is on the rise. Secondly, it is difficult to argue for the status quo in a country where per capita income has not increased in twenty years. Finally, Italy is a big country and its leaders believe they have bargaining power.

The economic strategy of the League-Five Star coalition is questionable. While Italy needs growth and not austerity, it is less a demand shock than a supply shock that needs to be addressed, less a Keynesian expansion that an investment in skills and business management, in order to awaken dormant productivity.

We will soon know what are the real priorities of the new team. But in any case, people have the right to make mistakes. And today they are all the more inclined to make use of this freedom that the reputation of competence of the traditional parties has been put down by the global financial crisis and that of the euro zone.

What consequences should be drawn from it? In the short term, we need to help Italy to get out of its problems from above, by tackling a dualism that sees coexisting a network of world-class companies and a network of other, smaller, are dangerously late on their German or French counterparts. The available European financial tools can be used for this purpose, and the investment budget for the euro area will soon find an outlet if consensus is reached to create it.

But we must also think, for the future, the rules of the game common. For twenty years the European institutions have been playing schoolteachers with governments: they lecture, forbid, compliment and protect. Over the years, the budget monitoring system on which they rely has become so complex that only a handful of technicians master the mysteries. In the manner of apostolic prefects, they alone can specify what is authorized, tolerated or prohibited.

As long as there was consensus on desirable policies, this technocratic paternalism could defend itself. In a context of revolt against the established economic order, it has become politically dangerous. A conflict with Brussels over the application of the rules of the Stability Pact would offer Matteo Salvini, the leader of the League, or this or that other European Eurosceptic, a perfect opportunity to turn bureaucratic lead into electoral gold.

It would be better, therefore, if the system were to keep the looser flange in the States, and as long as governments could convince lenders to give them credit, leave them free to attempt the policies of their choice. This presupposes, of course, that these lenders bear the full risk, and do not expect partner countries to take over these debts tomorrow. There are indeed two polar regimes in a monetary union: one that combines collective discipline and solidarity, the ultimate outcome of which is the mutual guarantee of debts; and the other, which relies more on the individual responsibility of States, whose logic leads us to accept in extreme cases the possibility of sovereign bankruptcies. The political conditions that we face, lasting for sure,

It’s not about punishing governments, or asking the markets to discipline voters, as Commissioner Öttinger awkwardly suggested. It is no more a question of entrusting the management of sovereign overindebtedness to one-not-know which automatic mechanism. But we must allow governments to take their risks, and in return make them more accountable for their actions. This involves minimizing the potential shock wave of sovereign restructuring, completing the disconnection between banks and states (ie by completing the banking union), and setting up nets. liquidity to prevent creditworthy states from being subject to the vagaries of the market.

Lastly, this presupposes greater clarity on the preservation of the euro zone: the more it will be able to accommodate the disparities within it, the more it will be able to resolve sovereign crises, and the more it will be safe from the danger of dislocation. Pushing unruly countries to the exit, or simply letting go, would make everyone take a leading risk. We need a monetary union that is more flexible, but also more resilient.

-JEAN PISANI-FERRY

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