Key point not yet achieved. Jacques Delors believes that the euro is still “on the edge of the abyss”, as we stated in this column yesterday. Is he right? Probably yes: first and foremost because nothing can guarantee that those member states being asked immediately to adjust will do so with the effectiveness required. The procedures that derive from the European economic governance that has finally been put in place have been applied correctly, given the current political and legal situation, in that (a) the European Central Bank (ECB) has set out for the Italian government the nature, key content and timetable for the measures upon which is predicated action by the ECB itself, through the purchase of treasury bonds issued by Italy, and (b)the Italian government has given a positive response to the ECB letter by pledging to bring about the required budgetary balance within two years.
European economic governance has, then, worked, and this column has been pointing this out with all the forcefulness which, in my view, the realisation of the previously theoretical strand of economic and monetary union (EMU) merits. The key point has not yet been achieved, however. By this, I mean Italy's fulfilment of the announced measures. What was in the first draft prepared by Rome and submitted to the ECB has subsequently been largely dismantled (in part by the government itself and almost totally by the opposition), and debate in parliament and the senate is ongoing. No one challenges what has to be achieved: both the government and the opposition have confirmed their desire to meet the target of reducing public expenditure by €4 billion by 2012, €12 billion by 2013 and €20 billion by 2014. But the measures in the initial plan, as submitted to the ECB, no longer exist! And the alternative plan is still under discussion.
Points of uncertainty. This is not to say that the government's new plans do not contain courageous initiatives. Yet: (a) the intention to halve the number of MPs and to get rid of the provinces (which duplicate the regions and municipalities) remains, but these will require amendment of the constitution which takes many years; (b) there will be no increase in VAT, it is being “held in reserve” in case the other measures prove insufficient; (c) the solidarity levy on high incomes has been axed. Overall, the current text is radically different from the one previously submitted to Brussels. The ECB, in the meantime, working on the initial austerity plan, has purchased a significant number of Italian treasury bonds. True, Italy has confirmed its intention to reduce its annual deficit to 1% of national product next year and to zero by 2012. However, it is the way to achieve this aim that is proving controversial and risky.
Italy under pressure. At the start of the week, ECB President Jean-Claude Trichet stated that his bank did not negotiate with governments, it “sends them letters”. On 8 September, the ECB governing council, meeting in Frankfurt, will deliver its view on whether or not to buy more Italian treasury bonds. Mr Trichet has already pointed out to the relevant European Parliament committee that it is national governments which issue treasury bonds and which are responsible for their credibility on the markets. The European Commission is keeping a close eye on the situation and will give its opinion of the Italian measures, as Economic Affairs Commissioner Olli Rehn has announced.
The Italian Bill is still being debated in the national parliament where the opposition has been extremely critical of government plans and intends to bring significant changes. At first sight, it is not clear how stimulation of the economy, on which the ECB insisted, will work.
This column has already argued that this bringing of transparency is in itself positive, as it has brought to light waste, deficiencies and abuses in the way the Italian nation functions. Politicians have not come out of it at all well. For example, MPs in Italy are calculated to earn €144,084 per annum, compared with the €106,583 paid to MPs in Austria, €84,108 in Germany, €81,600 in the United Kingdom, €72,017 in Belgium and €62,779 in France. Simply addressing excesses and abuses at all levels (they are particularly prevalent among the rich, but are to be found also in pensions, invalidity payment scams, etc) would bring a huge improvement to the budgetary situation.
The key question. The real question, for both Italy and a number of other member states, is whether and to what extent the people will be prepared to accept and comply with the discipline that goes hand in hand with membership of the euro. It is a question of attitude and willingness.
Tomorrow I will discuss what I think is the significance of this question. (F.R./transl.rt)