Grilli: Austerity Measures Are not an End, but a Means for Growth
Adelina Marini, January 28, 2013
As of last year the tradition finance minsters of EU member states to appear in hearings in the Economic and Monetary Affairs Committee in the European Parliament is strengthening. Although these events usually pass without much media attention, excluding the double hearing of France's and Germany's finance ministers - Pierre Moscovici and Wolfgang Schäuble - they are quite interesting as a trend, especially against the backdrop of the growing remarks about the need of enhancing the role of national parliaments on European level. The latest such call was conveyed by British Prime Minister David Cameron during his long-awaited speech on Europe on January 23rd. Then he said that there is no European demos and therefore it is necessary to enhance the role of national parliaments.
European Parliament chief Martin Schulz fought back saying at a special press conference on the occasion of the forthcoming political season in 2013 that when Mr Cameron makes a decision at a EU summit together with the other heads of state or government, he then is accountable to his national parliament. However, that decision has an impact on the citizens of the other member states too. That is why the European Parliament is established, Martin Schulz explained, who introduced for the first time the practise heads of state or government to speak in the European Parliament. Up to this moment, the MEPs were addressed (beyond their capacity as rotation presidents) by Mario Monti, Angela Merkel and Werner Faymann, and in the beginning of February, in Strasbourg, will appear French President Francois Hollande.
The eurozone crisis has showed very clearly the interconnectedness of the economies not only in the euro area but in the EU at large, where many of the non-euro countries are dependent economically on the developments in the zone of the single currency. That is why the procedure of hearing ministers of finance by MEPs is very useful, although it still needs perfection. The European Parliament is the place where national positions can be heard publicly. MEPs are much more aware of the European legislation in which they participate as rapporteurs, authors of resolutions, as participants in negotiations with the Council and the Commission, and they indeed know in detail the new European rules. National members of parliament are familiar with them in various degrees because they often have to vote them at home. However, they are not as deeply in as their fellow European Parliament colleagues and what is more important - they are elected to defend the national interest and rarely care about the common European perspective.
So far, through the economic committee passed the ministers of Spain, Greece, Hungary and, as mentioned above, of France and Germany. Last week before the MEPs appeared Italy's Finance Minister Vittorio Grilli. His appearance was interesting in itself because it happened before the parliamentary elections in Italy, caused by the withdrawal of parliamentary support for the technocratic government of former European commissioner Mario Monti. That is why a large part of the questions to Mr Grilli were related to the elections, but also to the specific measures the government has implemented in the course of the one year of technocratic rule, the purpose of which was to save the Italian economy from slipping into the abyss which would have been difficult at that time or even impossible to bear by the eurozone.
A year later the economic situation in Italy looks different, in Grilli's words, but the economic indicators to a large extent show the same situation. According to Bank of Italy, the gross domestic products has shrunk by a little over 2% in 2012 in general and the forecast for 2013 has been revised from 0.2% to a 1.0% drop because of the deteriorating international environment and the sluggish economic activity in the past months. It is possible in the second half of 2013 the Italian economy to begin expansion, but these expectations are very conditional. Italy's government debt still is enormous (126% of GDP in November) and is expected to continue to grow, reaching 127.6% this year. According to estimates by the European Commission, 5.5% of Italy's GDP is spent on debt servicing - a share which is expected to remain unchanged in the years to follow.
Italy has been in an Excessive Deficit Procedure (EDP) since 2009 as in April last year the parliament adopted a legislation that introduces in the Constitution the balanced budget rule. However, it will enter into force in 2014. Italy is one of the 14 EU member states that are in the macroeconomic imbalances procedure. Two indicators are above the admissible thresholds - loss of export market share and general government debt. Wages are also not sufficiently adequate to productivity. It is expected the nominal unit labour cost to increase in the upcoming years with a rate close to the eurozone average. Unlike high government indebtedness, private indebtedness is contained.
There are six country-specific recommendations under the European Semester from 2011 and all are partially met. Those are fiscal consolidation; overcoming segmentation of the labour market; reform of the framework for collective bargaining; opening up of the services sector for greater competition; improvement of the framework for private investments in R&D; acceleration of the work on efficient spending boosting growth and co-financed by cohesion funds. For 2012 the Commission adds two more recommendations and they are: to pay attention to youth unemployment and boost labour mobility; fight tax evasion.
Unemployment is also growing. In November, according to Eurostat, the number of unemployed was 11.1% of the workforce while the share of young people is 37.1%. The long-term unemployed are 5.1%. The expectations are this year unemployment to grow up to 11.5% and in 2014 to 11.8%. All this forced the French MEP from the EPP group, Jean-Paul Gauzes, to ask the Italian finance minister whey the markets changed so abruptly their attitude for Italy, given that practically not a single reform has been implemented. Here it is important to note, though, that one of the significant positive changes in the indicators is the drop of spreads (compared to the German Bund) - from 517 points in July 2011 and 537 in July 2012 to 254 basis points on January 4th 2013. The interest of the 10-year benchmark bonds has also drastically dropped from 7.06% in November 2011 to 4.54% in December last year.
All this, Vittorio Grilli explained, was due to confidence. Yet in his introductory remarks he said that after months of tension in the financial markets in the euro area growing confidence can now be observed, increases of bond yields and spreads. The crisis itself, he added, was a crisis of confidence - a thesis shared by German Chancellor Angela Merkel as well in the peak of the shocks in 2011 and 2012. It is a fact, Mr Grilli went on, that this cannot happen in one year only. It is important, as in Italy so in Europe, all institutions to continue these efforts.
One of the questions MEPs ask every time is about austerity measures and the effect they have. Astrid Lulling (EPP, Luxembourg) asked who should be trusted, since the former Eurogroup chief Jean-Claude Juncker distanced himself from the austerity policy, but some indices give hope that their effect is positive. Whom should we trust, she asked and added: "here we are a bit sceptofrenic". The Italian Minister of Finance was convinced that there are countries that did not have much of a choice but to apply tough measures. They are not simply a bitter pill, they are something much bigger, he explained. Some countries had bigger choice than others, but Italy had a very narrow choice because it is impossible to have a reliable growth strategy if you have not stabilised the financial markets first. It is like building a house on sands.
Fiscal stabilisation is not an end in itself, the minister added, it is a means for growth. He suggested that Juncker probably meant a more common European approach. To a question about the danger of two-speed Europe because of the crisis, Vittorio Grilli said that risk will disappear by itself when the crisis is over. According to him, when the deep reforms in the eurozone end, when economic convergence is achieved, then the issue will disappear automatically. He was not a big optimist that this could happen any time soon but said he believed in the euro and Europe.
Last week, through the economic committee passed Irish Finance Minister Michael Noonan too, who, however, spoke in his capacity as a rotating president of the Council of finance ministers. He is also among those who notice improvement. In his words, the EU entered 2013 in a much more rigid condition than in 2012. Some member states have improved their competitiveness, there is improvement in terms of deficit and debt. MEPs, though, attacked him with claims that the negotiations with the Council are becoming tougher and tougher. The main priorities of the Irish Presidency in the first semester of 2013 will be to complete the negotiations on the two-pack - the package of two legislative proposals, complementing the economic governance of the EU, are absolutely blocked, but Michael Noonan assured that a breakthrough will be achieved very soon.
Another important piece of legislation on which negotiations are expected to end soon is the Capital Requirements Directive IV. When that is over, the main priority will be the banking union.
Noonan was asked about the need of compensating the programme countries - an idea launched by the former Eurogroup chief during his last hearing in the economic committee in the beginning of the month. Ireland is for now the most successful country of all programme countries. Noonan said, however, that currently proposals were being discussed that are directed more to debt sustainability rather than being direct injections. He probably has in mind the promise Ireland got in June when the framework allowing the eurozone permanent fund to directly recapitalise banks his country to benefit from the programme, thus significantly reducing its debt taking out the share paid for the rescue of the Irish banking sector. According to him, however, the key was in restoring growth. Growth generates solutions, Michael Noonan concluded.