The fact that Italy’s public debt has a lower credit rating than private debt is a reflection not of public debt’s intrinsic inferiority but of a political choice made by European leaders. And, by bolstering an authoritarian politician, that choice is now blowing back on them.
By Yannis Yaroufakis and cross-posted from Project Syndicate.
Italy is now the frontline in the battle of the euro. Deputy Prime Minister Matteo Salvini is being propelled by a political tailwind that may, after the European Parliament elections in May, enhance his capacity to inflict serious damage on the European Union. What is both fascinating and disconcerting is that the xenophobia underpinning Salvini’s ever-increasing authority is being generated by the eurozone’s faulty architecture and the ensuing political blame game.
In its recent report on the economic imbalances afflicting each EU member state, the European Commission blames the Italian government for its failure to rein in debt, which, it says, results in tepid income growth. According to the Commission, the government’s reluctance to cut its budget deficit has spooked the bond markets, pushed interest rates up, and thus shrunk investment.
Salvini could not be more pleased. The report presents a splendid opportunity to blame the Commission itself for Italy’s travails, by arguing that it was actually the EU’s fiscal austerity policies which constricted growth, pushed the economy to the brink of a new recession, and led to the election of the populist government now dominated by Salvini. And, as if that were not enough, it was the Commission’s threats of penalizing Italy unless it imposed even greater austerity that unnerved bond traders and pushed interest rates up.
Italy’s tragedy is that the Commission and Salvini are both right – and also both wrong. It is correct that Salvini’s announcement that the government would rescind its promise to impose pre-agreed levels of austerity alarmed investors, made Italian debt less viable, and caused capital flight. But it is also correct that the Commission’s fiscal rules, were they to be implemented fully, would have caused a recession that would have made Italian debt less viable anyway.
When two clashing explanations of the same phenomenon are both correct, they must be incomplete, even if they capture different aspects of observed reality. In such cases, it is useful to adopt a new vantage point from which to take a fresh look at the problem. When it comes to the Brussels-Rome clash, I believe, that vantage point is on the other side of the world: Tokyo…