If one is to judge by the Italian public finance data released on December 10 by the National Institute for Statistics (ISTAT), Italy is on the path to adjustment. In the third quarter of 2011 the general government net borrowing has been 2.7 percent of GDP, down from 3.5 percent in the corresponding quarter of 2010. According to ISTAT the corresponding primary fiscal surplus has been 1.7 percent of GDP. In order to achieve the needed adjustment the Italian government is placing a heavy burden on Italian households and firms, and more steps are planned, most notably in the fields of regulatory liberalization and labor market reform. In spite of these achievements Italy still faces 10-year borrowing costs of around 7 percent. Such a level of long-term rates might make the budgetary situation unsustainable, given the high level of public debt—close to 120 percentage points of GDP—and the poor prospects for output growth.
While until few months ago one might argue that the high cost of borrowing was attributable to a lack of internal credibility, in today’s situation this can no longer be assumed to be the case. What is then failing to persuade the markets that Italy, and Europe, can survive the current juncture?
The answer comes from the talks in Berlin of Italian Prime Minister Mario Monti with German Chancellor Angela Merkel. Monti has emphasized that in order to achieve the necessary adjustment his government is demanding heavy sacrifices from Italians. He has nonetheless made clear that for those sacrifices to bring about progress, “the European context must become more favorable, by permitting in due course a lowering of interest rates and greater integration with the EU [European Union].”
This message is meant to address all those who today think that the European Union is made by a conglomeration of neighboring states placed in a geographical entity named Europe; that each state should achieve fiscal discipline on its own, in order to avoid any trouble to its neighbors; that non compliant members should leave the club; that the selfish sentence “every man for himself, and God for us all” must be adopted as a motto for Europe.
This was not what the founding fathers of Europe had in mind. Jean Monnet, Robert Schuman, Konrad Adenauer, and Alcide De Gasperi thought that future conflict among European nations should be made impossible. The strategy of compromise, and of incomplete solutions—which has so far dominated the political debate in Europe—is the most that can be achieved when the goal of a stronger and safer Europe is hampered by a myopic view of European integration.
The markets’ skepticism in spite of the boldness of Prime Minister Monti and his government in pursuing a consistent adjustment strategy, and of the willingness of the Italians to accept it, highlights the contradiction between the need to keep Europe united and the half-hearted nature of the solutions pursued. It is time to show to the whole world, and to the European people, how strong Europe is, and how forcefully it can and wants to react in the face of a crisis threatening to erode its very foundations.