Commentary
Italian consequences for ending quantitative easing
The only certainty is that the great promises of the Italian electoral campaign, now written into the “Government of Change contract,” are being smashed against the wall of budgetary compatibility.
In the end, the long-awaited decision arrived: the ECB (the national central banks, on behalf of the ECB) will buy government bonds from the Eurozone countries until December, as part of the quantitative-easing program. The purchases will be halved by October (from €30 billion to €15 billion monthly), and will be reduced to zero from January onwards.
Started in 2015 to lower inflation in the euro area (now estimated at 1.7 percent), Mario Draghi’s “bazooka” also helped to protect the sovereign debt from the assaults of speculation and finance. It has protected them, helping to keep their yields low. Italy has saved on debt service of about €10 billion a year. To avoid shocks, the shutdown operation will leave the cost of money at 0.00. Therefore, the end of quantitative easing will not imply a restructuring of the conventional monetary policy, in order to maintain stable the economic situation, which is in a phase of slowdown (the growth of the Eurozone for this year has been revised downwards from 2.4 percent to 2.1 percent). At the same time, Draghi clarified that the proceeds of the expiring bonds, purchased through quantitative easing, will be reinvested long to ensure liquidity to the system.
Is everything good? Not really. Economic growth remains weak in part because the liquidity injected into the system has not reached the real economy. There has been a lack of expansionary fiscal policies to accompany monetary incentive and of public and private investment to adequately boost the economic demand. Within the current European governance, the ECB is only focusing on price stability and maintaining the value of the currency, while the States, which are responsible for fiscal policy, are restricted by the golden rule of the balanced budget.
Moreover, the Eurozone countries also have another problem: they have no defenses against the speculative virus. It is the market that determines the conditions of their financing, which will change significantly after Draghi has bought the last government bond on the secondary market (from the banks). Italy has the most to lose in this situation, with its debt burden of €2.3 trillion (131 percent of GDP).
A draft resolution on the DEF (economic and finance program) is currently circulating and will arrive in Montecitorio the June 19. As Minister Tria declared a few days ago in Corriere della Sera, this document would contain a basic principle: Italy will pursue its policy objectives “in compliance with the European commitments on the 2018-2019 balances.” In other words, no deviation of public expenditure. He also mentioned a new possible framework for public finance, which at the moment remains a mysterious object.
There is a commitment to sterilize the “safeguard clauses,” a €12.4 billion package. Where will they take the money? Some are suggesting amnesties (they call it “fiscal peace”) and spending cuts, and others of increasing the public deficits (but this would contradict the commitment on the 2018-2019 balances).
The only certainty is that the great promises of the last electoral campaign, now written into the “Government of Change contract,” are being smashed against the wall of budgetary compatibility, which, apparently, the yellow-green government does not intend to seriously question. Meanwhile, the economy’s signals are not encouraging: analysts have revised downward the forecasts for growth in Italy: according to the OECD, 1.4 percent this year, 1.1 percent in 2019. These estimates are in line with the latest figures on the decline in industrial production (-1.9 percent in April on an annual basis), the slowdown in exports to non-EU countries and consumer confidence.
How will these data affect the performance of government accounts? How can one think of keeping the commitments on 2018-2019 balances if the GDP, instead of expanding, shrinks?
These questions must be on the Economy Minister’s mind. He might be thinking about the impact the new yields of government bonds will have on the overall picture of public finances, especially after Draghi’s communication on the end of quantitative easing.
Originally published at https://ilmanifesto.it/draghi-chiude-il-rubinetto-litalia-rischia/ on 2018-06-15