Deficit or no deficit—that seems to be the question. A few hours after the presentation of the Italian budget law, this is the main issue that is dominating the media coverage, the political debate, and, naturally enough (as things go these days), the propaganda.
“Give me deficit or give me death!” “If France can do it, so can we!” Those were the shouts from the government side.
“They are irresponsible!” goes the standard reply of the opposition, aligned to the dictates of the technocratic European powers-that-be.
Nevertheless, going beyond the particular choices that the government will end up actually making in the coming days, it is probably the right time to clarify a few things on this topic—starting with the fundamentals.
So-called “orthodox” economists argue that a state, just like a family or a business, should not spend more than what it takes in (from taxes), or at least severely limit its reliance on external borrowing to finance public spending. But there is a fundamental error to this view: states, as history has shown well enough, simply cannot be likened to households and businesses.
Does this mean that states can’t “go bankrupt” at all? It should be emphasized that the term “bankruptcy” has a very different meaning in this case: no court exists that could open bankruptcy proceedings against a state and put up its assets for auction; however, a state’s condition of insolvency, if it occurs, can indeed cause quite serious consequences for a country (in terms of market access, foreign investments, liquidity, etc.).
Of course, all countries are different in this regard. The US is not Argentina, and Italy cannot be compared with the United States. A state’s geopolitical and monetary power matter, as well as its macroeconomic fundamentals. But what is also important is the way in which the relationship is set up within each state between political power and the authorities setting monetary policy (until 1988, much later than the supposed “divorce” between the two, our country had monetized a large part of its debt through purchases of government bonds on the primary market by the Bank of Italy).
In the case of the countries in the euro area (and, in some ways, in the case of the other European Union countries as well), and thus also in the case of Italy, the problem is the asymmetry between a monetary policy entrusted to an independent supranational entity and a fiscal policy formally in the hands of the national governments—which, however, exercise it within the framework of the restrictions imposed by the Stability Pact.
In this way, the Eurozone countries (especially those in the south) have given up their budget-making authority to the bond markets—to quote a famous American economist—which made austerity policies into structural features (which in Italy even took the shape of constitutional requirements). What can a single European state do in the face of a speculative attack? Nothing, except for falling in line and cutting expenses even more to “reassure the markets” (this is precisely what Minister Savona points out in his paper).
This is the ultimate cause of the hemming and hawing within the Italian government on the question of the deficit limit, torn between those who fear the “reaction of the markets” and those who, while fearing it all the same, need to have some achievements to boast of for the upcoming elections (or to find a convenient scapegoat). But they will find a compromise—and without pushing their luck too much. That’s a safe bet (Renzi did the same).
Moreover, at stake here are only a few decimals, not more than one point of GDP, not an actual shock maneuver. And Brussels—within certain limits—can always play the role of benevolent mother, sensitive to the needs of a country that just needs to take a breath of fresh air. When talking about the financial extra leeway that could be found in various parts of the budget, the most important problem at this point is not how big this would be, but rather the allocation of resources.
To say it clearly: the upcoming budget would indeed be “of the people” only if it were to make taxes more progressive and introduce a tax on large estates; if it were to allocate more resources to health care and public education; if it were to finance a truly “universal” citizenship income without giving up on policies aimed at full employment.
The risk is, however, that the proposed “brave maneuver”—in the words of the Prime Minister—will end up rewarding especially those who already have the most, and even benefit the big tax evaders, without any “multiplier” effects on growth, and without any relief for those who have paid the most for the crisis in recent years.
