La deflazione e il governo Renzi secondo De Benedetti

At last, in the letter the Italian government sent Brussels about amending its “Stabilization Law”, it states that deflation is a serious risk to the Italian economy. Better late than never. Deflation is not a risk, it’s a dramatic reality in Italy and across an increasingly broad swathe of the Eurozone. And yet in recent years the issue has been greeted with a kind of blanket denial. I’d hazard I’ve been writing that Europe is heading in this direction for more than a year now. People have simply not wanted to see what was staring them in the face. The continent’s economic culture, forged out of a fear of inflation, has simply pretended the issue doesn’t exist. Even semantically: official central bank documents, all of them, have continued to talk of the risk of low inflation; they still do, even though it’s clear that Europe is slipping into deflation.

American economists were the first to pick up on the trend, and they’re still blazing the trail. For a while now, I’ve been feeding my fears through contact with the Fed and with Washington think tanks. The most recent report sent to Congress by the US Department of the Treasury on “International Economic and Exchange Rate Policies” is an interesting case in point. It’s well worth an in-depth read. It’s all there, in language clear as a bell. It says for example that “Europe is faced by outright deflation,” and that there is a chance it may export this around the world because “European demand is exceptionally weak”. Germany’s errors are stated with a clarity I have found no sign of in “official” writings on this side of the Atlantic: the US Treasury says that Berlin is weakening the European economy and driving it to deflation because it refuses to stimulate internal demand, even though its accounts are essentially in balance; it will not permit more flexible and expansionary European budget policy.
And that’s how the Eurozone has become the black hole of world growth, the epicentre of a potential deflationary earthquake capable of setting the entire world economy atremble. The threat is all the more dangerous given that many central banks around the developed world have slashed their rates to almost zero. And yet in America, the UK and even in China, inflation is below 2%. Inflation forecasts were pared back yet again this summer in the United States, Europe and Japan.

There is no doubt that these tremors have dealt a harsh blow to the heart of our continent. In September, the average inflation in the Eurozone was 0.3% (0.8% shorn of the oil price trend). An area corresponding to one fifth of world output is slipping into deflation and stagnation. The so-called peripheral countries are caught between a rock and a hard place, between the single currency and ebbing competitiveness. Because they cannot devalue to make themselves more competitive compared with the core countries, they have to keep wages and prices in check. Seven years on and there’s no sign of escaping an economic downturn that is beginning to unravel our social fabric. And we’re doing nothing about it. We may actually have imported this downturn from the United States, but they reacted immediately and returned to growth while we Europeans are trapped in a spiral of dogmatism based on outdated rules and Germany’s atavistic fear of inflation.

The Maastricht Treaty seems like the stuff of prehistoric times. Back in 1992 there was no such thing as Google, Facebook or Twitter. It was another world. The internet was taking its first baby steps in Italy. Even in 2001, just before the euro went into circulation, Google’s turnover was 70 million; today it’s 60 billion. Back in the days of Maastricht, China had an autarky-based economy and was just beginning its climb to mass industrialization. Europe was the centre of the world market; after strenuous efforts it had recently learned how to manage the spectre of inflation. That spectre dated back to the days of Weimar (lest we forget, Nazism gained a foothold as a result of rampant unemployment caused by rigid deflationary policies brought in by the German Reichsbank in the wake of the 1929 crash); a spectre that showed signs of rearing up its head again a number of times after the war. The parameters followed back in the ’90s were (perhaps) correct for that world and for that economic culture. Now they’re simply senseless. They’re passé, as is the fundamentalist interpretation they channel. The glasses through which Europe has looked at price movements and economic trends are passé as well.

You didn’t have to be a money diviner to have realized years ago that deflation was a real threat to Europe. All you had to do was look at what was happening out there, out in the real world, where goods are bought and sold and where prices are set. It was obvious that oil prices would drop after the discovery of shale gas, which has transformed the United States from an oil importer to an oil exporter, and that’s without even considering an uptake of good energy-saving practices. It was obvious that globalization would drive the price of products down by shifting manufacturing to places where labour costs are lower than they are in Italy by a factor of sixty. It was plain to see how the internet and online shopping would put a squeeze on prices. We should have reacted immediately by ditching the theoretical models our central institutes adopted to put together their forecasts, and instead introduced the greatest possible flexibility to those fractious parameters that now risk hanging out to dry an entire generation of Europeans because of that blasted 3 percent. No, our response has been austerity and budget breakeven. Only now do we learn that the weight of debt will only increase this way, become a dramatic spiral of recession, deflation and higher and higher interest payments.

Deflation is ruinous for everyone. And it’s worst of all for the highly indebted. The cost of that debt becomes a millstone, it gets harder and harder to pay back. Total worldwide private and public debt is now equivalent to 272 percent of world GDP. Nobody can afford deflation. Not least Europe, whose population corresponds to 5% of the world population, whose GDP is 20% of world GDP and whose debt is 50% of world public debt. Even less so Italy, which has 1% of the world’s population, 2.5% of its GDP and 20% of world debt.

Matteo Renzi has proven himself to be an excellent politician, and he will be playing his part in Europe. Taken as a whole, his government budget is positive. But technically speaking, the recently adopted Stabilization Law will do nothing to spring Italy from its decline, or perhaps its fall. Positive as they may be, the measures adopted in the budget are far too paltry to help the country exit this spiral of recession and deflation. I say this because of the simple fact that they do nothing to clearly change consumer behaviour and consumer expectations. Without faith in a turnaround and with the belief that prices will drop from one month to the next, the people of Italy will continue to put off their purchasing decisions.

That will not achieve results. As Larry Summers put it so well, no nominal rate is capable of offsetting investments and savings at today’s inflation rates. It falls to Europe to do much of the work. The ECB should be doing this work by buying up corporate bonds (a market worth some 9,000 billion overall), European government bonds, and even US debt securities. Germany’s resistance to this is well known, but Mario Draghi has proven himself capable of protecting Europe’s interests above and beyond majority shareholder pressure. What is needed is an inflationary shock that spikes over the 2% planning target - one that has completely slipped off Europe’s radar these past few months. Something like 3% or 4% for the next two years would be a useful and sustainable target. This would help reduce the exchange rate with the dollar, whose current level strongly penalizes Eurozone output.

[**Video_box_2**]Brussels could also do some of the work against deflation by at least doubling the buffer of investments under the Juncker Plan, from €300 to €600 billion, a level at least comparable with corresponding commitments in the US. European governments could also get to work and adopt common sustainable rules (at least keep investment outside the deficit calculations please!) and - at long last - a common economic policy. Germany must do it, it has to do it by injecting purchasing power into its economy, borrowing to invest in order to rebalance a situation that is unsustainable over the medium term, with Berlin today selling to all and buying too little from some.

But while we wait for all this to happen, Italy has to get moving and at least have the courage Gerard Schroeder had when, ten years ago, he pushed the German deficit above 3%, at the same time enacting reforms to get it back down again over the medium term. These negotiations are humiliating for us and for Europe too. Haggling over a 0.3% correction when we’ve just had seven years of zero economic growth, eight points of GDP up in smoke, is so absurd as to seem unreal.

€48 billion has to be invested in the economy, the deficit/GDP ratio has to be allowed to go up by three points, and taxes on labour costs must be slashed. We have to say up front we are going to break this barrier; we have to commit to a programme of reforms that in three years will bring the country back under the 3% threshold partly by increasing the denominator (i.e. GDP), partly by cutting unproductive spending by up to 28 billion over the three-year period, along with a progressive clawback of pensions over €2 thousand.

Straightaway, remaining IRAP taxation (20 billion) should be completely eliminated, with the same amount coming off IRPEF taxation on the middle and lower classes; the rest should be invested in root-and-branch welfare reform, without which it’s impossible to talk about the (necessary) streamlining of government and virtuous labour market flexibility.

As The Economist writes this week in a feature on the tardy truth about deflationary risks, tinkering will no longer do. Deflation is a disease that cannot be fought with aspirins, or with screwdrivers either, come to think of it. Expectations need to be overturned. Politics needs to rise to the challenge in Italy and in Europe.

I can already hear the objection: De Benedetti, how will the markets react if Italy’s deficit shoots up to 6% of GDP? I believe I know the market better than many others, and I am in no doubt whatsoever that in the coming months securities buyers and sellers around the world will hammer us if we are not capable of turning growth around, if we don’t look beyond those pointless parameters from twenty years ago. I already mentioned the US Treasury report and American concerns about Europe’s stuttering growth. Recent reports from the Monetary Fund and Moody’s, and indeed a significant proportion of papers issued by international bank research units, put the failure to grow at the top of Italy’s list of stability risks. If the Italian government comes up with a serious plan and a crystal clear schedule for reforms with the deficit reined back in within three years, I am certain that the markets will react favourably.

No confirmatory evidence, you say? That’s as may be. But deflation is already upon us. And if we twiddle our thumbs any longer, it will eat its way through what little wealth we still have, and there’ll be nothing left for us to try and escape its clutches.
Or as The Economist succinctly says, “Once deflation has an economy in its jaws it is very hard to shake off. Europe’s leaders are running out of time.”

A great rock song from thirty years ago ran “better to burn out than to fade away”. Well, let’s try not to fade away slowly and inexorably, let’s bust out of the spiral of our fate and you’ll see, Italy won’t burn out at all.

L'articolo in italiano sul Foglio di domani