It would have led to primary budget surpluses (surpluses after interest payments on debt) that would have collapsed domestic demand and the economy and made that target even more distant. The surreal nature of the measure made it a dead letter. By making it seem more realistic, they would like to make it operational. But the dramatic effects on the economy would be the same whether the aim was to reach 60% or 100%. Rules should not be made on the drawing board.

We must ask ourselves if and how much it is possible for Italy to reduce its debt while maintaining an expansive fiscal stance, asking ourselves not only what our country must do, but what policies other countries and the ECB must adopt to facilitate an extremely slow reduction. This is where the trouble gets serious, because with inflation rising above 2%, the ECB has fewer cards to play against appeals to the German High Court by German professors who would like to stop buying public bonds.

On 28 October there was the ECB board meeting and our bond spread did not react well to Christine Lagarde’s words that were meant to be reassuring precisely on the level of inflation. How come?

The ECB presented projections that inflation will fall below 2% in the medium term and said that it will tolerate temporary rises above 2%. It believes that for the time being there will be no impact of price increases (exogenous, energy, etc.) on wage bargaining, and therefore it does not want to introduce measures that would dampen aggregate demand and the recovery – repeating the unfortunate mistakes of 2008 and 2011 when it raised rates, respectively, just before the collapse of Lehman Brothers and the spread crisis. The sensitivity of Italian debt to a rise in rates or a decrease in purchases is also a sword of Damocles for Frankfurt. The immediate reaction of the markets, which has since receded, was not convinced by Lagarde’s reassurances, and BTP/Bund spreads have risen. The expectation is that the ECB will be less aggressive in the future.

So what should be done?

In this context, it is not enough to propose more or less sweetened formulas, European governance must be reformed. The ESM also proposes to replace the rules on debt with those on public spending. In other words, public spending should vary at a rate that reflects the past growth of the economy in question. Well, if an economy has had negative or modest growth rates, it will either have to reduce spending or keep it constant, with the result that the economy will be worse off! The model they have in their heads is the mainstream model where public spending is not a factor in growth, but rather an obstacle. But in my opinion they are also liars, because they know that this is not the case, but they say so because of the unfortunate mental rigidity and the unbearable moralism of a part of the German elite.

According to statements by the Commissioner for Economic Affairs, Paolo Gentiloni, the debate on the future of European governance should soon begin. Meanwhile, about a fortnight ago, in an interview with Der Spiegel, Stability and Growth Pact Director General Klaus Regling criticised the “debt rule”. What do you think about this?

The European Commission has indeed relaunched the review of European economic governance, a process that was already launched in February 2020 and then suspended due to the pandemic. I re-read the document launching the review. It is full of good analyses on the past, in particular it recognises that the austerity policies of the first half of the last decade were counterproductive and that the ECB was left alone to fight deflation; it judges negatively the trade surpluses of some countries; it argues that a European fiscal capacity should be built and that monetary and fiscal policy should be coordinated (as also argued in the ECB’s strategy review of last July). It is also acknowledged that the current rules are an abstruse Sagrada Familie (The Basílica de la Sagrada Família, also known as the Sagrada Família, is a large unfinished minor basilica in the Eixample district of Barcelona, Catalonia, Spain Editor) of rules that are not very transparent and incomprehensible to the informed citizen. It is therefore a good thing that Regling agrees. But it is on the proposals that Europe becomes weak. The Stability and Growth Pact proposals, as we have said, are a repetition of what we have already seen, and perhaps worse.

It is likely that the real decisions on the Stability and Growth Pact will have to wait not only for the new German government, but also for the French presidential elections next spring. Will it be worthwhile for Italy to still have Draghi in government in order to obtain the most appropriate changes at the negotiating table?

It will be better to have Draghi in the presumption that he has clearer and more advanced ideas than the politicians who support him. Unfortunately, there has been no debate in the country on the reform of European governance, neither on the left nor on the right. Let us remember that Enrico Letta has in the past elected Italy’s public debt as enemy number one, understanding little or nothing about the damage of austerity and even agreeing with European policies. Certainly now he too will have understood something, but he is not opening a debate, and to do so he should choose other leading economists. There are some brave and prestigious ones, why doesn’t he? Giuseppe Conte merely reintroduces rebates – no comment. Letta and Conte have our attention. What can we say about the right? If it were up to Salvini & Meloni we would be like Bolsonaro’s Brazil. They have always rowed against the pandemic. What is there to add?

There have been different interpretations of this: what do you think of Weidmann’s resignation from the Bundesbank? Does his step back mean a weakening of the “hawks” and a strengthening of the “doves”, at least in the ECB?

It is a Bundesbank tradition! In 2011 we already had the resignation first of Axel Weber as president of the Bundesbank, and then of Juergen Stark as a member of the executive council of the ECB in controversy over monetary policy choices. We will see with whom Weidmann will be replaced, probably a hawk. Isabel Schnabel who is also a member of the executive board would be a good choice (for us), but too unbalanced towards the current ECB leadership for German conservatives. In fact, Schnabel would be a balanced choice even from their point of view (neither hawk nor dove), allowing a consensual management of the Bank, also taking into account that it continues to be under fire.

In short, what moves should the Italian government make in the coming months, also in view of the revision of the Stability Pact?

Naturally, it should take the strength of the European authorities’ “self-criticism” on the mistakes of ten years ago. And strongly emphasise that one cannot say “Lets forget the past”, which is too easy. Germany has had huge savings in interest expenditure symmetrical to the worsening of our public finances.

Why professor?

Because when investors were allowed to flee from our bonds without the ECB lifting a finger to support us, they turned to German bonds. Then when the ECB intervened, it had to buy German bonds as well, with additional benefits in terms of negative interest for Berlin. Well, this has to be weighed at least as a political responsibility for the worsening of the Italian debt. We had reduced it with great sacrifice from 120% to 99% in 2007 or thereabouts, then austerity and the inaction of the ECB (until Draghi) brought it back to 130%. But, above all, we must not fall into the trap of the rules: by making them more “realistic”, the Regling hawks (now disguised as doves) intend to make them more “enforceable”. Better, then, to have absurd and unenforceable rules. The argument must be turned on its head: what must be done to make our debt sustainable and at the same time ensure decent growth (which would also make the monetary union more solid)? The spending rules that might prevail instead of debt rules may be even worse, i.e. pro-cyclical instead of anti-cyclical. Economic policy is more an art than a science.

Unfortunately Christian Lindner, the FDP candidate for the finance ministry job in the future German government, has declared his support for the ESM/Regling proposal, as Eurointelligence informs us (3 Nov. 2021). As this source comments, “In the case of Italy, where the national debt is now running at around 150% of GDP, this proposal would require a debt reduction in the order of 50pp by 2042. We don’t quite see how this is possible without either austerity, or a big increase in productivity”. Fiscal contraction would negatively affect productivity growth and would lead to a novel Italexit moment. Productivity growth depends on sustained aggregate demand and on investment. ECB and European support is needed.

But Lindner also rejected any idea of making the Recovery fund permanent. The latter will only be acceptable to the German Constitutional Court as a one-off measure. As Eurointelligence correctly comments, an organic reform of European economic governance cannot be done by subterfuge to escape the Treaties or national Constitutions.

Better to give up rules then?

No more rules. Or better, let us keep a rule on national budgets, but let us start the constitution of a federal budget that federalises the financing of public investments both as a structural adjustment of imbalances within the euro area and, via federal deficits, as a countercyclical function. It should also be written down that federal fiscal policy and monetary policy should be coordinated for the purposes of growth and structural and environmental rebalancing of the euro area, without abandoning the objective of monetary stability in the medium term. It goes without saying that Italy should present itself with adequate firmness at the European table. I assume that Draghi knows how things stand, and his sangfroid is best suited to cornering the hawks politically. Then the balance of power is what it is, but our weakness can be our strength. Let me be clear, in all this I am not absolving Draghi of past responsibilities, from “collaborationism” in privatisations to the infamous “sweat and blood” letter to the Italian government written with Trichet in 2011. But Draghi is also the one who gave the Keynesian speech at Jackson Hole in 2014. As a good Catholic and an intelligent person, he may be able to learn, and certainly adapt to historical circumstances.

Opportunism professor?