This is an English translation of an article that first appeared on La Repubblica on June 5th, 2015
The arm wrestling between Athens and its international creditors seems likely to lead to yet another compromise. While some see this optimistically, it is time to shout loud and clear that this is an agreement that is unlikely to solve anything. Particularly not Greece’s real, underlying problems, which are huge and have to do with solvency, not liquidity. To tackle Greece’s real problem we need to address the real issue: the lack of a plan for investments that will cause long run growth, and hence solvency. This is not only true for Greece, but also for Spain and Italy. Europe cannot simply continue to cover its eyes and ears as if to block out the truth.
Every new compromise will require a new type of intervention and bailout six months down the line – postponing the problem every time. A long-term solution will be found only if the diagnosis changes. Greece is not growing because of a toxic combination of public sector inefficiency and lack of investment. Without investment in productivity and human capital nothing will change. To kickstart growth we need more than another compromise.
In Athens, even among those who have enthusiastically supported Tsipras since the beginning, there are those pointing the finger at the party that promised change. Therefore it is worth making some distinction. Yes, the management of the crisis by the Troika has been embarrassing in the way that it has forced Greece to its knees. And in the meantime the Greek government got too defensive. Apart from addressing the very serious problem of corruption, it did too little with public sector reform where there are huge problems of nepotism. It is ok to refuse other budget cuts: but it is necessary to also have the courage to change, for example, the recruitment mechanisms to hire people according to experience and capacity within the public sector. As well as to direct public investments more strategically, for example, through adopting the suggestion of the Minister of Finance Yanis Varoufakis, to establish a National Investment Bank, capable of encouraging spending, replicating at local level the mission of the European Investment Bank. Europe will not grow by Quantitative Easing alone.
Obviously it is useless to pretend this is a problem only for Greece. In terms of economic fundamentals, particularly relating to lack of investment and productivity growth, Portugal, Spain and Italy are just as bad as Greece. There are those who reply that (modest) growth in Italy is back – the latest data on unemployment shows an initial drop and public spending is slowing down. But Greece, we know, is not that far away: and not only geographically. Greek debt, in 2007, was not much higher than today’s Italian debt – and suddenly it went out of control. Today, the Italian economy is just as sick: although the deficit is low even zero (!) debt/gdp continues to grow as the denominator is stuck. And will continue to be stuck if public and private investments do not increase.
“Fasten your seat belts, Italy is taking off”, says Matteo Renzi, the Italian Prime Minister, after declaring that the 159,000 jobs registered in April by Istat are all thanks to the Jobs Act. But the reforms put in place by the Italian government are not the right ones to revive growth and investment. If Italian GDP did not grow in the last 20 years, it is not only because of the pension system, public workers or article 18. Obviously, it is important to have a dynamic job market, and the Jobs Act – at least in spirit – goes in this direction. But real and substantial employment growth can arrive only with investment, public and private, in two fundamental areas: productivity and innovation. It is in this way that Denmark is today’s the number one supplier of high tech services to China’s green economy. Where are these kinds of projects, and such vision, in Italy?
What is needed, in short, is an economic revolution, not only in Rome or in Athens, but at the European level. A revolution that, through an agenda for growth, rediscovers the original meaning of Europe: solidarity, growth and stability. We now hear of strengthening governance, of a two-speed Europe: on one side the countries within the Euro, on the other, all the remaining countries. Germany and France are the leaders pushing this agenda: and the Gabriel-Marcon document seems like a manifesto. Of course, it is important to speed up the mechanisms, to cut European red tape, being able to intervene – for example – with meetings able to be called quickly in case of emergencies. But essentially, once again, this is tinkering round the edges and the effects will be marginal. We need to target the real problem. European countries will be able to compete with China and USA only by acting together to increase European competitiveness. Alone – in face of all Grexit or Brexit – we are lost.
This is also why we must not only rediscover our sense of solidarity, but also understand what is really differentiating us. A new diagnosis of the disease is needed: only in this way will we be able to find the right drug. Differences are clear: those who are cutting back, are not growing. Those who are focusing on strategic investments, patient finance and transformational innovation are forging ahead. If we want a united Europe, we must all invest, innovate and grow.