Carlo Clericetti – Italy: Reform of the State-Saving Fund – Stop that Monster!

Huge power for technocrats that nobody controls and that can impose debt restructuring on states: this possibility alone would be enough to make investors flee, causing the crisis that the body should avoid. The Italian Government seems to be willing to accept it. That would be yet another mistake, perhaps fatal this time.

Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he  blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.(published on on 10 June 2019)

Originally published on on 22 Nov 2019

Translated and edited by BRAVE NEW EUROPE


The reform of the European Stability Mechanism (ESM), the so-called “state-saving fund”, has come a step closer to approval. The positive side in this case is that unanimity is needed, and therefore Italy has a veto power; the negative side is that the government – and especially the Minister of Economy Roberto Gualtieri – seems satisfied with the changes obtained to the original text, and therefore appears inclined not to use this power. It would be yet another mistake in our relations with our European partners, and this time it would be fatal, because there is almost certainty (the “almost” is used only because sometimes miracles happen, but who would bet on this?) that the mere fact of the entry into force of that mechanism would cause an economic catastrophe for our country.

As Carlo Cottarelli, a former director at IMF, said in an interview in La Stampa: “If investors know that the State Rescue Fund will probably ask for a restructuring of our debt as a condition for a loan, how do you think they behave? They would stop buying government bonds at the first sign of tension.” In reality Cottarelli is far too optimistic, because the most likely thing is that investors who own Italian government bonds not only will not buy them any more, but begin to get rid of them, without waiting for a threat of crisis to bring down their value. But if they sell, they start the fall in prices, with a “snowball” effect that would inevitably evolve into an avalanche. It’s a similar thing to what happened after the famous “Deauville walk”, during which Merkel and Sarkozy decided that private investors should be involved in the costs of the crisis.

The fact is that the Germans, their Nordic allies and even the French demonstrate that they have not understood – and continue stubbornly to refuse to understand – how the financial markets work. It is enough to remember the attacks made by Jens Weidmann, president of the Bundesbank, on the “whatever it takes” of Draghi, which solved the crisis of the spreads without the ECB having to intervene with a single euro. And remember the proposals of the seven German and seven French economists who followed the same logic behind the reform of the ESM. And, again, remember the ridiculous debate on the “reduction of risk before the sharing of risk”, another testimony to the ignorance of market mechanisms. At a certain point Draghi intervened in that debate, explaining that risk reduction is achieved precisely by sharing risk: words in the wind, have been completely ignored.

Now these financial geniuses would like to entrust the evaluation of the sustainability of a country’s debt to the technocrats of the ESM (whose director is the German Klaus Regling). Maybe they are the same technicians who developed the method to calculate the output gap, the one used to judge the public accounts of EU countries. A method ridiculed by economists from all over the world, not only critical economists, but also many of those who work in the main international institutions. A method that Italy has been challenging for some time, but to which only marginal corrections have been made that have not altered its total absurdity. It would be better to rely on “heads or tails”: at least there would be a 50% probability of having the right answer, instead of the total certainty that it will be wrong.

And then, perhaps there is not only the obtuseness behind this plan. Many have pointed out that the Fund can be accessed not only by States, but also by banks. And that the so-called recent “openings” of the German Minister of Finance, Olaf Scholz (which in essence do not change anything in the position of Berlin), coincide with the worsening of the situation of the two largest German banks, Deutsche and Commerz, now on the brink of disaster. It would not be bad for them, to satisfy their financial needs, to be able to draw on a pro-quota fund financed by all countries (we are the third lender).

At this point, Italy should present a proposal of its own, which, while accepting the Union’s fundamental cornerstones, to challenge those elements which are useless provocation, changing its rules of operation: the guidelines of auditing, reduction of country risk, reduction of public debt, but with different methods from those followed so far.

Dumping the output gap method appears finally to be agreed upon. The proposal on the table is to replace it with the control of public expenditure, which should no longer be increased. It would already be a step forward, because at least it is a parameter not subject to arbitrary calculations, but it would introduce yet another element of rigidity: once again, the rules instead of politics, because it is obvious that politics only creates problems (having to accept democracy …). One could counter-propose that the fundamental parameter becomes the primary budget balance (revenue less expenses net of interest), which measures what the State puts or takes away from the economy. The famous rule of 3% maximum deviation, established by the Maastricht Treaty, should be applied to that: not because it is a particularly intelligent rule, but, precisely, as a compromise proposal.

Those with a high public debt would not be allowed to have a negative primary balance (also a compromise proposal). Beyond what public debt limit? We will come back to this later.

The positive primary balance should be the only condition for possible access to EMU aid. If you are in negative territory, it means that the country in question is pursuing a policy of austerity (of course…), and not “cheerful” public finance, and this should be a sufficient condition to obtain support. As you will remember, Italy has had a primary surplus for 27 years, with the exception of 2009, the year in which the crisis was most acute. No other country can boast a similar record.

Not only that. A country with a positive primary balance should not pay a rate on public debt issues higher than the Eurozone average. If the market requires a higher rate, it would be up to the ECB (or the ESM itself) to intervene to calm the markets. Again, as with whatever it takes, if the commitment were credible, the market would in all likelihood adapt to this on its own, without the need for intervention, at least after the first auctions had confirmed that the ECB is serious.

As for public debt, one of the many mechanisms designed to reduce it should be applied, for example the one called P.A.D.R.E. (Politically Acceptable Debt Restructuring in the Eurozone) or another similar mechanism (there is also one developed by German economists). At the very least, it should be noted that with quantitative easing the ECB has in fact applied the substantial part of these mechanisms, namely the purchase of public debt in proportion to the central bank shares held by each country. This would formalise the fact that the ECB would continue to hold that part of the debt indefinitely. The EQ was possible because it was motivated by the need to avoid deflation and pursue the central bank’s objective that price growth should be “below, but close to, 2%”. This objective has not yet been achieved and is not even expected to be achieved in the short term. If one wanted, one would also find a motivation compatible with the treaties for definitively retaining the securities acquired with the Quantitative Easing. If you wanted to…

In that case, the weight of the public debt for all countries would be suddenly reduced (in proportion to the share held in the ECB). The average European level of the debt-to-GDP ratio, currently around 90%, would drop by 15-20 points, and that could be the new threshold. It would not be a scandal: the famous 60%, which has no theoretical justification, was fixed almost 30 years ago, in a very different world and especially before the most serious financial crisis for a century. Italy would still remain above the threshold, and therefore would continue to be required to reduce its debt (another compromise). But the task would be much less arduous than it is today, especially in the context of the new rules. In this context, it can also be accepted that a limit be placed on banks’ ownership of their country’s public debt. But it should be implemented over a longer period, so as to avoid immediate repercussions. Furthermore, it would make sense if the limit were not absolute, but, for example, securities within the limit would be considered risk-free, while in the case of those nations in surplus a country-risk coefficient would be applied.

If Italy were to present these proposals at the next meeting, how likely would it be that it would be heard? Zero. However, it would have presented a plan that was not provocative and this would be a sufficient reason to veto the current plan, which, it is worth repeating, is a plan that would have catastrophic consequences for our country.

In any case, it is not just a question of avoiding serious damage for us, which is already more than enough. The proposed reform gives enormous power to a technocratic body that is not accountable to anyone, to the detriment of Parliament (which already has very little power) and even of the Commission, which has at least indirect legitimacy. Approving such a monstrosity means reducing democratic principles to a simulacrum, good only for the rhetoric of official speeches. Be careful, that sooner or later history takes revenge.

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