Italy's lower house of parliament has passed a government austerity package, seen as crucial to keeping the country from falling victim to the debt crisis that has struck fellow eurozone members Greece, Ireland, and Portugal.
Before the vote, prominent Italian politician and economist Antonio Martino spoke to RFE/RL correspondent Charles Recknagel about the roots of the crisis in Italy and its implications for the eurozone.
RFE/RL: Mr. Martino, you are a parliamentarian, an economist, and a former cabinet member of two governments led by Prime Minister Silvio Berlusconi. That has afforded you a detailed view of the ups and downs of Italy's economy over many decades. How did Italy -- the euro zone's third largest economy -- get into the fiscal mess it is in today?
Antonio Martino: In order to understand the problems, we should go back some time. In the past, after the war, Italy had a government which was more or less favorable to the free market, that believed in fiscal prudence, that believed in not overtaxing people, and that believed in keeping your budget in order. This worked fairly well until the beginning of the 1960s. In 1961, the ratio of the debt to GDP was 1.5 percent.
After that Keynes arrived, I mean a distorted version of Keynesianism and deficit spending, and it was endorsed in an enthusiastic way by the left and center-left. And they said that keeping a balanced budget was an archaic idea and therefore they started to spend more than they could get in revenue. The deficit started to increase. Just think that in 1980 the debt over GDP ratio was 54 percent. In 1993 -- that is, 14 years later -- it was 123 percent. So our financial mess has a long, long history behind it.
RFE/RL: Italy, of course, is now collectively racking its brains over how to reduce the government's massive debt burden, which today still stands at about 120 percent of gross domestic product (GDP). In the eurozone, that is second only to Greece at 160 percent. What are some of the steps Italy must take to emerge from the crisis?
Martino: We have inherited this enormous debt from the mistakes of the past. But we haven't tackled the problem the right way. There is only one way in my view that you can get out of a mess like this and that is you must privatize, liberalize, reduce the size of what the state owns by selling it to the private sector, have a radical fiscal reform that allows incentives to work properly, and keep spending under control.
No country I know of has ever had a decent rate of growth when [public] spending exceeds 40 percent of GDP. Today, the Italian public sector spends 51.2 percent of GDP. With this type of spending there is no chance, no hope for growth.
Plus we have a monstrous tax system, which has rates that are so punitive that many small businesses are closing. And all the direct taxes on physical persons, on corporations, and other activities give only 14.6 percent of GDP. This is not because of evasion -- of course there is tax evasion -- but this is mostly because there is avoidance and erosion.
Avoidance and erosion allow the very wealthy not to pay taxes, so those that are hurt by the tax system are not those who are already rich but those who could become rich and the system prevents them from doing so.
Second, we should stop with the idea that anything has to be subsidized by government. The propensity to spend is just bizarre in this country. The city of Bologna gives aid to Cuba. Is this what a municipality should do?
End Of The Eurozone?
RFE/RL: Italy, of course, is just one of several eurozone members who find themselves with crushing levels of government debt. Among the others are Greece, Portugal, Ireland, and Spain. As the eurozone tries to confront these crises collectively, they are placing enormous strain upon its unity. Is it time to rethink the concept of a single currency area?
Martino: What is going on now is that we have a system that includes in the same single currency countries that are very different from one another. If you go back to the experience of the monetary union between Belgium and Luxembourg, these were two very similar countries, two small countries. They had independent governments, therefore independent fiscal policies, but they had the same currency. The fact that Belgium had a large deficit and an enormous debt, and Luxembourg did not, put such a stress on the same currency that the monetary union nearly failed.
Now if this happened between two countries that were not very dissimilar, like Belgium and Luxembourg, imagine what happens between Greece and Germany, or Portugal and France.
The Treaty of Maastricht, for those that don't obey the parameters, has penalties. But if countries like Greece cannot pay its debt, cannot service its debt, cannot find buyers for its debt, do you help that country come out of the mess by giving it a fine?
I think the whole story should be rethought. And those which do not meet the parameters should be kicked out of the euro. They would regain their national sovereignty, they could devalue their currency, which is much less painful than to make incomes and prices go down in the whole country. It is easier for the dog to wag the tail than for the tail to wag the dog.
RFE/RL: We have talked about how the strains of the fiscal crises could pull the eurozone apart. But, alternatively, could they also not bring the eurozone closer together, perhaps by leading to a single fiscal administration for the zone?
Martino: Well, this is what some of them hope. I don't think so. I think a common currency, with the idea it could unite Europe even more, would be a very divisive factor. Because the interests of one country are set against the interests of another country. If it is in Germany's interest to conduct a restrictive monetary policy, while it is in France's interest to conduct an expansionary policy, the result is division, not union
Before the vote, prominent Italian politician and economist Antonio Martino spoke to RFE/RL correspondent Charles Recknagel about the roots of the crisis in Italy and its implications for the eurozone.
RFE/RL: Mr. Martino, you are a parliamentarian, an economist, and a former cabinet member of two governments led by Prime Minister Silvio Berlusconi. That has afforded you a detailed view of the ups and downs of Italy's economy over many decades. How did Italy -- the euro zone's third largest economy -- get into the fiscal mess it is in today?
Antonio Martino: In order to understand the problems, we should go back some time. In the past, after the war, Italy had a government which was more or less favorable to the free market, that believed in fiscal prudence, that believed in not overtaxing people, and that believed in keeping your budget in order. This worked fairly well until the beginning of the 1960s. In 1961, the ratio of the debt to GDP was 1.5 percent.
After that Keynes arrived, I mean a distorted version of Keynesianism and deficit spending, and it was endorsed in an enthusiastic way by the left and center-left. And they said that keeping a balanced budget was an archaic idea and therefore they started to spend more than they could get in revenue. The deficit started to increase. Just think that in 1980 the debt over GDP ratio was 54 percent. In 1993 -- that is, 14 years later -- it was 123 percent. So our financial mess has a long, long history behind it.
RFE/RL: Italy, of course, is now collectively racking its brains over how to reduce the government's massive debt burden, which today still stands at about 120 percent of gross domestic product (GDP). In the eurozone, that is second only to Greece at 160 percent. What are some of the steps Italy must take to emerge from the crisis?
Martino: We have inherited this enormous debt from the mistakes of the past. But we haven't tackled the problem the right way. There is only one way in my view that you can get out of a mess like this and that is you must privatize, liberalize, reduce the size of what the state owns by selling it to the private sector, have a radical fiscal reform that allows incentives to work properly, and keep spending under control.
No country I know of has ever had a decent rate of growth when [public] spending exceeds 40 percent of GDP. Today, the Italian public sector spends 51.2 percent of GDP. With this type of spending there is no chance, no hope for growth.
Plus we have a monstrous tax system, which has rates that are so punitive that many small businesses are closing. And all the direct taxes on physical persons, on corporations, and other activities give only 14.6 percent of GDP. This is not because of evasion -- of course there is tax evasion -- but this is mostly because there is avoidance and erosion.
Avoidance and erosion allow the very wealthy not to pay taxes, so those that are hurt by the tax system are not those who are already rich but those who could become rich and the system prevents them from doing so.
Second, we should stop with the idea that anything has to be subsidized by government. The propensity to spend is just bizarre in this country. The city of Bologna gives aid to Cuba. Is this what a municipality should do?
End Of The Eurozone?
RFE/RL: Italy, of course, is just one of several eurozone members who find themselves with crushing levels of government debt. Among the others are Greece, Portugal, Ireland, and Spain. As the eurozone tries to confront these crises collectively, they are placing enormous strain upon its unity. Is it time to rethink the concept of a single currency area?
Martino: What is going on now is that we have a system that includes in the same single currency countries that are very different from one another. If you go back to the experience of the monetary union between Belgium and Luxembourg, these were two very similar countries, two small countries. They had independent governments, therefore independent fiscal policies, but they had the same currency. The fact that Belgium had a large deficit and an enormous debt, and Luxembourg did not, put such a stress on the same currency that the monetary union nearly failed.
Now if this happened between two countries that were not very dissimilar, like Belgium and Luxembourg, imagine what happens between Greece and Germany, or Portugal and France.
The Treaty of Maastricht, for those that don't obey the parameters, has penalties. But if countries like Greece cannot pay its debt, cannot service its debt, cannot find buyers for its debt, do you help that country come out of the mess by giving it a fine?
I think the whole story should be rethought. And those which do not meet the parameters should be kicked out of the euro. They would regain their national sovereignty, they could devalue their currency, which is much less painful than to make incomes and prices go down in the whole country. It is easier for the dog to wag the tail than for the tail to wag the dog.
RFE/RL: We have talked about how the strains of the fiscal crises could pull the eurozone apart. But, alternatively, could they also not bring the eurozone closer together, perhaps by leading to a single fiscal administration for the zone?
Martino: Well, this is what some of them hope. I don't think so. I think a common currency, with the idea it could unite Europe even more, would be a very divisive factor. Because the interests of one country are set against the interests of another country. If it is in Germany's interest to conduct a restrictive monetary policy, while it is in France's interest to conduct an expansionary policy, the result is division, not union