The 71st Public Policy Seminar

The Future of the Euro Zone seen from Italy
Political and Economic Dimensions

Vincenzo Petrone
Italian Ambassador to Japan1. Introductory remarks

On the distinctive nature of the EU integration process.
A project advancing by successive leaps, in a non-linear way
The need to reach consensus among 27 (28) Members States and to
overcome initial inertia if not outright resistance to further integration.

A textbook case: the Euro, the common currency introduced toovercome the problem of competitive devaluation within the Single
European Market1991 - Maastricht Treaty
A common currency and monetary policy

Formal requirements for joining:¾Public deficit <3% of GDP¾Public debt <60% or approaching¾Inflation rate

but without effective mechanisms to cope withasymmetric shocks¾no system for fiscal transfer within the Euro zone
¾small EU budget available (max 1.24% of GDP)¾limited intra-EU labour mobility¾major constraints on wage flexibility¾no common fiscal policy and taxation(allowing for opportunistic behaviours)

The current fiscal and banking crisis has clearly shown the flaws and the limits of thepresent arrangement.
How to cope? How to react in time?

2. The solutions envisaged and the measures
implemented
A solution based on a policy mix based on:¾fiscal discipline¾deeper fiscal and banking union¾availability of funding programs - EFSF>>ESM - with sufficient
firepower¾provision of sufficient liquidity by the ECB¾bank recapitalization¾systemic reforms (labour market, pension schemes, publicadministration, regulatory framework)

The measures adopted
In March 2012, Fiscal Compact, comprising:¾ a mandatory balanced budget rule
¾ a benchmark for government debt reduction, if > 60% of GDP(with UK and the Czech Republic not signing the agreement)
From this month the European Stability Mechanism (ESM) to be
operational with some 500 billion euro of firepower
The ECB role
two LTRO (Long-term refinancing operation) at a low interest rate
Last week, EU leaders discussed and agreed to:¾ pan-European regulation of banks with an enhanced supervisoryrole by the ECB¾ direct financing of insolvent banks¾ use of EFSF/EMS funds to buy bonds of MSs that comply withcountry-specific recommendations

Far-reaching systemic reforms in order to reduce public expenditures
and, more important, increase competitiveness.
However, systemic reforms will produce results in the medium/long term.
In the short run, urgent need to promote economic growth in the Eurozone via investment in public infrastructure projects, research,education, …
Economic growth will generate more fiscal revenues and positiveexpectations.
Unless economic growth is resumed any solution will not be stable,definitive.

3. The case of Italy
The less known reality of Italian economic fundamentals.
¾no major macroeconomic imbalances apart from high public debt
180

Public Debt as % of GDP・累積債務

160
140120116

118,6120,12010

2011

105,4105,72005

2008

2009

Germany

France

100
8060
40
200
EU (27 countries)(Source: Eurostat)

Italy

Spain

GreeceFiscal Deficit/GDP %

財政赤字

0-2

2008-2,72009

2011 -1

2010-3,9-4-5,4-5,2-4,6-6-8-8,5-9,1-10-12-14-16-18
Germany

France

Italy

Spain

Greece(Source: Eurostat)Primary Balance/GDP43,42
00,2

2,5

1,2

1-0,802009

2010-2-4-6-8-10-122005

Germany

2006

2007

France

2008

Italy

Spain

2011

GreeceSource: European Central Bank

(Source: Bank for International Settlements (BIS))

Moreover, Italy can rely on:¾large financial reserves (household saving)¾sound banking system (no housing or financial bubble)¾limited exposures to indebted countries
180

171.5

Exposure to Greece, Portugal and Spain of the private sector(end-Q3 2010; in billions of US dollars)
137.1

160
140
120
100
80
60

25.2

40

14.7

200
Germany
GreeceFranceItaly
PortugalJapanSpain

Why was Italy attacked?
In 2011 the markets assumed that Italian virtuous fiscal policies were at risk
because of local elections in 2012 and general election in 2013.
In summer 2011 restrictive fiscal measures were decided and approved
effective from 2014
The markets were not convinced.
Italy’s spread (over German bonds) shot up to over 550 basic points.
On Nov 8, 2011 the government resigned.
Nov. 17, 2011 Mario Monti in charge.
PM Mario Monti, an economist and a former EU Commissioner.
The three-pronged policy approach:¾(fiscal) discipline¾growth promotion¾guaranteeing equity and fairness (across and intra generations)Fiscal measures and pension reform
財政措置と年金制度改革
December 4, 2011 approval of:
A set of fiscal measures worth€20.2bn in 2012, €21.3bn in 2013 and €21.4bn in 2014
On the revenue side:- tax increases (VAT - 21% -, new tax levy on real estate, tax on luxury
goods…)- fight against tax evasion
On the spending site
- reduction of government expenditures and transfers to local governments
Pension reform >> large structural saving- about €7.6bn total cumulative savings (net of taxation) in 2014, increasing toalmost €22bn in 2020.
- linking retirement age and contributory periods to changes in life
expectancy
Now based on solid foundations

January 20, 2012 - decree law to promote growth throughderegulation and liberalization 規制緩和と自由化¾liberalisation of opening hours for retailers¾promotion of competition in professional services¾strengthening of the Antitrust Authority and of authorities in chargeof consumer protection
June 27, 2012: approval of the labour market reform

労働市場改革Reduction of rigidities in the labour market
but at the same time introducing a new modern social safety net
However, systemic reforms will produce results in themedium/long term.
Urgent need of fostering investment and growth4. Conclusion
Toward a full fiscal and political union?
The different visions of different players.
Italy: a committed member from the very inception ofEuropean integration

The Euro area in 2011
- Population: 332,4 millions- 14.2 % of world GDP- 15.6 % of world export (excluding intra-euro)- 25.4 % including intra-euro trade