Managing the mechanism of growth is tricky – particularly when austerity-hit consumers can't or won't create economic demand
For some years now, the Italian government has organised a seminar in Venice early in the year at which officials, central bankers (sometimes) and businessmen can speak frankly about the country's economic and other problems to British and Italian journalists.
These sessions are conducted under Chatham House rules, which means anything said may be referred to, but, unless the rule is waived, remarks must not be attributed to speakers by name. (I once chaired a session at Chatham House itself, where I went through the ritual of stressing the anonymity of the proceedings, and every panellist said that they would be happy to be quoted.)
One of my outstanding impressions of the past decade is that the Italian government had successfully presided over a reduction in the budget deficit from 120% to 100% of gross domestic product until the onset of the 2007-08 financial crisis when, hey presto, the deficit shot back up to 120%.
The Italian economy, in common with most members of the eurozone, has been, and is, suffering from the double blow of the financial crisis itself and the faulty structure of the arrangements for what used to be called "the single currency". And this is an economy which, for all its intrinsic faults – known technically as structural or labour market rigidities – somehow or other managed to get by quite well for years, and was admired for the ingenuity of its small and medium-sized firms.
Of course, Italy had a chronic "competitiveness" problem, with a rate of inflation persistently higher than that of Germany, a very important trading partner. It used to annoy the German economic establishment that Italy would get back in step via occasional adjustments to its currency (that is, devaluation) and I can testify that there was joy in German official circles when, as a result of joining the euro, Italy lost this important instrument of economic policy.
This year I was particularly struck by a remark made by one senior figure in Venice, who, after an elaborate disquisition on the many "supply side" reforms that were under way, suddenly confessed at the end that it was difficult to introduce reforms "when people are scared and there is no [economic] expansion".
It had been the worst crisis and "recovery" in the nation's history, he said. "Tensions are growing … We know we are at risk." He speculated about whether "growth was for democratic capitalism what repression is for authoritarian societies". Did we know how to manage a society that had lost the mechanism of growth?
There are a lot of such gloomy reflections around. A number of people I know were impressed by a recent Anglo-German Foundation lecture in London in which the Marxist professor Wolfgang Streeck asked: "Has Capitalism Seen Its Day?" And elsewhere, economists ranging from Lawrence Summers of Harvard to our own Adair Turner (former head of the Financial Services Authority) are asking whether the growth mechanism is dangerously dependent on "bubbles".
These are serious questions, but in the case of Italy and other non-German members of the eurozone the problem is not one of bubbles but of a lack of growth stemming principally from a dearth of economic demand: this is associated with the eurozone's austerity policies, and aggravated by the loss of the exchange rate instrument of economic policy.
And if anyone tells me that the restitution of exchange rate flexibility within Europe would lead to a series of self-destructive competitive devaluations, I should reply that that would demonstrate – guess what? – a serious lack of demand.
By the way, a good bit of news from Venice – all the more striking as one returned to flood-hit Britain – was that at last Italy's brilliant engineers (all those bridges and tunnels) appear to have cracked the problem of "sinking Venice"– once they were allowed to get on with the job after decades of bureaucratic wrangling. The problem is not so much that of Venice sinking as of water rising, and we were all assured that the defences are now almost complete.
One returned to Britain not only to the sight of the actual floods, but also to the spectacle of shadow chancellor Ed Balls receiving floods of abuse from Conservative back- and front-benchers on the grounds that he is being proved wrong for having attacked the policy of austerity now that, at last, there has been a resumption of economic growth in this country.
In fact he was absolutely right, and the chancellor and his allies are wrong to blame the financial crisis on Labour's public spending (which they approved of at the time) rather than the banks.
What is more, all those Eurosceptics ought to be grateful to Mr Balls: he was the one man who, even more than Gordon Brown, insisted that the faulty economic structure militated against the political case for our joining. Reported by guardian.co.uk 46 minutes ago.
For some years now, the Italian government has organised a seminar in Venice early in the year at which officials, central bankers (sometimes) and businessmen can speak frankly about the country's economic and other problems to British and Italian journalists.
These sessions are conducted under Chatham House rules, which means anything said may be referred to, but, unless the rule is waived, remarks must not be attributed to speakers by name. (I once chaired a session at Chatham House itself, where I went through the ritual of stressing the anonymity of the proceedings, and every panellist said that they would be happy to be quoted.)
One of my outstanding impressions of the past decade is that the Italian government had successfully presided over a reduction in the budget deficit from 120% to 100% of gross domestic product until the onset of the 2007-08 financial crisis when, hey presto, the deficit shot back up to 120%.
The Italian economy, in common with most members of the eurozone, has been, and is, suffering from the double blow of the financial crisis itself and the faulty structure of the arrangements for what used to be called "the single currency". And this is an economy which, for all its intrinsic faults – known technically as structural or labour market rigidities – somehow or other managed to get by quite well for years, and was admired for the ingenuity of its small and medium-sized firms.
Of course, Italy had a chronic "competitiveness" problem, with a rate of inflation persistently higher than that of Germany, a very important trading partner. It used to annoy the German economic establishment that Italy would get back in step via occasional adjustments to its currency (that is, devaluation) and I can testify that there was joy in German official circles when, as a result of joining the euro, Italy lost this important instrument of economic policy.
This year I was particularly struck by a remark made by one senior figure in Venice, who, after an elaborate disquisition on the many "supply side" reforms that were under way, suddenly confessed at the end that it was difficult to introduce reforms "when people are scared and there is no [economic] expansion".
It had been the worst crisis and "recovery" in the nation's history, he said. "Tensions are growing … We know we are at risk." He speculated about whether "growth was for democratic capitalism what repression is for authoritarian societies". Did we know how to manage a society that had lost the mechanism of growth?
There are a lot of such gloomy reflections around. A number of people I know were impressed by a recent Anglo-German Foundation lecture in London in which the Marxist professor Wolfgang Streeck asked: "Has Capitalism Seen Its Day?" And elsewhere, economists ranging from Lawrence Summers of Harvard to our own Adair Turner (former head of the Financial Services Authority) are asking whether the growth mechanism is dangerously dependent on "bubbles".
These are serious questions, but in the case of Italy and other non-German members of the eurozone the problem is not one of bubbles but of a lack of growth stemming principally from a dearth of economic demand: this is associated with the eurozone's austerity policies, and aggravated by the loss of the exchange rate instrument of economic policy.
And if anyone tells me that the restitution of exchange rate flexibility within Europe would lead to a series of self-destructive competitive devaluations, I should reply that that would demonstrate – guess what? – a serious lack of demand.
By the way, a good bit of news from Venice – all the more striking as one returned to flood-hit Britain – was that at last Italy's brilliant engineers (all those bridges and tunnels) appear to have cracked the problem of "sinking Venice"– once they were allowed to get on with the job after decades of bureaucratic wrangling. The problem is not so much that of Venice sinking as of water rising, and we were all assured that the defences are now almost complete.
One returned to Britain not only to the sight of the actual floods, but also to the spectacle of shadow chancellor Ed Balls receiving floods of abuse from Conservative back- and front-benchers on the grounds that he is being proved wrong for having attacked the policy of austerity now that, at last, there has been a resumption of economic growth in this country.
In fact he was absolutely right, and the chancellor and his allies are wrong to blame the financial crisis on Labour's public spending (which they approved of at the time) rather than the banks.
What is more, all those Eurosceptics ought to be grateful to Mr Balls: he was the one man who, even more than Gordon Brown, insisted that the faulty economic structure militated against the political case for our joining. Reported by guardian.co.uk 46 minutes ago.