Finally, Berlusconi's Departing -- But That Won't Help the Eurocrisis Unless Austerity Plans Exit, Too
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Berlusconi’s Exit Will Not Solve the Crisis
Even if Berlusconi exits the picture (hopefully today!), and even if he is replaced by a stable technocratic government that gets down to business and creates stability in financial markets, will there be a proper growth plan in Italy which will allow it to overcome its decade long disease of low growth? If not, by definition the debt/GDP ratio will continue to rise. And the current situation will present itself again in some months. The catastrophe will be delayed, but not prevented.
Perhaps the most ominous problem is that the “austerity” plan that Italy is supposed to accept is being run by financial interests of the IMF and the EC. These institutions are principally concerned with ‘belt tightening’ and with fear of inflation (all lenders fear inflation because it reduces their wealth). Fact: the few developing countries that have experienced growth in recent years (China, Brazil, Argentina, etc) are those that have turned their backs on the IMF’s growth plans. To grow, Brazil and China have made expensive investments in key areas like education, and research, and in targeted industries like biotech and now green technology. These smart investments are causing them to be emergent leaders in the global race for new growth inducing technology.
IMF-style austerity will cause Italy to spend less in precisely those areas in which they need to increase investment!
So for both Keynesian reasons (lack of demand when incomes go down) and for Schumpeterian reasons (lack of growth spurring innovation), Italy is in a big mess. It can only survive with targeted fiscal policy in the right areas. It’s time to learn from China and Germany. Austerity plans will only make things only worse. Of course, reform is needed (especially around corruption and other areas like pensions), but contrary to the “wisdom” of the EC and the IMF, the main reform it needs is to learn how to spend in the right places so to increase productivity, innovation and prevent the brain drain which has been hurting it for decades. And this requires spending.
And the rest of Europe? The Euro only works if it is backed with solid cohesive monetary policy (a proper central bank, something the ECB is failing to be), and solid cohesive fiscal policy. But when we hear about the latter, we hear only about reforms like pension reform and job flexibility. Those countries in the EU that are currently leading (mainly Germany and the Scandinavian countries) and complaining about the weak southern neighbors have been lead spenders in areas like green technology, which will be the ‘next big thing’ after the Internet and the growth-spurring machine of the 21 st C. While many have argued that it is Germany’s lower wages (unit labor costs) that are the source of its strength, its higher than average spending on R&D and green technology has been ignored in the recent debate.
Germany has blocked the ECB from engaging with proper central bank monetary policy. Will it now also put the stop on cohesive fiscal policies that will allow the PIIGS to make similar investments?
Let’s hope not. Because if these countries can’t spend in the right places, we will all pay.
*This article originally had the wrong graph included as "Figure 3." It was updated on 12/11.
Mariana Mazzucato is a Professor in Economics at the University of Sussex in the UK, where she holds the RM Phillips Chair in Science and Technology Policy, in the SPRU centre. She is Coordinator of a large European Commission FP7 funded project on Finance Innovation and Growth and is the Economics Director of the ESRC Centre for Social and Economic Research on Innovation in Genomics (INNOGEN). For more on her work, visit marianamazzucato.com.