Economist says 'starve the beast'

With less than three months in office under his belt, Italian Prime Minister Mario Monti has set out to overhaul Europe's fourth-largest economy - a mammoth task considering the country's debt crisis, which has only recently showed signs of abating, and only with the help of the European Central Bank (ECB). The Prague Post sat down with noted Italian professor of economics and libertarian thinker Enrico Colombatto while he was in Prague on a stint as visiting professor at the University of Economics to talk about Italy's future and the fate of the eurozone.

The Prague Post: You have an economist as prime minister now. Has that helped the economy?

Enrico Colombatto: What he's done so far is squeeze taxpayers. He's put a tax on real estate, a tax on petrol, a tax on wealth, but he hasn't been able to cut any expenditure so far. Our problem is not a lack of taxes, but excessive expenditure. You have a honeymoon of about three months with Parliament and public opinion, and he has wasted it. He's announced a package of measures that have liberalized the economy, but they're really peanuts. He's attacking cab drivers and liberalizing the petrol stations and pharmacies, but these are details.

TPP: What should he be doing instead?

EC: The bureaucracy should be destroyed. If you want to start a company today, it takes ages. You need licenses of all kinds, and it's expensive. Regulation is overwhelming, and the judiciary is overwhelmed and inefficient. One thing he hasn't done is to touch the Italian labor market, which is hyperregulated. You can't fire anybody. The quality of the labor force is really low, so something should be done about the education system. The cost of labor is also high. Today, if you offer, say, 100 euros per hour for a job, you pay 200 euros because of the high rate of payroll taxation and social security contributions. You can easily see how this is a recipe for unemployment.

TPP: Aren't these more long-term reforms?

EC:  No, the effects would take a long time to be seen, but these are things that could be changed in a short time. It's a question of political will. Monti wants to run for president. He denies it, but it's in the back of his mind. This is a much more sensitive issue, but right now he's got Parliament with him, and he's wary of touching the labor market because he knows the left will tell him 'no.'

He doesn't want to touch the transfer system in south Italy either, which is a disaster. By transfer system I mean fake government jobs created in the south, then taxation of the north to transfer money to the south via these fake positions. It doesn't make sense to have postmen in the south who actually have no mail to deliver. The number of civil servants in Naples is much higher than the number in Milan.

TPP: Will the austerity he has enacted be enough to satisfy Merkel and Sarkozy?

EC:  Merkel doesn't care. She keeps saying "Do it! Congratulations! Keep going! But don't expect a single penny from us." And she has an electoral problem because in Germany, public opinion is against bailouts, and rightly so. Why should they foot the bill for us when we've been squandering money? It's our problem, not theirs.

TPP: Has the ECB's shopping spree for Italian bonds had the desired impact?

EC: Absolutely. They have had the effect that the ECB has bought something like half a trillion worth of Greek, Spanish and Italian treasury bills, and if they hadn't bought them, the interest rate would have gone through the roof. I would like to know what the figures would be without ECB intervention. And the ECB is not supposed to do that, by the way. The ECB is almost bankrupt. It has in its pocket something like 3 trillion in assets that include bonds and various collateral given by the banking system. If Italy had to default even partially, the next question would be if the ECB is solvent.

TPP: So if the ECB can't shoulder the burden alone, should the European Financial Stability Facility be made a permanent bailout fund?

EC:  One school of thought says the only way out is to print money, so we're going to just buy treasury bills like crazy. If they had to pursue that method, they should have done it a year ago. When everything blew up in Greece, they should have said "OK, we're going to the printing machine." It's not too late to do that now, but it's very expensive. If we had done it a year ago, the market would have expected it and would not have speculated against Italy and Spain. The other school of thought is "Let them default."

TPP: And then what? Investors will come back just like they did in Argentina in 2002?

EC:  They always come back. And if not, so what?

TPP: They came back to Argentina because there was still so much room to grow, but isn't the Italian economy too developed for that?

EC: Oh, we have a lot of space to grow. But what if they don't come back? That means the government cannot run a deficit, which is not that bad. Starve the beast. It's the same thing with Greece. If they default - and they are definitely moving toward this situation - people will think twice before lending them money. But that could be the best discipline for Greece.  

TPP:  Is the euro a failed experiment?

EC:  I would say yes, it has failed. If it was meant to unite Europe, it only united it in disaster.

Emily Thompson can be reached at
ethompson@praguepost.com