Called “Bidenomics” by some, after the U.S. vice president who helped create it, the austerity package used in Europe by the International Monetary Fund (IMF) has been met with a lot of controversy. While the recession may be over in a few European countries, that doesn’t mean the pain is. For many countries, the recession is still fresh in their minds, and people are still suffering.
Recent political developments in Europe may not make the headlines as often as US political news tends to do, but following the recent election of a new left-wing President in Greece and the Bidenomics platform offered by the US Vice President, we can’t help but ponder how these trends may impact global economies. Want to know more?
RIM – The global trend of intense fiscal stimulus, led by the US, is being tested in southern Europe.
Italy, Greece and Spain, which were hit hard by Europe’s sovereign debt crisis a decade ago, are once again running large budget deficits and planning massive spending to rebuild their economies.
Prime Minister of Italy
Mario Draghi
and other leaders in the region are betting that ambitious investments can yield long-term growth. If this game doesn’t work, these countries will end up with some of the highest debt ratios in the world, which could destabilize the eurozone.
After years of struggling with tight budgets that left little room for investment in transformation, they now see a unique opportunity to revitalize their economy.
Mr Draghi, who presented his plans to the Italian parliament, said they included not only a list of public works, but also the fate of the country.
Many industrialized nations share President Biden’s belief that aggressive tax incentives and public works can not only repair the economic damage of the Covid 19 pandemic, but also improve economic growth for years to come.
The massive borrowing plans, benefiting from historically low interest rates and central bank support, stand in stark contrast to the austerity trend that began in Western countries after 2010, when many governments seized on the Greek debt crisis as a warning of the consequences of excessive deficits.
The European Union, which for years has been committed to balancing its budget, even if it meant painful austerity measures, is joining the rush to borrow. Central to this is the EU’s €750 billion stimulus fund, equivalent to $900 billion, officially known as the next-generation EU. The combination of grants and low-cost loans is financed by the EU’s general loans and is designed to support investment and capital recovery that boosts long-term productivity and growth.
Economic problems in Europe
This is a clear shift in the economic paradigm. Borrowing to finance growth, on such a large scale and on top of existing debt, which is already high, is something we have never seen before, he said.
Enzo Moavero Milanesi,
Former Foreign Minister of Italy.
Draghi, who as president of the European Central Bank played a leading role in defusing the near permanent euro debt crisis in 2012, now has a golden opportunity to shake up Italy’s ailing economy.
Since the 1990s, Italian politicians have tried to rebuild the country’s economy while passing tight budgets. Mr Draghi is the first in decades to use strong fiscal power to help.
The Italian economy has rarely grown at more than 1% per year over the past quarter century. The economy never fully recovered from the global financial crisis and subsequent eurozone crisis, and shrank by another 9% in 2020 amid a pandemic and severe austerity.
Germany, France and other EU countries supported the bailout fund mainly out of fear that Italy and southern Europe would be plunged into another deep economic recession that would again threaten the cohesion and survival of the eurozone.
I think there is a broad consensus this time that we need economic growth and not fiscal tightening to get out of the crisis and keep the huge national debt, he said.
Federico Santi,
an analyst at the consultancy Eurasia Group.
Italy will be the main beneficiary of EU funds, worth around €190 billion, of which €70 billion will be in the form of grants. To finance the investment plan, the country will contribute nearly 60 billion euros from its own coffers.
Demonstrators gather in front of the Greek parliament to demonstrate against austerity measures in 2015.
Photo:
Christopher Furlong/Getty Images
Italy’s debt reached 156% of GDP, mainly due to the pandemic. In Greece, this figure rose to 206%, the highest in the developed world after Japan.
Most of the Greek debt consists of rescue loans from the rest of the eurozone, which the country has been unable to repay for years, making a new debt crisis in Greece unlikely for a long time.
The biggest long-term risk to debt sustainability in Europe comes from the much larger Italian economy. The future of the euro may once again depend on Draghi’s behaviour.
The big risk is that these investments will not increase the country’s growth capacity, i.e. they will only boost GDP for a few years. After that, the effect of the increase in demand will wear off, growth will be low again, but debt will be much higher, he said.
Lorenzo Codogno,
Consultant in London and former economist at the Italian Ministry of Finance.
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So far, financial markets have accepted this risk, assuming that the ECB will continue its massive purchases of government bonds and thus lower the cost of borrowing in the countries.
In any case, I think the ECB will maintain a moderate monetary policy stance for two or three years. I expect it to provide as much support as possible at this stage, said Francesco Daveri, an economist at Bocconi University in Milan.
In the longer term, however, the financial market could come under pressure if economic growth weakens again, debt remains high and the ECB tightens monetary policy, economists say.
Although there is some overlap in the reasoning behind the US and European fiscal packages, the size is much larger in the US, which has so far adopted fiscal measures amounting to about 26% of GDP, much larger than the stimulus measures adopted in Europe.
Bar in Venice last week after coronavirus restrictions were relaxed.
Photo:
Manuel Silvestri/Reuters
Rather than increasing household spending, Europe’s spending plans are aimed at improving the productive side of the economy by investing in digital and physical infrastructure, education, eco-efficiency and other long-term needs.
Draghi also wants to improve the training and technology of Italy’s inefficient civil service and streamline its notoriously slow justice system.
If the efforts of Draghi and his Greek and Spanish counterparts do not bear fruit, the experiment could lead to further pressure for fiscal discipline from fiscally conservative northern Europe. But if a return to borrowing is warranted, it will bolster calls for a European fiscal union that uses the collective strength of the EU to invest in weak economies.
If Bidenomics works in the United States, President Biden will go down in history as the new Roosevelt, Moavero said. In Europe, this could set a precedent that would be difficult to match.
Send an email to Giovanni Legorano at [email protected].
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