Children of a Lesser Euro

THE REASON WHY ITALY AND FINLAND ARE STILL NOT GROWING

by Carlo Altomonte, Dept. of Policy Analysis and Public Management, Bocconi
Translated by Alex Foti

Six years have gone by since the explosion of euro’s sovereign debt crisis: in 2010 Greece went on the brink of default, triggering a crisis that soon extended to Portugal and Ireland, until it finally hit Spain and Italy. Since then, Europe has belatedly and laboriously staged a series of interventions culminating in the completion of the European Banking Union, the policy of quantitative easing by the ECB, and the (final?) financial rescue package for Greece. All good, then? In fact, a clear distinction needs to be made between two domains of the crisis: on the one hand, crisis management, such as the financial rescue programs leading to the European Stability Mechanism; on the other, crisis resolution, i.e. a policy framework the fosters the return to economic growth which is sustainable in the new macro-financial context.
 

Until today, the instruments created by European institutions to manage the crisis seem to have been adequate, while on the recovery front the picture is more mixed. Greece excluded, in 2015 all eurozone countries have recorded positive growth rates in excess of 1%, with two exceptions: Finland and Italy, whose economies grew by less than one percent. More in general, since the crisis burst in 2008, these two countries have seen their GDP levels decrease in real terms, by 6% and 8%, respectively, which puts them at the bottom of Europe’s ranking of performers. In a way, it is surprising that Italy is sitting next to virtuous (at least in the eyes of Italians) Finland, a country having a debt-to-GDP ratio of only 62%, which is less than half of Italy’s, and enjoys triple-A rating on its national debt; a country which is one of the 10 most competitive economies of the world.
 

So what do Italy and Finland have in common? Looking at the numbers, it’s hard to conclude it’s the euro’s fault: other members of the Single Currency, like Ireland and Spain, have overcome the crisis and are growing at more than 2% a year. It’d be equally problematic to argue like Germany does that a common currency and stable public budgets are enough to warrant competitiveness and growth: Finland among the four eurozone countries being given a triple-A by Moody's, but it cannot find the road to growth back again. Rather Finland, like Italy, suffer from the fact that the euro is also an economic policy tool and thus can have adverse effects, if used improperly. Accepting the common currency means to embrace a well-defined economic policy paradigm, which says that gains in competitiveness cannot derive from exchange rate devaluations, but only from investments in human and technological capital, from quality, R&D, flexibility in labor and capital markets, and efficiency in public services. These are all things that Finland seems to have forgotten since the end of the happy Nokia story, and that Italy would do well to learn once for all.