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Below the English translation of my interview published by the Italian magazine Micromega on 15 December 2023. This is the link to the original version (in Italian).

The ongoing negotiations on the new European fiscal rules are showing the usual opposition between the pro and the anti-austerity front. It is an age-old contraposition, rooted in the original architecture of the monetary union. With Emilio Carnevali, who teaches economics at Northumbria University in Newcastle (UK), we try to better understand the origin and reasons for such a contraposition and, above all, whether it still makes sense today. – by Cinzia Sciuto, from

Professor Carnevali, we are familiar with Italy’s positions on the subject, while on the “austerity front” we often tend to simplify and reduce everything to stereotypes. So, let us start here: what are the reasons of the “austerity front”?
The reasons behind this position are different. And they can vary from country to country, even on the basis of the characteristics of individual economies. It is clear that small Northern European countries with a high level of foreign trade have less interest in practising expansionary fiscal policies, simply because they are not very effective in that context. For some countries, one can also identify more strictly political-electoral reasons. The Free Democratic Party  of German Finance Minister Christian Lindner, for example, is in great difficulty in Germany. This is a party that has made fiscal austerity a kind of banner of identity. It seems quite clear to me that Lindner is trying to concede as little ground as possible on this point, also with an eye on his own electorate.

But the pro-austerity position of countries like Germany certainly did not originate with Lindner’s arrival in the German finance ministry. What are the historical reasons for these positions?
In fact, these positions are certainly not new. Just think that before Lindner there was a certain Wolfgang Schäuble in the position of Minister of Finance. And, by the way, Schäuble belonged to a different party. Leaving aside personalisms, and wanting to examine as detachedly as possible the historical reasons for this pro-austerity position within the eurozone, we can say two things. First, the birth of the euro meant the adoption of a single currency – and thus the establishment of a single central bank – for countries with different economic characteristics. With a single central bank, there can only be one monetary policy that is common to all. So, it is clear that these countries could not continue to have, for example, such different inflation rates as in the past. When inflation differentials are attributed to different national fiscal policies, these had to be somehow “made more homogeneous”. The ECB was born in the image of the Bundesbank, the German central bank, to inherit its reputation in terms of fighting inflation. Therefore, the other eurozone countries had to become a little more like Germany too. Now everyone in Italy is more or less critical of Europe’s overly austere fiscal rules. But in the past, many saw in these externally imposed “constraints” an opportunity, in terms of lower inflation, lower interest rates, more investment and thus more growth.

The second reason is related to public debt. When a state issues public debt denominated in a currency that is no longer under the control of the national central bank, it exposes itself to risks. Even without budgetary rules imposed from above, and without a federal budget and a central bank acting as lender of last resort, countries with high public debt objectively have little room for manoeuvre. Rules or no rules. A high public debt also diverts resources that could be used for social purposes and can worsen inequalities.

It would seem that these reasons of the pro-austerity front are “good reasons”. What then is wrong with this reasoning?
They are reasons consistent with the original architecture of the single currency. Since the year of the introduction of the euro to date, however, a series of relevant facts have intervened. Eurozone countries have recorded anaemic growth rates. Italy has not grown in the last twenty years. But above all, there has been a devastating sovereign debt crisis that has exposed all the fragility of such a structured monetary union. The single currency project was on the verge of shattering before Mario Draghi’s famous speech in the summer of 2012, when the ECB president promised to do “whatever it takes” to save the euro. That promise then took the form of the OMT (Outright Monetary Transactions) programme, which can be considered the first sketch of the ECB’s role as lender of last resort, although it was characterised by questionable conditionalities. This was followed by the first Quantitative Easing (2015), emergency Quantitative Easing during the coronavirus pandemic (2020) and the Transmission Protection Instrument (2022).

From a less ‘technical’ and more ‘practical’ point of view, what has this evolution of the European Central Bank meant for the eurozone member states?
It has meant not being completely at the mercy of the financial markets when things go wrong. We saw this with the pandemic. In that case, Europe learned the hard lessons of the sovereign debt crisis. The rules of the Stability and Growth Pact were suspended, and the ECB immediately intervened to buy government bonds of eurozone countries. Governments spent huge resources on healthcare, but also on keeping the production system going and supporting citizens’ incomes. No one, during that terrible time, ever worried about “where we get the money”.

Besides the interventions of individual national governments, there was also the intervention of European institutions, with the Next Generation EU. Italy was among the main beneficiaries.
Yes, that is the other great innovation that has taken place in recent years. For the first time we had an embryonic federal budget with significant resources allocated from the centre to the individual eurozone states to respond to a crisis. But most importantly, with resources that were raised through the issuance of European debt securities. This was a significant step forward, because the federal budget would be a solution to the congenital fragility of this incomplete monetary union. It is no coincidence that in history monetary unions have almost always been made at the same time as political unions. The case of the euro, where the birth of a single currency was not accompanied by a common budget and debt, is a very rare instance.

From a purely theoretical point of view, there is no question of the fact that a single currency needs a federal budget with which to manage, above all, asymmetric shocks. But clearly on the political level everything is much more complicated. Unfortunately, it seems to me that many in Europe want to see the Next Generation EU experiment as a “parenthesis” and not as the start of a more structural reform process.

Isn’t the reform of Stability and Growth Pact going in the right direction to overcome that fragility of the monetary union you mentioned earlier?
I don’t know. Because the reform is not there yet, as there is still no agreement between the European governments and no official text. Given the stalemate on the federal budget side, the quality of the reform will have to be judged on the basis of the progress that will be made in leaving sufficient flexibility for national governments to make sensible budgetary and investment policies. I say sensible in the sense that the policies imposed by the rules of the so-called Fiscal Compact – the latest evolution of European fiscal rules – were completely devoid of economic rationality. One thing that bothers me a lot about the Commission proposals that have circulated so far is that I often have a hard time reading them. That is, I really struggle to understand what exactly the proposals consist of. And I don’t think I’m the only one.

Can you give me a concrete example?
For example, there is this concept of “net expenditure” which – according to the European Commission – should become the main benchmark of the new rules. As Giovanni Carnazza pointed out in an article on the website, its definition is not entirely clear. But it seems to impy the calculation of the so-called “cyclical component” of the government deficit, which is something extremely problematic: in practice, all the tools of the old methodology linked to the calculation of the output gap, the potential GDP, and the “natural” rate of unemployment (what is called the NAWRU in the documents of the European Commission) are being brought back in through the back door. And I will stop here, because I am sure that the readers who do not have a PhD in economics must be lost. But this is precisely the point: we need rules that at least the heads of government can understand, since they should be committed to them.