Rome’s Castille and Nero’s lyre
Last Wednesday, Italy’s lower House overwhelmingly approved (464 votes in favour and 11 abstentions) the first reading of a Bill aimed at amending article 81 of the Constitution. When it is given its final approval, the Italian government will be prohibited from financing the deficit with debt, except in the case of an exceptionally serious crisis and then only if an absolute majority of votes in Parliament permits it.
The Bill itself is not new. Giulio Tremonti, the former Finance Minister under Silvio Berlusconi, first announced it in midsummer in a desperate attempt to cool down an overheating situation. The market, the street, Parliament and many within Mr Berlusconi’s own political party were telling the 75-year-old cavaliere to go.
The man, however, had then not yet understood that his presence at Palazzo Chigi (Italy’s Castille, lol) was doing nothing to win back market confidence in his country. He pretended not to realise that a country whose Prime Minister is not in full command of his ship has to pay higher interest on its bonds if it wants anybody to buy them. With the Italian media frenziedly speaking of nothing else but lo spread – the spread, that is the percentage difference between the yield of the German Bund and the Italian BTP – the embattled Berlusconi Cabinet adopted the text of the law in September.
What’s new, then, if the text of the law is not new? Why all the fuss about it having been approved (first reading) in the Italian Parliament?
Mario Monti, revered across the Italian political spectrum as a paragon of virtue and economic wisdom, expressed satisfaction that the balanced budget principle made it through the Chamber of Deputies with such a majority. So he should.
So he should because what is new is that if the former European Commissioner (internal market, services, Customs and taxation 1995-1999, competition 1999-2004) and Rector of Milan’s Università Bocconi had not meanwhile replaced Mr Berlusconi as Prime Minister, no way would 464 members of Parliament have voted in favour (first reading) of the proposed constitutional amendment.
In itself the amendment may not appear to be a great deal. After all, a balanced budget amendment merely entrenches in a Constitution the apparently common sense principle that a state ought not spend more than its income.
Only apparently so, of course, because what is obvious for most of us private citizens is not at all obvious in the case of states. In fact, the practice of deficit spending is common among states.
Now, Italy’s Budget deficit stands at 3.9 per cent of GDP, which places it among the lowest in the eurozone. The ratio of Italy’s debt to GDP, however, is 120 per cent, putting it second from the top after Greece.
Benchmark that against the US. Gross debt in the US stood at $15.03 trillion – a trillion is a million million dollars – as at the end of November and its GDP at $15.003 trillion. With GDP and gross debt almost equal, the debt to GDP is 100 per cent.
Can a Budget ever be balanced under these circumstances? It’s not just the percentages but the sheer magnitude of the debt that makes a difference. In this case, size matters. In Italy’s case, if the political will is there, the Budget can be balanced over a reasonable period.
Initiatives to get the US to entrench the balanced-budget principle in its Constitution have not been well received by economists. A number of Republican senators are in fact sponsoring just such a Bill but the chances of it becoming the 28th Amendment are rated as close to nil. One criticism is that with its hands thus shackled, a government would be unable to implement countercyclical measures in an economic downturn, thus begging for a depression.
Another criticism, albeit of a different sort, is that under certain circumstances proposing just such a constitutional amendment is nothing but political posturing. Other states, on the other hand, have adopted just such a provision. In 2009, Germany approved the Schuldenbremse (debt brake) amendment, whereby, from 2020, the state will be constitutionally barred from running a deficit at all.
Well, in Italy’s case it may well have been a case of political posturing when, in September, Mr Berlusconi’s Cabinet announced that it had adopted the text of the law that was finally approved last Wednesday.
It may be convincingly argued that the cavaliere, knowing that his days as Prime Minister were numbered and, therefore, would himself never have to abide by this constitutional law, finally agreed to a draft balanced-budget amendment. After me, the flood, or a case of Nero (the arsonist) playing his lyre as Rome burnt?
Whether such a measure is political opportunism or political wisdom depends on the circumstances, of course. I think it’s a good idea, when it’s genuine.
Meanwhile, in its recently-published doctrinal document Our Roots, our own Nationalist Party declares that our economy “must continue to be managed” according to a number of principles, among which “strict control of government expenditure and revenue, with particular emphasis on public debt reduction”. It goes as far saying that this principle should become a legally binding one, “even constitutionally”. Cool.
Dr Vella blogs at http://watersbroken.wordpress.com .