Apologies for the uncompleted title. It should read "The market where possible, the government where necessary." It is taken from a reflection made in a recent article by Giulio Tremonti, Italian Economy Minister, in Il Corriere della Sera.
Mr Tremonti was writing about the current economic crisis, providing a very excellent analysis of the European context of this crisis. He claims that the economic recession is not over yet and therefore we should not be talking of an exit strategy (a strategy for governments to start reducing their direct intervention in the economy to bail out banks and other companies with the use of public funds) but we should still be talking of crisis management.
He makes the point that today within the European Union, there are no economic borders. The Treaty of Rome that set up the European Economic Communities in the late 1950s and its successors made sure of that. However, we still have political borders. So the crisis that had hit the banks in 2008 had crossed political orders and affected significant segments of the European economy through the now notorious credit crunch because there were no economic borders that could stop it from spilling over.
The crisis has now started to hit governments (for example Greece, Spain, Portugal) but we tend to circumscribe the responsibility for such a crisis in public sector finances to the governments of specific countries because we still think of countries and the political borders that divide them. The crisis affecting governments and their finances will soon start to rebound back on to banks, again because we have no economic borders.
These banks will eventually need some form of support from the governments of the country of their provenance and so this has meant that although the responsibility for this crisis is not of everyone, it is eventually everyone's responsibility to resolve it.
In practical terms this means that, for example, a German taxpayer has to see the taxes that he pays being used to support German banks that had become exposed to debt of governments of other countries, instead of them being used to support the German economy.
Given this context, where the economic borders have been removed prior to the crisis, we cannot now, after the crisis has happened, resort to political borders and seek to circumscribe the crisis only to certain states. The political answer to the economic crisis has therefore got to be pan-European.
This brings us to the title of this week's contribution. The European ideal has been to allow the market to operate wherever possible and this has certainly contributed to the economic growth that Europe has enjoyed from the 1950s to the present day. It has also contributed to the peace that Europe has enjoyed since 1945 after centuries of political conflicts that tended to involve most of Europe. The automotive sector has been an important driver of this economic growth which then spilled over to other sectors. European governments have not only allowed this to happen but have also encouraged it. Gradually, the role of governments in the operation of the economy started to recede as it was no longer seen to be necessary.
The question that needs to be asked is whether it has now become necessary for governments to take an active role in the economy once more. The direct interventions of a number of governments to support banks and other companies have been undertaken because they were seen to be necessary.
However, governments have generally thought such interventions to be short term in nature and would eventually be reduced and eliminated totally once we are out of the recession. This explains the exit strategy that I referred to earlier on. It may now be starting to become evident that although the international economy will eventually move out of the recession, governments' intervention will still be deemed to be necessary.
The market on its own cannot make it as it will be difficult to sustain positive economic growth on the basis of private sector demand. Consumer and investment sentiment remain dampened and are likely to remain so. We require increased demand from the public sector in the fields of energy, environment and infrastructure.
This does not mean that we need to use public funds as governments may resort to the public - private partnership model. These are segments that need to be spearheaded by governments though, and therefore the presence of governments in the operation of the economy has become necessary once more. Moreover, since these activities tend to cross political borders, the political response has to be pan-European.
Therefore, using the maxim highlighted in the title of this week's contribution, it would seem that to exit the economic recession and kick-start the European economy, governments' intervention is still necessary; but it needs to be undertaken within a European context and not within the context of individual states.