Italy and Greece zeroed their fiscal deficits, expect Germany’s response

Discussion between Angela Merkel, German Federal Chancellor, in the centre, and Catherine Ashton, High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the European Commission on the left, in the presence of Herman van Rompuy, President of the European Council, on the right (in the foreground). (EC Audiovisual Services).

While the political scenery in Italy and Greece – the two key countries in Eurozone’s fight against sovereign excessive debt – could be termed as critical, their economic prospects do not seem discouraging at all. In this respect Italy gained a positive assessment from the IMF last week. The Fund’s report points to the zeroing of fiscal deficits this year, a surplus in the external trade account and the positive results of the stress tests performed on the Italian banking system. The Italian banks are now proven able to withstand the losses under a possible most adverse macroeconomic scenario. In Greece despite a highly charged political climate – with the crackdown of the fascist inclination Golden Dawn political party, accused of being a criminal organisation – the auditors’ troika composed of EU-ECB-IMF confirmed that the country will produce a primary fiscal surplus this year, albeit small. This information was confirmed yesterday by the Greek ministry of Finance. Let’s start from Rome.

Italian SMEs disadvantaged

In Italy, the decision of Silvio Berlusconi to withdraw his party’s five ministers from the left-right coalition government, under Prime Minister Enrico Letta, has opened a new round of political uncertainty but not unrest. President Giorgio Napolitano decisively repelled the possibility of an early election, insisting that the present legislatures should produce a new government. The entire country is convinced that Berlusconi is using his political party for ‘personal reasons’, to protect himself from the country’s judicial system. Last August the Italian High Court issued a final conviction against Berlusconi for tax fraud. Now he can be ousted from the Senate, the upper legislative body.

The IMF however focuses on other Italian sites. Under Article IV of the IMF‘s Articles of Agreement, the IMF holds bilateral discussions with member states, usually every year. On this basis the Fund writes a report on the country’s economy. According to this report the executive directors of the IMF concluded that “the important steps the authorities have taken to secure fiscal sustainability and implement structural reforms. The economy is showing signs of stabilizing but unemployment is still high and trend growth remains low. Against this backdrop, Directors stressed the need to maintain the reform momentum to sustain a robust recovery. These reforms should be complemented with steps at the euro area level to strengthen the currency union”.

This is not at all a negative appraisal of an economy which just emerged from a long-term recession and fiscal difficulties. Not to forget that all along the last three years, the Italian political scenery was not at all normal, with the Teutonic meaning of the term. Governments had time horizons of some months. Yet Italy managed to zero its primary fiscal deficits and is presently producing surpluses. At the same time the country posts a foreign trade surplus, based on the efforts of an outward looking business community, composed mainly by SMEs.

Despite the financial problems those SMEs are facing, they still can turn out competitive products and services, which sell well all over the world. Even the IMF recognised that the EU must take “steps at the euro area level to strengthen the currency union”.

To this effect the prime target of the European Banking Union must be the rehabilitation of the Italian and all south Eurozone financial markets, in order the region’s SMEs to regain access to similar credit conditions for the same risks, as in core Eurozone countries. Germany, with or without a ‘grand coalition’ government has to understand that the other option for Italy is to abandon Eurozone. By the way, Italy is the only south Eurozone country being able to stand on its feet outside the euro area.

Greece zeroes deficits

Going a bit south-east to Athens, an also weak coalition government under Prime Minister Antonis Samaras found the courage, to accuse a Nazi methods using ultra-right political party of being a criminal organisation and actually dissolve it. ‘Golden Dawn’, attempted to set the country’s political agenda, having being catapulted into the Parliament with 18 seats, an outcome of the misery from five years of austerity and deep economic recession.

However after a local branch of Golden Dawn organised the murder of an antifascist hip hop artist, the government understood that if this party or rather criminal gang is left untouched it could drive the country to hell. In a well organised police operation in close cooperation with prosecutors the entire party’s leadership and those directly implicated in the murder were rounded on charges of operating a criminal organisation, under the guise of a political party.

The news took the Greek public opinion by surprise last Saturday morning. However this is not the first time that politicians face the judicial system of this country. The late Andreas Papandreou, the powerful president of Pasok socialist party and PM for eight years, was tried back in 1992 by the Greek High Special Court accused of taking bribes. He was acquitted with 7 to 6 votes.

In spite of the uncertain Greek political environment though all along the years of crisis after 2009, the country has managed to produce now a primary fiscal surplus, as confirmed by the creditors’ troika. At this point it must be reminded that Greece asked for Eurozone’s help after an unbelievable 15.6% of GDP fiscal deficit in 2009.

Now with the country’s surplus being confirmed the rest of Eurozone member states have to honour their last November promise and accept a good hair cut on their loans to Athens. Germany however being accustomed to interpret promises under an egotistic Teutonic prism doesn’t concede to this. It was quite different last year when Berlin finally accepted an IMF proposal, to cut down Greece’s debts, if the country manages to produce a primary fiscal surplus in 2013. Now that this condition is met, Berlin changed the tune and talks only of interest rate reductions and extensions of loan maturities. It remains to be seen if promises on the highest level, between fellow Eurozone member states, can be that easily broken.

In any case both those two weak links in Eurozone’s chain, Italy and Greece, have managed to fulfill their obligation and produce primary fiscal surpluses, despite their grave internal political problems. Now it’s the turn of Berlin, Paris and Brussels to stand by their promises and do whatever it takes to strengthen the monetary union, by accepting measures in favour of all, not just for the German and the French banks. Up to now Berlin gains from the marginalisation of the highly competitive Italian SMEs and profits from the loans to Greece.

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