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The new Italian Prime Minister, Enrico Letta, after his government got full approval from the country’s legislators in two days and two trips to Berlin and Paris, managed to confirm the reputation of Rome as the catalyst of historic European developments. The Treaty of the European Union was signed in the eternal city. In less than 48 hours Letta managed to unlock the enigma of how to marry fiscal consolidation with growth. In this major issue we have to be fair however and note that he got enough French help in accomplishing that. Let’s follow the facts.

Going to Berlin on Tuesday 30 April the new Italian PM had in his pocket the recently approved provision of the Italian Constitution, obliging the government to run balanced budgets. Given that, it was very easy for him to take a step ahead and tell Chancellor Angela Merkel in public, that “what Europe needs now is growth and jobs and this is what my coalition government is going to do”. Of course Merkel, lacking imagination or pretending to, just repeated that “fiscal consolidation doesn’t exclude growth”. Naturally she meant that the only way to that is the German austere way.

In any case Letta told her that Italy has honoured all its obligations towards Eurozone and pointed out that his country is systematically cutting down public deficits during the past eighteen months. In reality he said that he doesn’t need German lessons on that. He also reminded her, that Italy has cut down government spending and increased taxation, up to the point to have already pushed the economy into a vicious cycle of recession, growing unemployment and more austerity. In view of all that Letta also left to be understood that his government has concrete obligations to the two parties which support it in Parliament. Obviously those obligations contain invariably economic policies for growth.

Seemingly the discussion between the two leaders remained at that. Berlin obviously didn’t want to examine any other option towards the ‘marriage of fiscal consolidation with growth’, than the old Teutonic obsession of ‘albeit match free’ and more austerity for the many. In the present conjuncture the German elite very probably plays this game aiming at destroying the rest of Eurozone economies, in order to acquire their assets for peanuts. Germans have proved they can easily believe such rubish. France and Italy however cannot and would not allow that. Let’s see how.

Fiscal consolidation with growth

The next day, yesterday 1 May, Letta rushed to Paris. He needed urgently the French connection or sensed that France needed his support to counter Berlin’s intransigence. The French President Francois Hollande greeted Letta very warmly, despite the fact that the Italian chose to go first to Berlin. Hollande knew that the Italian’s contribution was of primordial importance in solving Eurozone’s enigma in a different way than the one offered by the German sphinx.

In a few hours the two set the base for this different solution. They didn’t say much but in the substance of it the new Italian PM explained that, “in order to support jobs and growth in Europe the first condition is the cost of money to business, that is why we want the Banking Union to be enacted the soonest possible. We should not lose any more time”. He added that Europe needs growth and underlined that, “Italy is determined to promote growth policies as urgently and decisively as it did in consolidating its fiscal sector”. Those few sentences were reported and underlined by all major Italian media and were commented as the new road to growth.

In a few words he opened the way for a new Eurozone monetary policy, friendly to growth and designed to be fair to all and not just to Germany. The idea is that the cheap money from the European Central Bank but more so from the financial markets, being now lent to the banks of the central Eurozone countries at almost zero interest rate, must reach also the South under the same conditions. The Banking Union will guarantee that this kind of cheap and abundant money will be available from the financial markets also to the Italian, the Greek, the Spanish and the Portuguese banks and trough them to the regions’ business sector. Just two days ago the Bank of America/Merrill Lynch told the Europeans that there are €20 trillion waiting to be lent at interest rates below 1%.

Today all the southern countries are financially starved because the ECB’s monetary policy of cheap money does reach there. It’s the infamous problem of the financial fragmentation of Eurozone. The Governor of the ECB, Mario Draghi has repeatedly said that this fragmentation doesn’t permit central bank to transmit its monetary policy to the periphery of Eurozone. Under the current arrengemnet the financial markets will not undertake any risks in that region.

Banking Union

Only yesterday the European Sting’s writer George Pepper noted that “Berlin’s basic argument is that Eurozone cannot overcome a debt problem with more debts. The answer that seems to be now formulating by the other side is that ‘yes you can, if the money is for free’, that is at almost zero interest rates. Japan is doing exactly that despite being much more indebted than Eurozone”.

The Eurozone group of countries which back the growth argument, comprising today apart from Italy and France the entire southern periphery plus Ireland, will most probably find a strong ally in the Governor of ECB. Mario Draghi insists that the central bank’s monetary policy has to be freely transmitted all over the Eurozone, to reach all the small and medium enterprises of the euro area. That is why he insists, as Letta now does, that the Banking Union must be enacted the soonest possible.

This is tantamount to a growth strategy from the side of the monetary authorities. Not to the liking of Berlin. Once the Banking Union is in place and the ECB guarantees that all the banks in the periphery have reached such a creditworthiness levels as the German banks, then the cheap and abundant money from the world’s financial markets will flow to the peripheral lenders and through them to the business sector and the households of the region.

As for the German banks that Berlin boosts about their sturdiness, it seems that all that was not true. The mighty Deutsche Bank has just announced a capital increase of €2.96 billion, despite the fierce rhetoric of its management that their bank is solid rock and will never ask its shareholders for more capital. Now all that proved to be a big lie. The largest bank of Germany acknowledged that it didn’t feel financially well and needed some blood transfusion, forgetting the fat words about its concrete structure. This is one more proof that Germany when pressed by reality is abandoning altogether the stern and self-assured rhetoric and humbly accepting reality.

In total the Banking Union of the Eurozone, will guarantee that the periphery gets exactly the same treatment by the ECB and the world’s financial markets as the central countries. The credibility of the region’s banks will be guaranteed by the ECB and given that the lenders will be able to finance their customers under the same conditions as in Germany. Exactly as it was the case until 2008, when Greek and German borrowers had to pay the same rates. Seemingly that is why Germany has already started to question the creation of the Banking Union. But this time it will be too much even for Berlin to try and block it.