Can Italy bridge the gap between North and South Europe?

By Conor Brennan

On Thursday 6 December 2012, Business for New Europe and the Italian Chamber Commerce and Industry to the UK held a panel discussion entitled “Can Italy Bridge the Gap between North and South Europe?”

With the Italian Prime Minster Mario Monti standing down after elections in March 2013 and low expectations of economic growth, next year is destined to be challenging and significant one for Italian relations with Europe.

Chairing the debate, director of Business for New Europe, Phillip Souta introduced the four panellists: Tony Barber, European Editor of the Financial Times, Lucrezia Reichlin, Professor of Economics at London Business School and former head of Research of the ECB, Holger Schmieding, Chief Economist at Berenberg Bank and Domenico Siniscalco, Vice Chairman at Morgan Stanley and former Italian Minister of Finance.

Opening the discussion Domenico Siniscalco commented that recent relations with Europe and particularly with Germany had been a “tale of the two Marios”. While Mario Monti was reassuring Germany, Mario Draghi was able to “dig a deeper” and “form a consensus with Merkel”, he said.

Although exports and business overall were doing well, Siniscalco said, the domestic sector in Italy was “doing very badly”. He gave the reasons for this as a lack of confidence over taxation, suffering from foreign exchange rates, the existence of red-tape, corruption and problems within Italian politics.

Holger Schmieding reiterated Germany’s commitment to Italy and other struggling Eurozone members. Reminding the audience that the most recent bailout fund for Greece passed a Bundestag vote by a majority of 85 per cent, he said “count on Germany to support Europe, if Europe wants that support”.

The European Central Bank (ECB) was now the lender of last resort, said Schmieding, and it had the ability to say no; this meant the ECB was the “most independent central bank”. Saying that the ECB could have acted sooner and as profoundly as the Bank of England, said Schmieding, there was now a mechanism in place thanks to cooperation between Merkel and Draghi.

Highlighting a report by the Lisbon Council and Berenburg Bank, Schmieding believes that the crisis has forced a “dramatic convergence” between North and South Europe. “The process is working”, he claimed.

Less optimistic, Lucrezia Reichlin highlighted that Italy experienced two decades of no growth before the crisis began. According to Reichlin, for Monti to restore credibility and growth he should continue with adjustment because “Italy is not out of the tunnel”.

Reichlin believes Italy should ask for help in the form of the new support mechanism and the “sooner the better”. This is unlikely but would be more feasible in the government than the next, she said.

The gap between North and South Europe does need to be bridged, maintains Tony Barber. Deeper economic integration is blocked by disagreements between states and cultural attitude also plays a part, he said. Barber dismissed the comparisons between the EU and US, stating “Germany provides de facto support for many funds to these States” and Europe does not have the same identity as the US.

Moving on to the challenges of demography in Southern Europe, Barber commented on Spain as an example of the reverse in flows of labour into a country since the financial crisis. From 2002 to 2009 Spain’s working age labour force increased 12.5% mainly due to immigration, while now it is in “sharp reverse”. This, he added, would make it harder for Spain “to return to fiscal sustainability”. Italy would need to address this also if they are to bridge the gap, he concluded.

During the questions and answers section, Domenico Siniscalco claimed closer controls and a more federal European Union would help Italy from diverging away from Northern Europe. Taking a question on private actors playing a role in Italian politics, Siniscalco said there are different cases and in principle he did not have a problem with it.

Lucrezia Reichlin did not agreed that the banking sector in Italy was in a healthy position and forecast a growth projection that may become unsustainable. She claimed that she was “much more optimistic about Spain” and reiterated that Italy should ask for help, stating “it needs to be used”.

Answering a question about the democratic deficit of the current Italian situation, Tony Barber believes that there is a “problem trying to convince the public” and “there are definitely democratic issues”. Holger Schmieding however, said “if you borrow you depend on your creditors” and Italy has made a democratic choice on the matter. Addressing the same question, Domenico Siniscalco expressed reservations, saying when Troika are called in “it is suicide for parliament”.

Concluding Holger Schmieding urged the new Italian administration “not to back-track after Monti”, while Lucrezia Reichlin stated that a future government should not be afraid to “be radical” when it comes to structural reforms.