Andrea Terzi — Mario Monti defends the austerity fortress

I have known Mario Monti since the time he was my professor of Monetary Economics in the late 70s. An excellent teacher, he opened his course by teaching financial accounting and balance sheets, explaining that every financial asset has a corresponding liability and demonstrating the importance of net sectors’ financial positions.

Today, Mario Monti chairs the EU “high-level group on own resources”, working on a reform of the EU budget. In an interview by Federico Fubini (Corriere della Sera, 18 October 2015), he discusses the current state of public finances in the EU and shares his concerns that the tight fiscal policy enforced in highly indebted EU countries is now being relaxed prematurely.

I do believe Monti has a point when he claims that the recent EU concessions on budget rules have initiated a tendency toward flexibility, risking a possible loss of credibility for EU rules. He may also have a point when he argues that the Italian government’s tight fiscal policy in 2011-13 (under Monti’s premiership) may have contributed, politically, to convincing Germany to accept Draghi’s “whatever it takes” move that saved (so far) the euro.

But Mario’s view of public debt is, I’m afraid, outdated.

In the cited interview, Monti criticizes Italian Prime Minister Renzi for being too relaxed on fiscal rules. I won’t discuss here if Renzi’s projected budget indeed deviates, and, if so, how much, from EU rules. This is not the point here. My point is Monti’s approach to public debt and his concerns about fiscal flexibility.

I too am concerned about flexibility, but, I suspect, for a different reason. I fear that easing fiscal rules through a non-transparent process may raise more political discontent among EU partners. A sounder political approach would be fiscal expansion coming from a shared EU governance decision. And yet, as long as the latter is not yet happening, what’s wrong, economically, with the EU permitting larger deficits than the rules allow?

On the contrary, Monti is alarmed with flexibility for precisely an economic reason. He views public debt as a gift to today’s voters, funded by future voters’ money. And I suspect he would use this same argument if a larger fiscal deficit were the result of a shared EU decision. Monti’s concern is not only about single euro members attempting to get away from rules; it is about making any exception to those rules, at any level of government.

This is where I believe Monti is wrong, and I will show why by building on the concepts that he taught me long ago.…

Sectoral balances follow.

Money And The Real Economy
Mario Monti defends the austerity fortress
Andrea Terzi, Professor of Economics, Franklin College, Switzerland