Prodi Strikes Back

I think one of the topics for next years election in Italy is just being decided. Romano Prodi (former President of the EU Commission) has just spoken out against Sinascalco. He is in favour of making cuts. Prodi is quoted as saying that:

“Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision……The government lost control of current expenditure. The situation is very serious.”

Prodi is about to become the whipping boy, having to go into an election with the ‘popular’ policy of making widespread spending cuts.


Anatole Kaletsky has some very harsh words to say about the Brussels leadership and all this. I don’t entirely agree with his general economic analysis (I don’t think eg devaluation is a quick solve all policy in the way he seems to) but he certainly makes some strong points:

“The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call ?deniability?. The anti-euro claims are partly designed to shift blame for Italy?s problems on to Romano Prodi, the former Commission President who is now Berlusconi?s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe?s politicians ? and they bring me back to the comparison between Britain after Black Wednesday and Europe today.

The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth.

These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe?s ?democratic deficit? because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can?t.

If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

4 thoughts on “Prodi Strikes Back

  1. It isn’t just Kaletsky. Martin Wolf in the FT writes –

    {{ – Economists argue about the necessary and sufficient conditions for a successful single currency. But the majority would agree that it helps if the area in question is subject to common shocks, markets for goods, services, capital and labour are flexible, the overall economy is dynamic and, not least, there is a shared identity embedded in common political institutions. Not one of these conditions is either necessary or sufficient. But the absence of all four creates a huge challenge. Yet this is precisely where the eurozone now finds itself: economies have diverged; growth is disappointing; markets are proving dysfunctional; and the movement towards further political integration is now in peril.- }}

    The article is under sub at the FT @ Crushing reality of eurozone

  2. Here’s a longer quote from the interview. Whatever his failings, Prodi is a big cut above the people who are running Italy right now. I remember what happened to De La Rua in Argentina. At some stage they may try to eat him alive. He has all my sympathy:

    “The data are shocking: unfortunately, the deterioration of the Italian accounts is quite serious,” said the leader of the centre left Union, Romano Prodi, launching another worried message concerning the public accounts. During an interview with Bloomberg, Prodi emphasised that “the data that come not only from Brussels but from the OECD, the IMF and ISTAT are quite serious…we need to fix these accounts.” Prodi relaunched his proposal. “I clearly placed a fiscal policy for development, which is that of decreasing labour costs in the long term, increasing resources destined to research, a fierce battle against tax evasion accompanied by the end of amnesties, so that the taxpayer knows that there is the authority of the law in Italy. Then we will need special measures for the specific problems, but the problem is to launch a message of financial health in the long term while in these years there was too much anarchy.” Passing to economic trends and the prospects for the current year, Prodi said that Italy can await “near zero growth.” Concerning the risk of a credit rating cut, Prodi said “rating revisions depend on how a government reacts to news: the rating isn’t changed immediately, it’s changed if there is no reaction, no correction by the government. I hope that there is one, either through an extraordinary budget, added taxes, but it must be decided by the government.”

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