Eurozone Watch

From outside Italy, it is often hard to understand what is going on in the country. We have thus asked Benedicta Marzinotto from the University of Udine and Chatham House to explain the current economic and political situation to us.

The latest available data for the Italian economy have surprised on the upside. As early as September 2006, the Italian government was expecting 2007 economic growth to pick up by only 1.1% from the previous year. Now the forecast is for this year's national output to rise by 2.3% from 2006 (updated on 8 June 2007). This comes as largely unexpected, not least because Italy is back into political turmoil against the difficulties in passing any piece of legislation when the government majority is as thin as 3 seats ahead of the opposition (in the upper house).

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Recently, a debate has developed on the long-term growth perspectives of Germany. Wolfgang Munchau and Susanne Mundschenk from Eurointelligence.com have asked me to contribute my views for their website. Here is my – rather optimistic – evaluation:

Not even a year ago, most economists doubted that the German upswing would last beyond the end of 2006. In fact, Germany’s leading academics at that time were still questioning whether the Germany economy would be able to grow by 2 percent in 2006, with forecasts for a significant growth deceleration for 2007 being the norm. Bert Rürup, head of the “council of wise man” advising the government in economic questions said in May 2006, he would be satisfied if growth even reached the government’s forecast of that time, 1.6 percent for 2006.

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The results of the EU summit have been extensively commented since last Sunday. However, we at Eurozone Watch believe that a number of aspects which are relevant for economic governance in the EMU have not been elaborated in the debate so far.

The first concerns the decision to eliminate free competition from the European Union’s objectives. Firstly, we in principle agree that free competition need not necessarily be listed as an objective of the European Union. Free competition is an instrument to achive growth and international competitiveness, not an end in itself. Thus, the case for the elimination from the Union’s objectives can be argued, without necessarily questioning as such the concept of free competition within the Single Market.

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Yesterday, we had our long-time announced conference on EMU divergences in Berlin, sponsored by Nouriel Roubini's RGE monitor , the Stiftung Wissenschaft and Politik and the Arbeitskreis Europäische Integration.

From early morning until the evening, the day was packed with presentations and discussions whether certain economic developments in the euro area since its start have been pathological (see the programme and papers here). For us from Eurozone Watch, it was especially interesting to see how many serious economists, political scientists and policy makers are now interested in the topic of cyclical divergences, the discussion on which Eurozone Watch has been pushing since its launch a year ago.

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Update on the third part of our series on Sarkozy and Europe

After publishing our analysis on Sarkozy's fiscal shock yesterday, the French prime minister Francois Fillon actually reopened the debate on the "TVA sociale", the "social value-added-tax". The idea behind this concept is lower social security contributions to lower labour costs and finance the shortfall with an increase in the VAT.

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Third part of our series on Sarkozy and Europe

After his election as a president, Nicolas Sarkozy did not lose any time pushing forward with his economic and fiscal policy agenda. Even before the first round of the parliamentary elections this week-end (in which Sarkozy's party did extremely well), a number of legislative initiatives have been prepared to be pushed through the Assemblée Nationale over the summer. According to Sarkozy, France needs now a "fiscal shock".

Among the measures brought forward by Sarkozy are the following (initiatives with little or no macroeconomic effect or costs have been omitted):

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Second part of our series on Sarkozy and Europe

Among Nicolas Sarkozy’s projects for Europe is one issue which is of particular concern for Eurozone Watch. The French President wants to improve the economic governance of the Eurozone. In French terms: the Eurozone needs a gouvernement économique.

With some people, this term causes instantaneous allergy-like reactions: discussing a gouvernement économique for instance is a no-no for many Germans or Dutch, or others who in a reflex interpret any mentioning of Eurozone governance either as an outright attack on the ECB’s independence or as an attempt to introduce elements of fiscal demand management through the backdoor. Neither of them of of course automatically linked to improving the economic governance of the Eurozone.

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