The Italian Presidency of the European Council began with a document filled with references to “competitiveness”. Public debt is considered to be at the root of the current crisis while the private sector is seen as the only solution. The recipe, following a mercantilist view, is to cut public spending and embark on a race to the bottom on who exports more. This is a flawed conceptual framework that confuses the causes and the consequences of the crisis and turns them upside down. Following such assumptions, austerity becomes the main goal, while private finance regulation seems out of fashion. Even worse, an “excessive” financial regulation is considered an obstacle to the alleged private sector driven economic growth.
Thus, while the European institutions continue to emphasize how fundamental it is that the financial system supports the revival of growth and employment, the suggested solutions are largely based on providing more and more liquidity to the same financial system. Notwithstanding such abundance of liquidity, banks still do not lend to the real economy. “You can lead a horse to water but you can’t make it drink”, this means that in times of distrust, pouring more money into the system will increase savings and speculation, but not investments and consumption. In fact we are witnessing an increase of speculative activities, while families and businesses are strangled by the lack of access to credit. This leads to further growth of a hypertrophic finance sector and to its progressive detachment from the fundamentals of an economy in crisis: the very definition of a new financial bubble.
This is one of the basic reasons why finance must be refocused to become a tool at the service of the real economy, not an end in itself to breed more money from money. On the one hand some of the proposals that civil society networks put forward in the last years are finally part of the European agenda: a financial transactions tax, the separation between commercial and investment banks, a strict regulation of the shadow banking system, and so on. On the other hand progress, if any, was minimal on several of these issues.
On the issue of a financial transactions tax, the last Italian-led Ecofin ended with a substantial stalemate, postponing the debate to the Latvian presidency beginning in 2015. Unfortunately, Latvia, unlike Italy, is not among the countries that declared their commitment to introduce the tax. If there has been any progress in the last months, it is quite unlikely to see an acceleration in the near future.
We see a similar dilemma regarding banking structural reform. The separation between commercial and investment banks, as well as the linked issue of too-big-to-fail banks, is another central problem to prevent the recurrence of disasters such as those of recent years and to redirect banking activity to support the real economy. The new EU Commissioner Jonathan Hill, a former lobbyist now in charge of financial affairs, seems open to dropping the Bank Structure Reform, which should deal with these issues, if there is a lack of political progress. In early December, the Economic Committee of the Parliament asked the Commission to keep the proposal on the agenda and not to withdraw it. Once again – as in several other negotiating chapters – it does not seem as if the Italian-led Council has taken a decisive stance on the issue.
The recent stress tests conducted by the ECB highlighted the fragility of Italian banks compared to those of Central Europe. One of the various shortcomings of these tests, though, is that they examine in detail bank lending, while almost entirely excluding the risk of speculative activities. The Italian banks, which lend more to the economy than the German, French or English ones, pro rata, have been judged worse than their counterparts, even though these latter may be filled with derivatives and potentially “toxic” financial instruments.
These are just a few among many possible examples that show how the whole agenda seems tailor-made for the larger groups that continue to dominate – not only from a financial point of view – in Europe. In fact, the only issue the Italian government insisted on during its presidency seemed to be the EU-US free trade agreement, the TTIP: a harshly criticized agreement that focuses on the protection of the “rights” of big business at the expense of those of citizens, the environment and workers.
The Italian presidency could be criticized for many other things. Italy would have had everything to gain from focusing its presidency on financial regulation and on a broader change of paradigm in Europe. Even before analysing the meager results achieved in individual rules or negotiating chapters, however, the overall approach was flawed and inadequate. Therefore it is difficult to say if the glass is half empty or half full at the end of the Italian semester, when it is hardly possible to see the glass at all.