I’ll tell you about pirouettes and surprise by Fabio Panetta (ECB)
The interview given by Fabio Panetta, member of the executive committee of the ECB, to Corriere della Sera read and commented on by Giuseppe Liturri
The interview given today in Corriere della Sera to Federico Fubini by Fabio Panetta is impressive. member of the executive committee of the ECB.
Frankly, we did not believe it was possible to admit with such lightness, as if they were irrelevant events, some sensational errors of the recent past. As if these mistakes had not resulted in a few million unemployed and the end of thousands of businesses. After years of “let's do it like Germany” – meaning the economic policy model entirely based on exports and on the compression of internal demand – now it is all a hymn to the virtues of internal demand. If it weren't for the fact that ours has been Deputy Director General of the Bank of Italy since 2012, we would have to welcome his words with endless minutes of applause.
Unfortunately we had to wait for a sultry day at the end of July 2021 to learn that “Europe is one of the major economies, it cannot rely only on foreign demand. We tried during the financial crisis, with austerity, to compress domestic consumption and to grow under the influence of foreign demand. It didn't work: we got stagnant demand, a sluggish recovery and a long period of dangerously low inflation. Internal demand must be stimulated ”. It must be objected to Dr. Panetta that there was nothing to prove. Applying those prescriptions of economic policy, in those years, could only have provided the result that can be read in the books of the first year of economics: a long recession. It couldn't work and a few brave economists were already repeating it at the time. The fact that today this disaster is presented as an unpleasant hiccup, it really sounds like a joke, in addition to the damage of almost two years of recession between 2012 and 2014.
But Panetta is generous with other pearls of wisdom: he admits that spending on the Next Generation Eu, aimed at goods of which Germany is a major exporter, will determine a "stimulus equal to half a point of GDP thanks to the growth that the NGEU will determine in other Villages". We had little doubt that Germany had done the math well, before giving the green light to the NGeu, now we don't have any more. This also explains the relatively modest impact (just over one point of GDP) of the Ngeu for Italy: if the expenditure ends up in imports of German or foreign goods, the GDP does not grow.
Also on the monetary policy front, after the disastrous rate hikes with impending or ongoing recessions (July 2008 and July 2011 are remembered as tragic moments in the history of the ECB), we learn that " from now on when inflation falls below at 2% monetary policy will have to be inspired by the "Pirates of the Caribbean", even if some would prefer "Sleeping Beauty". When the price dynamics rise towards 2% we will be patient: we will raise rates only if we are convinced that inflation can be stable at 2% in the medium term ”. Faced with the risk of revving the economy, Panetta candidly admits that "in the past, impatience led the ECB to raise rates prematurely, compressing inflation excessively and holding back growth ." In short, in Frankfurt they were simply "impatient". A sedative would have been enough and we would have avoided the disaster of the last decade, with the eurozone regularly at the bottom of all the growth charts of advanced economies and the ECB always lagging behind the US central bank in understanding the dynamics of the economy and in the consequent launch of the appropriate interventions.
He concludes with a flourish, speaking of the ECB's purchases of government bonds with the PEPP program. He does not hide the presence of very different positions on the board, but Panetta thinks that it would make no sense to implement a restrictive policy by decreasing or ceasing purchases, while the prevailing orientation is the expansionary one.
Everything is beautiful, except that Panetta is not a passer-by and he was present in the rooms where certain decisions were made. We should deduce, quoting "My friends", that he cleared up … And now he is a candidate not to repeat those mistakes, while in the chancellery in Berlin they smile. Congratulations!
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/vi-racconto-piroette-e-sorpresone-di-fabio-panetta-bce/ on Thu, 29 Jul 2021 11:02:24 +0000.