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Stefano Micossi, "Hefty monetary and fiscal demand stimulus necessary to the Eurozone"

image-09/16/2014 - 20:53Commentary on Ecofin and Eurogroup meetings in Milano on 12-13 September


It is clear that the EUROZONE needs a hefty monetary and fiscal demand stimulus to reemerge from the doldrums, but it is equally clear that rampant mistrust between the member states are making it very difficult to agree on any rapid impact measures.
In his speech at Jackson Hole Draghi had called for a coordinated fiscal response exploiting existing room for manoeuvre to expand in countries with strong budgetary position; the German answer has been an acceleration of its budget balancing.
To the pressing demands by its partners to move swiftly on labour market reform, prime minister Renzi has answered that Juncker should speed up the disbursement of the announced 300 million investment plan - which of course Juncker cannot do, since he will take office only on November 1st. While the experience with previous ministerial calls for large EU investment programmes justifies widespread skepticism that the EU can actually deliver.
The new ABS purchase programme of the ECB requires that individually or collectively the EUROZONE member states guarantee the ECB from potential losses, but the notion has been met by a rapid fire barrage of opposing statements by many EUROZONE financial  authorities - surprisingly including also the French authorities, possibly reflecting opposition by their large banks.
And the very core countries that loudly demand structural reform in Italy (and France) are  still unwilling to let their telecom, electricity and gas markets open up under internal market legislation which they have subscribed to long time ago - in fairness without much pressure to do so by the indebted periphery, which would benefit the most from the resulting increase in private investment in these sectors, but would have to accept the resulting consolidation of the industry operating in these sectors.
In sum, what needs to be done to revive the EUROZONE economy is by and large known, but for the time being the probability of the required measures actually happening appears slim.
What could really tilt the table in favour of action would be the surprise of swift and radical labour market reform in Italy: the event that could really make all the other elements in the recovery strategy outlined by Draghi at Jackson Hole fall into place.
Mr. Renzi, please, take notice.

Stefano Micossi