The Mes is a bad deal, and it must be put in the attic even by the so-called “Europeanists”. The economic convenience is doubtful, the risk of financial stigma is real, the conditionalities now suspended could be reactivated. This is what Emiliano Brancaccio, economist and professor at the University of Sannio, says in an interview with the Huffington Post, in which he makes a careful examination of the pros and cons of an eventual recourse to the State-Saving Fund by Italy. Last March, together with other economist colleagues, Brancaccio published in the Financial Times an appeal for an “anti-virus plan” founded on greater control of speculation on the financial markets and on modern planning of public investments in Europe.
Let’s start from the point that all Mes supporters cite to ask for its activation: the famous savings of 5 billion in ten years. Can we really quantify it with certainty when requesting access?
The so-called “savings” of the Mes is calculated on the basis of the interest rates in force when the loans are disbursed. For now the differential between Mes and Treasury issues is around 480 million per year. It must be understood that this difference depends only in part on the “free” game of supply and demand for securities, which now has “free” very little.
What do you mean?
The ECB has long been bridging the whole market, to prevent an explosion in interest rate spreads and a new eurozone crisis. This aspect must be underlined, because it clarifies that even the possible savings deriving from the use of the Mes is ultimately a result of the choices of the central bank.
The political forces in support of the Mes claim that with the 36 billion lent by the fund we could also finance indirect expenses, including the construction of schools or infrastructure, or current expenditure measures such as hiring new staff. It’s really like this?
The “pandemic” Mes devices are subject to different interpretations, and it is not new. The same rules of the Treaties present elements of indeterminacy which then tend to be resolved within the European Council on the basis of the power relations of the moment. This opaque method is all the more valid for the Mes, which is now based not only on the rules that regulate it but also on the interpretation of a vague and contingent political agreement.
What does it mean?
I would not be surprised if in the future, for mere reasons of political tactics, a representative of the so-called “frugal” countries declared that Italy has used Mes money beyond the European mandate. To deny it with codes in hand would be a bit complicated, precisely because the framework of norms and interpretations is even less clear than usual. Again, everything will depend on the prevailing power ratios.
Mes detractors believe that the conditionalities now suspended for this particular credit line may return later, given that the EU regulations have not been changed and the famous letter from Gentiloni and Dombrovskis is valid for now. Are these exaggerated fears?
They are well-founded fears. During the lockdown there had also been an attempt to rewrite some rules of the Treaties and the same agreement as the Mes, but the operation was aborted also because too long an attempt was made to minimize the enormity of the crisis. In the end we had to settle for an ambiguous political truce, as can also be seen from the Eurogroup statement in which we insist on the commitment to “strengthening the fundamentals”. We can already foresee that the countries that have always criticized it will put the MES agreement under attack again, in order to interpret it in a more restrictive sense.
What is the “stigma” effect that everyone talks about about the Mes? Many say it doesn’t exist in this case …
The Mes is a privileged creditor, if we make use of it it is logical that the market demands higher interest rates on the rest of the public debt. Obviously, even in this case the increase in rates occurs only if the ECB permits and in any case makes itself felt over time, on new issues of securities and especially if the use of the MES becomes systematic. The problem is that in our case a very small increase in the rates on Italian government bonds is enough to cancel the modest savings that for now would come from the Mes. It is a risk that must be kept in mind.
Even Cyprus, after an initial opening, reversed on the Mes and said: “For now, no thanks”. Why, ultimately, nobody wants it?
Partly because it is a mechanism outdated by events: it no longer even serves to activate purchases of ECB securities, which today follow other paths. But above all it is avoided for a basic question. The Mes is an extra-treaties agreement that assumes by statute only the “creditor’s point of view”. Its logic is completely outside the community method, in which institutions are required to represent everyone, whether they are creditors or debtors, for better or for worse.
What do you think is the mistake that is being made in the Mes debate?
The political debate is not up to the gravity of the crisis, and for this reason it also ends up generating logical short circuits. The case of the Mes seems to me emblematic: contested by the so-called “sovereignists”, in hindsight it can be a problem especially for the “pro-Europeans”.
For pro-Europeans?
Exact. That mechanism is in fact the sum of all the failures of a dangerously unbalanced European structure in favor of creditors. Supporting the MES means endorsing this institutional imbalance, and it creates the conditions for that monstrous economic twist that the Keynesians call “debt deflation” and that can endanger the survival of the Union again. I realize that political forces are blinded by short-term tactics, but from the point of view of economic logic, an undeniable fact remains: putting the Mes in the attic would be in the vital interest of the European project.
But if you put the Mes aside, the problem remains that the negotiations on the Recovery Fund are on the high seas. The “frugal” are against and a part of the Visegrad group, Ireland brakes on the digital tax. What political significance would a downsizing of the Commission proposal have?
Beyond the proclamations, the instrument seems to me weak and late compared to the seriousness of the recession. As the influential Bruegel Institute pointed out, the main problem of the Recovery Fund is that even if it were approved by the summer and without second thoughts, in any case not even one euro would arrive in 2020, in 2021 we would get just 9 percent of the sums allocated and in 2022 the remaining 14 percent. This means that more than three quarters of resources would not arrive before 2023. Given that GDP is now plunging across Europe, at a speed never seen in the history of capitalism, the delay in European economic policy is disturbing.
As if that were not enough, yesterday the Commission has already reopened the “Stability Pact” chapter. The old budgetary constraints could soon come back into force. Christine Lagarde has asked for a modification of those rules, by many scholars considered ineffective if not harmful. Holland and not only defends them. What risks for Italy with a return to fiscal discipline at this stage?
The problem does not concern only Italy, at this moment no country respects the parameters of the Stability Pact. Restoring it without profound changes only means one thing: that the eurozone is blowing up. If the Dutch government and its associates want this outcome, they say it openly and without other hypocrisy.