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Financing the recovery. Europe, Germany, Italy

Modalità digitale, 19/05/2020, Meeting for The Aspen Junior Fellows

The main thread of the meeting could be summarized in this initial question: How can political relations between two culturally similar countries like Italy and Germany be so fragile and apparently unstable despite the solid trade relationship they enjoy? The parameters of the search for an answer were broad and deep, proof of the historic breadth of an Italo-German relationship dating back to the Renaissance and marked today by the shared values and principles of the European Union.

Certainly, one initial and important difference between the two lies in contrasting views on the concept of who should possess wealth. Indeed, Germany goes by the principle by which the State must be preserved, rich and scarcely indebted as compared with a slightly poorer society – to the extent that the German finance ministry is obliged each year to achieve a budget deficit of zero. Italy, by contrast, maintains a vision of society as tending to be wealthier than the State.  

The Italian approach may have had a negative influence on the national public debt since the country adopted the euro, which took place not in compliance with the required parameters but rather based on promises to reform public spending management. A reform that went ahead until the 2006-2008 period in which the public debt had stabilized at around 103%; what followed was a period in which clearly some mechanism malfunctioned and the debt spiked to 135% (pre-Covid 2020).

In fact, the diverse activities of successive Italian governments in those years were not consistent with the goal of reducing the public debt and stimulating investments. Various social measures were enacted that overlapped over the years, generating a tendency toward a welfare-based approach rather than one aimed at encouraging investments, such as those, for example, in infrastructure. Thus, at this particular post-emergency stage inversion of that tendency is going to be even more difficult.

Therefore, while the Italo-German relationship is fraught with complexity from a historic and political standpoint, on the economic front the two States enjoy a healthy import-export partnership in a variety of sectors that include automation, apparel, furniture and food. These economic sectors have developed almost independently of the shifting political leadership of the two nations, as opposed to the case of relations between Italy and France where, on the other hand, politics often overlaps industrial issues that intersect strategic sectors such as energy and telecommunications. The Italo-German trade balance grows annually and finds its maximum expression in a shared product value chain.

That synergy is fruit of a very similar cultural and economic structure. Indeed, both countries share a concept of social market economy founded on very strong government pillars (e.g. healthcare, education and welfare); an approach owed to heavily centrist founding fathers Adenauer e De Gasperi. Moreover, both Germany and Italy share a predominance of medium-sized manufacturers and exporters.

Nevertheless, areas of friction persist: suffice it to think, for example, of the recent German federal constitutional court ruling – whose domestic effects concern the possible lowering of interest rates and related future solvency of the private and public pension system – and Germany’s “cold” support in the initial phase of a Covid-19 crisis that struck Italy particularly hard. Some – potentially positive – elements emerged regarding domestic economic recovery, which included the tendency for some entrepreneurs to recapitalize SMEs and increased venture capital investments in key sectors of Italian industry, such as biotech. Also discussed were the cultural links between the two countries and the importance of strengthening them, not least thanks to the social activities of German firms.  

Finally, as the discussion expanded to considerations on the European framework in general, the hope was expressed in increased delegation to the European Union and in strengthening community institutions with a view to generating greater uniformity and harmony among the various domestic systems of Member States. This in an effort to limit differences that are today described as structural but that could in fact be the result of a lack of common policies in some crucial areas of government, e.g. fiscal policy.