Italy takes a 'vacation from reality'

Monti's Growth Fantasies

Another reality vacationer is found in Rome - Italy's prime minister Mario Monti, who increasingly looks like a zombie, which is to say his outward appearance is beginning to reflect that state Italy is in.

In order to get 'growth' going in the euro area, Monti now wants to change the way in which budget deficits are calculated. No, we're not pulling your leg.

He's also still going on about 'euro bonds', which is a complete waste of time and effort. Germany's constitutional court has already put paid to the idea, as this would make Germany liable for the debts of other nations. It's just not going to happen.

“Prime Minister Mario Monti on Tuesday set out Italy's priorities for growth in the euro zone, calling for changes in the way budget deficits are calculated and urging the EU Commission to be more active in setting a growth agenda.

Speaking at a conference attended by EU Economic and Monetary Affairs Commissioner Olli Rehn, Monti said the time for studying and talking about how to boost the euro zone's stagnant economy was over.

"I exhort Commissioner Rehn and the Commission to take a very active and leading role," said Monti.

He called for changes in EU budget rules to allow governments to pay outstanding bills to the private sector without pushing up their budget deficits, and greater distinction between public investments and other types of spending.

The issue of late payments by the public sector is under the spotlight in Italy, where firms are being squeezed by a lack of liquidity and the state is notoriously slow in settling bills with the private sector, estimated at least 60 billion euros.

Monti said budget deficit calculations should distinguish between "virtuous" public investments and less productive state spending, something so far resisted by Germany and some other northern European countries.

"I am inviting my German interlocutors to consider that increasing production capacity through public investments is a virtuous policy," he said.

Rehn said he "took due note" of Monti's concerns on late payments and the Commission also wanted to increase cross border investment in the green economy, and research and innovation.

Monti also said he was convinced that it will not be long before the euro zone decides in favor of commonly issued bonds, another policy long favored by Italy, which has high borrowing costs and one of the highest public debts in the euro zone.

"I am convinced it will happen, not immediately, but the time is getting nearer and I consider it positive and important," Monti said.

Virtuous public spending? It is becoming tiresome to have to keep refuting this nonsense, but let us just note here that public investments that the private sector does not undertake voluntarily are perforce diverting resources from being employed in the satisfaction of more urgent needs. There is no way for the bureaucrats to know whether their 'public investments' make any commercial sense, since they lack a profit motive. As a rule, these investments wind up as white elephants that simply waste even more scarce capital.

'Exhorting' Olli Rehn 'to take a leading role' is likely to backfire as well, given the man's well know contrary indicator traits. The best thing Rehn could possibly do for the euro area is to never again utter a single word in public.

As to the idea that new calculations should be used with the express aim of making deficits appear smaller than they really are, the less said the better.  However, this clearly amounts to yet another 'vacation from reality'.