Indecision and defeatism holds Europe back

“I have seen the future and it works,” said Lincoln Steffens, a left-wing American journalist, on returning from the Soviet Union in 1919.

After a weekend in Venice at a seminar organised by the Italian ambassador to Britain, I found myself struck by the same thought, which is not exactly the reflection that the world’s most perfectly preserved medieval city is supposed to inspire.

But should we perhaps be inspired, not depressed, by the thought of Venice, the ultimate “museum city”, as a microcosm of Italy and even of Europe as a whole? After all, Venice is still standing, not sinking into the sea, and after 500 years of supposed decline, it is still stunningly beautiful.

Maybe Italy and Europe, instead of sinking, will also prove their resilience and make a comeback? An event this week that pointed to this conclusion was the deal on electoral reform announced by Italy’s two biggest political parties: Matteo Renzi’s governing socialists and the opposition led by Silvio Berlusconi.

This pact, which should create stronger majority governments, was significant — not just for Italy but for all of Europe, because quite modest policy reforms would be sufficient to revive the Italian economy and transform economic policy debate across Europe.

For example, a broad consensus exists for moderate labour reforms, for big reductions in the employment tax burden, for dismantling layers of government bureaucracy and for shifting welfare spending from over- generous pensions to education, training and active measures to help the unemployed. But none of these reforms would achieve useful results unless supported by a stimulus from monetary and fiscal policy.

The European Central Bank understands this, and even the German government’s resistance to economic stimulus is eroding. So if a stable and democratically credible Italian government showed willingness to seriously implement supply-side programmes, the ECB would surely expand credit, especially small business loans.

And given the importance of small businesses to Italy, an aggressive programme of officially-backed SME lending could have an electrifying effect on the Italian economy as it did last year in Britain, with government-guaranteed mortgage loans. In turn, a rebound of economic activity in Italy would have big effects on business and financial confidence in Spain, Greece, Portugal and France, as well as quite possibly transforming the German economic policy debate.

In short, a modest change in Italy’s electoral arithmetic could produce enormous benefits, perhaps even saving Europe from what looks like inevitable stagnation and terminal decline. Why this disproportion between modest political changes and big economic effects?

Because European stagnation and decline are not inevitable. Europe’s businesses are globally competitive, as evidenced by trade surpluses bigger than Japan’s or China’s. Europe has caught up with the US in technology, and its infrastructure is generally better. But what Europe needs to restore decent growth and employment is pragmatic political decisions, above all to coordinate macro-economic stimulus with structural reforms.

At present, such coordination seems politically impossible because Germany vetoes any possibility of stimulus. But when desirable objectives are defined properly and articulated clearly to voters, political prejudices can eventually be overcome.

Under the right circumstances, European businesses and even governments are perfectly capable of innovation and efficiency.

The problem lies not in European traditions or technology or management or education, but in indecision and defeatism — the fatalistic belief that decline is inevitable and problems are insoluble, even when solutions manifestly exist.