An apparently obvious conclusion from last month’s Italian elections is that citizens – ie, voters – don’t like austerity programmes. The question that voters, especially in Italy, may not yet have reflected upon is what is the alternative in order to reduce the excessive burden of the debt, public or private, which has been accumulated over the past. There are at least three choices.
The first is to inflate away the debt, through the central bank buying large amounts of risky assets, thus socialising the losses, and keeping interest rates low, so as to reduce the real value of the debt. Some central banks around the world are indeed trying to pursue such an avenue, but the success is yet to be proven. In Europe this solution is prevented by the agreement that the member states reached at the launch of the euro that the European Central Bank should be independent and conduct monetary policy with the primary objective of pursuing price stability.