The Italian populist government – a crisis still waiting to happen

The economic program of the incoming Italian government is based on the work of Paolo Savona. Savona's plan to leave the Euro may yet go into effect.

Were the Italian people to look for a candidate to be Finance Minister of Italy it is difficult to imagine they could find an esteemed economist more qualified than Paolo Savona. Savona entered the Italian central bank The Bank of Italy in 1961. While at the bank he directed the working group that constructed the first econometric model of the Italian economy that the central bank ever had. The model was called M1BI (model one bank of Italy). Just as Mario Draghi was later to do, Savona then studied at MIT.

Savona was then seconded by the Bank of Italy to the Board of US Federal Reserve in Washington DC. He specialised in the area of international liquidity creation.

In 1976 Savona became General Director of Confindustria (the general confederation of Italian industry). This is the major association of manufacturing and service companies in Italy. Savona remained in that post till 1980.

From 1980 to 1989 he was the President of the Chief Regional Bank of Sardinia. He continued to serve as a president of major banks until 2010. Savona was Minister of Industry Commerce and Craftsmanship in the Italian government in 1993 and 1994. He is the author of many papers and books on international monetary economics.

In spite of this august background, Savona has generated some controversy. The paper of his, which has generated attention recently, is one delivered by him at a public presentation on 3 October 2015. This is called "ORIGINS, MEANINGS AND FUNCTIONS OF A PLAN A and B FOR ITALY IN EUROPE".

He begins. "I start with the popular saying 'there are none so deaf as those who WILL not hear'."

He note,s "since July 2011, I have invited the Italian authorities to prepare a Plan B: that is to prepare for the worst."

He suggests that the problem is that despite the repeated declaration that Italy has turned the corner and the economy is improving, forecasters suggest that Italy may not reach full employment again till as late as 2030.

He notes "the Italian economy has not emerged from the quagmire in which it was placed adhering prematurely and without preparation to the Euro and getting rid of the classic adjustment instruments (devaluations, credit for development and public spending)".

He said "My proposal for a Plan B did not propose a display of theoretical knowledge, but it dealt with the reality that we faced".

He described the crises that Italy faced when he was an advisor to government in 1971, 1974 and 1992-1993. He said that Italy "managed to recover using traditional intervention tools (exchange rate devaluation, interest rates, monetary creation and fiscal policy)".