Lorenzo Bini Smaghi: From Tuscany’s 19th century currency, the fiorino, to the euro – dialogue on international finance Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, in the Sala Luca Giordano at the Palazzo Medici Riccardi, Florence, 15 May 2008. *  *  *  I’m very pleased to come back to Florence to consider a highly topical subject linked to the effects of the financial turmoil on the world economy. To understand the current economic situation and the current short to medium-term prospects we need to take a step back and consider the imbalances that were building up on our continent until mid-2007, imbalances that were evidently unsustainable and that underlie the corrections we are going through. We have to distinguish three main imbalances. In chronological order, the first one concerns international payments. Over the years, the United States has accumulated huge deficits on its current account which have grown out of a lack of domestic savings. The US economy was essentially growing by borrowing from the rest of the world. In 2007 the US current account deficit amounted to over 6% of its GDP. For years the problem of the sustainability of America’s external imbalance has been emphasised, especially in Europe, which feared the risk of a disorderly unwinding with destabilising effects on the financial markets.
The setting of working and wage conditions having regard to general or sectoral criteria, without taking into account the specific situation of each company, has been one of the main causes of our structural imbalance in terms of employment, and one of the factors that explains why Spain has always, even at times of greater economic activity and higher growth, had a far higher unemployment rate than the euro area, and indeed the European Union, as a whole. It will not be possible to reduce our structural unemployment rate in a collective bargaining framework that does not take into account productive, commercial and cost conditions, that is to say each firm’s conditions of competitiveness. The duality of our labour market – whose adverse effects on productivity, on decisions regarding investment in human capital and on collective bargaining itself nobody denies – cannot be scaled back if there continues to be a major imbalance between the labour costs (including firing costs) of permanent jobs and of temporary ones. Moreover, it is unlikely that we can manage to reduce duality and, in turn, to increase total employment – which must be the main priority – simply by raising the labour costs of temporary employment. 2. The reduction of public debt  Our second challenge is to contain the growth of public debt and, then, to reduce its volume.