Italy, and Karl Whelan on the need for growth

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Mario Monti has done Europe’s voters a huge service. It would have been easy for him to remain aloof during this election; by standing for election he allowed Italians to directly express their opinion on the EU’s current macroeconomic policy mix. The results are pretty conclusive: current policies have no democratic legitimacy, at least in Italy.

We all remember Jean-Claude Juncker’s statement that “We all know what to do, but we don’t know how to get re-elected once we have done it”. He got it half right: they certainly don’t know how to get re-elected. But it is also clear that they really don’t know what to do about the economy either. And this represents a huge problem for the European project, since by pinning their colours so firmly to the mast of an incoherent and destructive macroeconomic policy mix, Europe’s leaders risk doing huge damage to that project. Indeed, the damage is already occurring.

It would be nice to think that these leaders would take seriously pleas by people like Karl for a saner approach to macroeconomic policy. The evidence since September, however, is that they will sit on their hands unless forced to do otherwise by the markets: the risk of financial crisis, not the reality of peripheral unemployment crises, is what grabs their attention. Another reason to welcome the Italian vote, perhaps.

Update: Paul Krugman has a very similar reaction here.

59 Responses to “Italy, and Karl Whelan on the need for growth”

  1. grumpy Says:

    Kevin, I suspect it is partly at least because financial Market crisis is clear to see for them and a reaction can then be extracted. Deciding on the most appropriate economic policy is much more nebulous and debate ridden. They don’t know what to believe or whether they are acting appropriately, or which economic pundits to listen to. Hence the likelihood of policy inertia until tangible threat of political change they are not confident they can stay on top of emerges, if it does.

  2. DOCM Says:

    No one would deny that there is considerable merit in the argument advanced by Karl Whelan and many other academic contributors to the debate.

    The real difficulty is that the argument is posited on a vision of the European economy which does not correspond to the actual reality. What is suggested, if I understand it, is that the countries whose budgetary situations are good to reasonable – again, notably Germany – adopt a policy of Keynsian reflation in order to pull the EA and the rest of the EU out of recession. This is seen as a responsibility especially for the EA as countries no longer have the instrument of devaluation “to restore competitiveness”. (This latter contention is not borne out by the empirical evidence currently available from the UK).

    Apart from the fact that the countries concerned are unwilling to act in the manner suggested, there must be considerable doubt as to whether it would work. Promoting a consumer boom in Germany would be most unlikely to pull the countries of the periphery out of recession. Indeed, there is evidence from a study by Deutsche Bank that it is in third counytry markets that Spain and Portugal are seeking their salvation.

    This is not to suggest that there should not be some easing in the excessive concentration on the need for austerity in countries other than Italy i.e. those countries that are willing to make the necessary painful structural changes rather than elect politicians who pander to the view that there is no need to do so.

    It cannot be argued that export surpluses are to be condemned in themselves. If they were, Ireland would also be in the dock. What has to be condemned is the deliberate skewing of an economy domestically in order to achieve them at the expense of others. Correcting this, unfortunately, is not so easy as it involves many different measures affecting the single market and varied interests; and the paradox that those countries that could benefit most are also very actively involved themselves.

    There is clear evidence of a recognition of the need to bring a stop to this by greater harmonisation of standards even in respect of areas that in terms of the current treaties remain a national responsibility in the economic policy and social areas.

    Otherwise, it is remains a question of continuing the hard slog back to growth and a more balanced economy (whether the Commission gets its forecasts right or wrong).

  3. grumpy Says:

    Will Ollie be big enough to consider he might know SFA about investor confidence trends, based on today’s reaction?

  4. Shay Begorrah Says:

    @grumpy

    Deciding on the most appropriate economic policy is much more nebulous and debate ridden. They don’t know what to believe or whether they are acting appropriately, or which economic pundits to listen to.

    Without any disrespect the issue in Europe is not that confused politicians, who are basically well meaning, are torn between multiple equally plausible narratives (Karl Whelan’s article is eminently sensible). The issue is that the politicians in the German bloc, the ECB and DG ECFIN have quite different priorities to the peripheral Eurozone and have the reins of European monetary and fiscal policy.

    After all the negative trends for unemployment and growth are pretty irrefutable and there is nothing unexpected (or unfortunate) about them, either from a historical and theoretical perspective.

    This does not matter. Unemployment in Spain is not a concern for Germany, or the ECB, but inflation and the political structure of the EU is (hence the madness of the Fiscal Compact).

    So when Angela Merkel hears about Irish emigration she thinks “Great! Labour mobility benefits Germany.”, when Jens Weidmann hears “mass youth employment” he thinks “necessary structural reforms”. Conversely when Olli Rehn hears “Keynesian demand management” he thinks “market distortion”.

    Now some of it is obviously foolishness (Olli Rehn, in particular, comes across as a fool) but a lot of it is simply the dominant powers in the EU trying to enforce their will on those with currently dissimilar economic needs.

    This is a political struggle, and we are on the losing side.

  5. DOCM Says:

    Herewith the link to the Deutsche Bank analysis.

    http://xa.yimg.com/kq/groups/17389986/1473140226/name/Deutsche+Bank+Focus+Europe.pdf

    Notably;

    “Indeed, the rapid progress, from the late 1990s onwards, on labour market flexibility has improved the capacity of German exporters to absorb gyrations in the exchange rate via productivity gains. In addition, since the mid-1990s German industry has engaged decidedly in off-shoring to low-cost countries, in
    central Eastern Europe as well as in Asia. This has allowed the major German exporters to absorb much more easily changes in the Euro exchange rate by spreading its cost base across several currency zones. Finally, Germany’s
    growing specialization in high-end products allows the country to enjoy “transitory monopolies” on a large fraction of its export range, which also dilutes the impact of the exchange rate.

    The situation of Spain is more surprising. True, productivity gains have been massive since the beginning of the crisis – the flip side of an unemployment rate now in excess of 25% – but we also suspect that Spain benefits from being quite tightly integrated in global industrial networks. We have already pointed in FE to Spain’s capacity to attract large foreign direct investment
    over the past 20 years, drawing on the still comparatively low level of labour costs there. Spain for instance has become Europe’s second largest car manufacturer, superseding France and now producting 3 times as many
    cars per annum as Italy, thanks to foreign – often non European – operators. Being integrated in these global networks allows some protection against exchange rate gyrations, which can be spread across the various production sites.”

    This the real not the imaginary situation with regard to the interplay of economic forces between the major European economies.

    The outcome of the election in Italy can best be summed up by a comment from an Italian observer (prior to the result); “the situation is as usual somewhat confused”. Its immediate impact, a fall in the value of the euro, is probably very welcome, especially to France.

    Nevertheless, the “excessive austerity” thesis is clearly winning ground in strictly political rather than economic terms cf. this interesting blog post by the FT’s Peter Spiegel.

    http://blogs.ft.com/brusselsblog/2013/02/will-irish-portuguese-bailouts-get-greek-treatment/

    P.S. Whatever happened to the IMF view with regard to multipliers?

  6. Peter Stapleton Says:

    It would be easier to agree with these views if the swing had been to a conventional left-wing candidate – albeit tainted with a Communist past – like Pier Luigi Bersani. But it is hard to see what service the Italian voters performed by continuing to endorse a person like Silvio Berlusconi. As for the surge in support for ‘ex-comedian’ Beppe Grillo – vediamo!

  7. Brian Woods Snr Says:

    @ KO’R: “The evidence since September, however, is that they will sit on their hands…” “… unless forced to do otherwise by the markets:”

    These boyoes were (I hope) elected by their respective citizen voters. WTF have ‘the markets’ to do with their subsequent economic decision making? Am I missing something here? Sure looks like it. Brown envelopes perhaps?

    Oh! I get it! “I’m really sorry for the pain I am inflicting on you, but those bold foreign folk made me do it!” “And trust me, I feel your pain also!” Jesus wept!

    @ DOCM: “The real difficulty is that the argument is posited on a vision of the European economy which does not correspond to the actual reality.”

    That will do very nicely, full stop and thank you.

    Now if only the economic theorists would re-learn some basic math and especially the guaranteed, unpleasant outcomes of exponential functions: that is, you CANNOT ‘grow’ a physical system, which consumes finite physical resources on an exponential basis. Its impossible. And this is exactly what we now observe: un-growth.

    But if your entire political, social and economic structure has been artfully constructed on the basis of ‘continuous growth’ – you are – in that long run, going to encounter a rather disagreeable surprise: like now!

    Now I have this very desirable, well appointed and well located Hobbit Hole* – going cheap. Anyone?

    *Good man Gavin. Well spotted!

  8. Eureka Says:

    Ok – there will be another Italian election in 3 months and a centre right job will get in. No biggee.

    This is simple and really boring – everyone everywhere needs to default and start all over again with rules this time – i.e. sovereigns cannot raise debt ever…

  9. Michael Hennigan - Finfacts Says:

    We are generally mute about or facilitation of massive tax avoidance in European countries, including the struggling economies, which is a bit inconsistent with seeing all the solutions in others’ hands.

    When for example an end user in Athens buys Microsoft software, it is booked in Dublin with no corporate tax paid in Greece. Are we helpless in all this?

    In the past decade, Italy’s GDP increased by less than 3%; that of France, with about the same population, by 12%. The gap perfectly reflects the difference in hourly productivity – - stationary in Italy, up by 9% in France. Italy’s disappointing result applies to the country as a whole, North and South alike.

    In the course of a decade, Italy received foreign direct investment inflows equal to 11% of GDP, compared with 27% in France.

    The real earnings of employees in Italy have been virtually stationary over the past decade, compared with a gain of 9% in France; real household consumption, which has risen by 18% in France, has grown by less than 5% in Italy and only by eroding the propensity to save.

    Germany’s trade with the EA16 is almost in balance.

    Italy hardly grew during an international credit boom up to 2007.</b.
    It would be very welcome if these aspirations for growth could be met but it’s not enough to appeal for growth;
    How much should other economies grow or spend to have a significant impact on the southern economies?</b?

    Part of their problems was that they couldn’t compete with Eastern Europe and China.

    Italian firms, on average, are 40% smaller than their Eurozone counterparts. The top 50 European corporations by sales in 2010 included 15 German and 11 French but just 4 Italian firms. Italy’s industrial structure seems static; rarely do firms grow and move up to the next size class.

    In the early 1960s, plants with over 100 workers employed 43% of Italy’s manufacturing workers, as against over 60% in France and Germany. Since then the employment share of large plants has declined much more sharply in Italy than in France or Germany, to under 30%

    While Italy has several global brands and 70% of the workforce are in the service sector, The Economist said in 2011 that unlike Germany, it has run a current-account deficit every year since 1999 and a trade deficit since 2005. Italy may still have the world’s sixth-largest industrial base, but Britain, often portrayed as an industrial weakling, makes and exports more cars than Italy does.

  10. Paul Ferguson Says:

    I understand Karl’s comments on one person’s debts being another person’s assets. But there can be no doubt that as we deal with less cash an more digital money we have a more indebted economy.

    For cash is created without a corresponding debt whereas digital euros are. The amount of debt-based money in the economy is a completely arbitrary function of the inconvenience of cash but there’s no reason why we shouldn’t update the system to take account of how our economy has gone digital.

    We’ve been here before in fact in 1845 when the Bank of England removed the power to create legal tender notes from banks. Tye knock-on effects of declaring all bank deposits legal tender would have us well on the way to a real solution to the crisis.

  11. David O'Donnell Says:

    Italy:

    And the winner is… Beppe Grillo
    26 February 2013 La Stampa Turin

    By bringing together the many Italians disillusioned by old-style politics, former comedian Beppe Grillo has robbed the coalition of the left, under Pier Luigi Bersani, of what was looking like certain victory. Italy will now have to reckon with a new player who is as indispensable as he is unpredictable.

    http://www.presseurop.eu/en/content/article/3463351-and-winner-beppe-grillo

  12. Gavin Kostick Says:

    @ DOCM

    “This is not to suggest that there should not be some easing in the excessive concentration on the need for austerity in countries other than Italy i.e. those countries that are willing to make the necessary painful structural changes rather than elect politicians who pander to the view that there is no need to do so.”

    That’s the spirit, squeeze them until the pips squeak.

    @ Paul Ferguson

    On your note that banks are running out of mortgages to give. My distopian vision is that this will be replaced by increasingly large student loans.

  13. David O'Donnell Says:

    CARTOON OF THE DAY

    Italy:
    What a performance!
    26 February 2013 International Herald Tribune Paris

    http://www.presseurop.eu/en/content/cartoon/3464691-what-performance

  14. grumpy Says:

    “What makes me feel really ill are the millions of people that have been staying afloat in the crisis, that have just been marginally affected by the crisis, that have managed to just get by to the detriment of the other lot of millions of people that cannot go on any more. Italy’s problem is this set of people. And as long as the salaries and the pensions of these people are not at risk it’s fine to immobilise the country. But this won’t last long. This situation won’t last long at all.”

    He is not referring to Ireland, but if he was, who would he have in mind?

    http://ftalphaville.ft.com/2013/02/26/1400652/beppe-grillo-at-markets-close/

  15. David O'Donnell Says:

    Italian election: stalemate threat sends shivers through the eurozonePoll cliffhanger brings fears that outgoing prime minister Mario Monti’s austerity programme could be paralysed

    http://www.guardian.co.uk/world/2013/feb/26/italy-election-eurozone-austerity-programme

    Final vote results confirm Italy deadlockBy Tony Barber and Guy Dinmore in Rome and Michael MacKenzie and Dan McCrum In New York

    http://www.ft.com/intl/cms/s/0/562609dc-7f58-11e2-89ed-00144feabdc0.html#axzz2M1qT7szk

  16. DOCM Says:

    We only have to get Ireland’s irons out of the fire. Other countries can look after themsleves.

    Some may have missed this point from the link to the Peter Spiegel blogpost above;

    “As the leaked note makes clear, it is unlikely the IMF will change the repayment schedule for its loans (it didn’t for Greece).”

    Whoever is in charge at the IMF, it is not the economists!

    Multipliers, anyone!

  17. seafoid Says:

    Are we back to risk off again? The funny thing is the corporates need growth but austerity still has such a
    mental hold on the markets that it can’t happen until there is a brain shift.

  18. David O'Donnell Says:

    DeConsteructing Peter Stapleton

    “It would be easier to agree with these views if the swing had been to a conventional left-wing candidate – albeit tainted with a Communist past – like Pier Luigi Bersani. But it is hard to see what service the Italian voters performed by continuing to endorse a person like Silvio Berlusconi. As for the surge in support for ‘ex-comedian’ Beppe Grillo – vediamo!”

    Hmmm one wonders why Bersani is “tainted”? Is Berlusconi not ‘tainted’? Is Grillo not ‘tainted’? Or is the author – Peter – exhibiting some bias in his ‘taints’? T’aint fair.

  19. Shay Begorrah Says:

    @DOCM

    No one would deny that there is considerable merit in the argument advanced by Karl Whelan and many other academic contributors to the debate.

    That sounds too reasonable for DG ECFIN’s biggest fan.

    Wait….

    The real difficulty is that the argument is posited on a vision of the European economy which does not correspond to the actual reality.

    <Collective sound of gagging.>

    Yes, it is Karl Whelan that is out of touch with reality while Olli Rehn is the widely respected economist. Of course Karl has some bad company (practically every major figure in macroeconomics with credibility remaining after the global financial crisis) but that just shows how widespread the delusions are.

    It is a little odd that all these people, who are so out of touch with “actual reality”, make predictions that seem to match what happens while the very serious people making EU economic policy seem to get the outcomes of their preferred policy set so consistently wrong though?

    What does deluded mean again?

    Otherwise, it is remains a question of continuing the hard slog back to growth and a more balanced economy (whether the Commission gets its forecasts right or wrong).

    It shows a certain amount of chutzpah to advocate that we keep up “the hard slog back toward growth” when the evidence is in that the slog is going in the opposite direction.

    Also the European Commission getting its projections consistently and badly wrong remains of critical importance, you should not get to make plans if you consistently get the outcomes wrong. These are incompetent fools, right wing fantasists or both.

  20. David O'Donnell Says:

    The official [EZ] view is that the bailouts of Greece, Ireland and Portugal—and maybe soon Spain—are aberrations, and that once those countries get their budgets on track, their economies will follow and the bad patch will be a memory. Mr. [Bernard] Connolly calls this “propaganda.”

    http://online.wsj.com/article/SB10001424127887324445904578285503854758408.html

    A Must Read: h/t nakedcapitalism

  21. DOCM Says:

    @ All

    FYI

    http://lexpansion.lexpress.fr/economie/bruxelles-contredit-moscovici-et-exige-un-deficit-nettement-sous-les-3-en-2014_374061.html

  22. Bryan G Says:

    Regarding

    http://blogs.ft.com/brusselsblog/2013/02/will-irish-portuguese-bailouts-get-greek-treatment/

    here’s what Schauble said last December on maturity extensions for Ireland and Portugal.

    it would be a devastating signal and I would really advise them not to pursue this point any further

    Note the “Irishman – know your place” tone.

    The statement is of course total rubbish. Maturity extensions would have a number of benefits that would increase, rather than decrease, Ireland’s ability to service privately held sovereign debt:

    - locking in an EU-subsidized interest rate, rather than the Irish-specific interest rate, reduces annual debt servicing costs

    - bumping out the maturity beyond 10 years helps allay seniority concerns as any newly issued 10 yr sovereign bonds will mature first.

    - it reduces the amount that needs to be raised on capital markets over the next 10 years (maybe by about 20% or so)

    The author of the FT article gets it wrong as it will be easier to get agreement on the EFSM reprofiling (where QMV is used) rather than the EFSF (where Germany has a veto).

    Based on the previous positive comments of the Portugese FinMin I would say that at least the EFSM reprofiling is probable. On the EFSF front, Schauble is likely to come under real pressure to acknowledge that his position is nonsense. There is still about €5bn of EFSF loans not yet distributed to Ireland, so it is possible that there is an agreement that this remaining amount will be issued as long-term loans, with the short-term left untouched, however I still think it likely that the pre 2020 maturities will be extended, since it makes re-entering the markets easier, not harder, for Ireland – which will in turn allow the “Irish success story” to be used to validate the current policy direction.

  23. DOCM Says:

    @ Bryan G

    I think you may have a point there!

    The interest of the link is that it returns the debate to the real world and not that occupied by academic pundits, however eminent.

    What is your view on the likely approach of the IMF, the supposed “good cop” in this thriller?

  24. Bryan G Says:

    @DOCM

    What is your view on the likely approach of the IMF, the supposed “good cop” in this thriller?

    I would say the chances of an IMF restructuring are close to zero. In my view the IMF believe that collectively the EU as a whole have the resources to solve the problem and that the IMF should progressively disengage. Becoming further entrenched would likely prolong the current gridlock rather than bring some pressure to resolve it.

  25. DOCM Says:

    @ Bryan G

    I agree!

    This stance should, hopefully, also puncture the bubble of illusions widespread in the academic world with regard to who rules the roost in different international organisations.

  26. David O'Donnell Says:

    DeConstructing Brian G

    “… allow the “Irish success story” to be used to validate the current policy direction.”

    A few criteria of “success” might be useful in interpreting the verb ‘validate’ and provide some pointers to your view of ‘current policy direction’

    Hint: criteria such as ‘unemployment rate’, ratio of toxic financial system debt/GNP, emigration levels, % children at risk of poverty/exclusion, direction of Gini coefficient, etc

  27. Bryan G Says:

    Going back to the OP, I think people generally are looking at things wrongly – instead of thinking of sensible incremental policy changes that would help, you have to go forward in time to the next crisis EU Council meeting and use that as the starting point – what will the crisis be – who will blink first and what new, if any, direction will result – what positions will be taken in advance of this crisis meeting?

    I think Karl Whelan’s paper is a good example of this – it makes perfect sense economically, yet when there was a real decision to be made – the ratification of the Fiscal Compact treaty, IIRC his opinion (like most other Irish economists) was “it’s rubbish economics, but vote for it anyway, as we’re going to need the cheap EU-subsidized money from the ESM”. Let’s call this “Fiscal Compact logic”.

    This was also what happened in Greece – at the end of the day the conditionality was accepted in order to guarantee the ongoing EU loans

    This is also what is going to happen in Italy – the fear of going back to the Lira will trump everything – Fiscal Compact logic will apply.

    From the Beppo Grillo quote above

    Italy’s problem is this set of people. And as long as the salaries and the pensions of these people are not at risk it’s fine to immobilise the country. But this won’t last long. This situation won’t last long at all.”

    I disagree with this as I think he underestimates the power of this set of people to maintain the status quo. If the crisis were addressed by devaluation or inflation, the pain would be more evenly spread over the entire population. What is happening now is that things are bimodal – there are clear winners and clear losers. It is pushing the indebted countries more in the direction of a Latin American structure rather than a Scandinavian one. Unfortunately Latin American structures can last a long time.

  28. paul quigley Says:

    @ Bryan G

    +1 and

    http://www.prudentbear.com/index.php/featuredcommentaryview?art_id=10766

  29. Paul Ferguson Says:

    @ Gavin Kostick

    I agree. To keep this system going smoothly we need to take on more debt than we repay and ever increasing student loans could become the new mortgages.

    It’s only a temporary solution though.

  30. Paul Ferguson Says:

    @ Gavin Kostick

    I agree. To keep this system going smoothly we need to take on more debt than we repay and ever increasing student loans could become the new mortgages.

    It’s only a temporary solution though.

  31. Shay Begorrah Says:

    Kevin O’Rourke is right to emphasize how much of a service Mario Monti has unintentionally done for Italy (and Europe) by being humiliatingly drubbed at the polls (i wonder what the demographics of Monti’s voters are?)

    The man from Goldman Sachs also demonstrated that even association with the Brussels/Berlin axis is politically toxic, Pier Bersani must be aware that the centre left’s lackluster performance was because of their economic policy proximity to the European Commission’s former stooge in Rome.

    Of course the crisis will have to escalate a good deal more before we see a purge of the European Institutions and either an end to the Euro or a monetary union fit for economic growth and shared prosperity.

    The Commission is certainly not planning on giving up its assault on democratic accountability quite yet:

    The BBC

    European Commission spokesman Olivier Bailly said the EU expected Italy to “honour its commitments” on debt and deficit reduction, and other structural reform, saying he understood the “concern expressed by Italian citizens”.

    “The Commission has full confidence in Italian democracy and… will work closely with the future government towards the relaunch of growth and job creation in Italy,” he said.

  32. Mickey Hickey Says:

    These events in Italy must have FG-Labour-FF quaking in their boots.

    It is written in good English.

    http://www.nakedcapitalism.com/2013/02/invia-i-pagliacci-ci-devono-essere-pagliacci-extended-play.html

  33. Michael Hennigan - Finfacts Says:

    Lots of wind and indignation but little substance.

    Italy could leave the Euro and have an exports bonanza just like the UK got from the collapse in sterling with its rounding error exports value to China.

    Italy’s unemployment level is as bad as it was in the mid 1990s and the youth unemployment crisis has been unchanged for 40 years.

    So austerity could be ended but what happens then?

    Of course most foreign observers will follow the narrative that the vote against Monti was all an anti-austerity vote.

    The aggressive anti-tax evasion campaign against the well-off/ family businesses under-declaring income would not have benefited Berlusconi? Guess how much business they do with Swiss banks?

    Shared prosperity? What is that?

    So no data from academics or amateurs?

    It could be a good thing aspiration, is worthless.

    It’s estimated that a 1% increase in German domestic spending would improve Italy’s trade balance by just over 0.02% while it would have a greater impact on economies such as the Czech Republic and Poland.

    Two-thirds of Germany’s surplus is ex-EU27.

    Increased foreign direct investment would have a bigger impact but governments cannot force companies to invest in a country.

    So to the inconvenient truth, Italy’s destiny is mainly in its own hands. Outsiders can only have a limited impact on a dysfunctional system and the resultant stunted economy.

    The rulers tend to be old and nepotism is rife in a system where family-owned businesses are significant.

    The average age on taking office of Italy’s 12 prime ministers since 1990 was over 62. 

    Italy has been electing clowns for decades and at last it has got a professional clown.

    “The big problem of the economy is a society that combines elements of the Indian caste system with that of the medieval guilds,” Enrico Letta, the PD’s (the centre-left Democratic Party) deputy leader told the Guardian in 2011. “Our watchword is social mobility, particularly for the young, who suffer most if people are co-opted into jobs instead of gaining them by fair competition.”

    Absent the euro, at least the clowns would have only themselves to blame.

    It would of course be the innocent who would suffer most and likely trump the impact of austerity.

    The attention of all the foreign observers would then turn their attention to some more riveting disaster.

  34. Bryan G Says:

    @paul quigley

    http://www.prudentbear.com/index.php/featuredcommentaryview?art_id=10766

    A good article but I think the characteristics of an eventual debt mutualization via the ECB and via the ESM would be quite different, whereas the author tends to lump them together. The former brings the whole issue of “does negative equity in a central bank’s balance sheet matter” into play and would have less direct impact on core countries than an explicit fiscal transfer resulting from an ESM default. It’s the difference between solving the problem by printing new money vs solving the problem by moving around existing money.

    With the announcement of the OMT program, and the capping of the ESM at €500bn I think the likely direction is clear. All that talk about increasing the “firepower” of the ESM via leverage/insurance etc. has stopped. The question then becomes one of whether the Bundesbank can get the OMT stopped via legal means, but I think it unlikely given the thinking behind the Pringle judgement.

    When push comes to shove, there’s going to be a deal on the table which Italy can accept subject to strict conditions, or reject and rely purely on capital market funding and deal with the consequences of that. Italy wanted the Euro much more than Germany ever did, so I’d be surprised if they chose the latter option. They might get a few token gestures towards a “growth agenda” but there won’t be much substance there.

  35. paul quigley Says:

    @ Bryan G

    Very clear thanks. Yes that’s the direction in which core country politics continues to push events. It will work in the way you say, but give ris, in turn to unpredictable and hazardous changes in the Italian political landscape.

    As Eurointelligence has it this morning, (sorry can’t link):

    ‘The German established is shocked beyond belief –

    Not in the Casablanca way, but for real. The German crisis-exit narrative has been so unbelievably complacent – everyone pursuing austerity, then happiness forever – that these elections came as a total shock. Angela Merkel did not say anything (quite wisely, we think). Frankfurter Allgemeine quotes leading German economists and business representatives to devastating effect. Lars Feld, a member of the German Council of Economic Advisers, predicted that investors will withdraw money from Italy, which will result in a rise in risk spreads. The Italian economy will then not be able to get out of recession. And that raises, once again, question about Italy’s debt sustainability. The eurozone crisis will have returned with full force. The head of Germany’s export association is quoted as saying that Germany should now contemplate the possibility of what he euphemistically called “a modified eurozone”. ‘

  36. grumpy Says:

    “European Commission spokesman Olivier Bailly said the EU expected Italy to “honour its commitments” on debt and deficit reduction, and other structural reform”

    Is anyone else reminded of the Daleks?

  37. paul quigley Says:

    Political confidence is as central as financial markets confidence, because no markets cannot function without states. The notion of ‘chanels of contagion’ applies to political counterparties too.

  38. Carson Says:

    A question for Karl Whelan or anyone else who might like to take it up:

    What is the best way for the Irish government to promote growth in the 2013 and 2014 budgets? Given that we have entered 2013 with the debt to GDP ratio ahead of target and that interest savings of approximately €1 billion have been achieved on the PNs for the next two years, there is some scope to act.

    Should the government increase capital spend, cut income taxes, something else? Assuming the government chooses to put that €1 billion to work to promote growth, what is the best bang for its buck?

  39. Eureka Says:

    And then there’s Greece:
    http://m.spiegel.de/international/europe/a-885723.html

    Still ticking away. Now, think for a minute. The peasants are revolting. Do you:
    A) Continue the softly softly approach (as you see it) or
    B) Do you make an example of someone?

    They must be very tempted to go for option B!

  40. Shay Begorrah Says:

    @Michael Hennigan

    So to the inconvenient truth, Italy’s destiny is mainly in its own hands.

    I am trying to get some sense of why you think the rejection of Monti and austerity is a bad thing?

    As best I can tell it is that Italy has had years of serial policy failure, therefore it should stick with a failed policy chosen abroad. This does not seem very hopeful.

    Also, this is the first time I have seen Google’s Eurostat data on unemployment, very nice:

    https://www.google.ie/publicdata/explore?ds=z8o7pt6rd5uqa6_&met_y=unemployment_rate&idim=country:it&fdim_y=seasonality:sa&dl=en&hl=en&q=italian%20unemployment#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:sa&scale_y=lin&ind_y=false&rdim=country_group&idim=country:it:ie&ifdim=country_group&hl=en_US&dl=en&ind=false

  41. grumpy Says:

    @eureka

    Option B!

    You do realise that with the Daleks there are only two options:

    A is “YOU WILL OBEY!!!”

    B is “EXTERMINATE!!!!!”

    You really think it might be B?!

  42. Joseph Ryan Says:

    @Eureka
    “They must be very tempted to go for option B!”

    The members of the ‘They’ club are rapidly reducing and those that remain must be getting very jittery, if they are half-normal!

  43. seafóid Says:

    Austerity is a bit like the Irish rugby team . We are looking at a lost decade post 2009 both with the local oval ball and in the European economic sense.

    http://www.guardian.co.uk/commentisfree/2013/feb/26/george-osborne-has-not-just-failed

    George Osborne hasn’t just failed – this is an economic disaster
    Coalition austerity has delivered depression and a lost decade. Labour has to avoid locking itself into more of the same

  44. seafóid Says:

    The austerians seem to have lost Italy

    http://www.nybooks.com/articles/archives/2013/mar/07/warrior-petraeus/

    The Centurions, by Jean Lartéguy, was a very different sort of book. The main characters were French officers captured at Dien Bien Phu. History records that their months in a jungle prison camp were horrific; at least half died. But Lartéguy focuses on a different matter—what the French officers learned from the Vietminh who had defeated them. The French higher-ups were not much interested in the Vietminh’s approach to war. Like the Americans, they believed that firepower, mobility, and professional soldiering would beat any ragtag army of guerrillas. But Pierre Raspéguy, the hero of The Centurions if there is one, listened to the Vietminh in Camp One and absorbed their rule number one. “You’ve got to have the people on your side,” he said, “if you want to win a war.”

  45. Michael Hennigan - Finfacts Says:

    @ Shay Begorrah

    My point is that it’s only Italians who can sort out their own problems.

    Given the durability of Berlusconi’s base, it was unlikely that Monti would anyway have won enough right of centre support to claim the premiership.

    Italy paid 0.66% more today on sale of 10 year debt compared with a month ago.

    Did not Bersani say that he wouldn’t reverse Monti’s cuts or something like that?

  46. Eureka Says:

    Austerians or financialists?
    As long as they support massive pay and bonuses for bankers to be paid for through the sacrifice of the masses I think financialist suits better

  47. seafóid Says:

    Well known Trotsky-Leninist Martin Wolf on “The sad record of fiscal austerity”

    http://www.ft.com/intl/cms/s/0/73219452-7f49-11e2-89ed-00144feabdc0.html

  48. seafóid Says:

    “My point is that it’s only Italians who can sort out their own problems”.

    The EZ is more of a “ni neart go cur le chéile” issue, Michael . Beggar my neighbour won’t work. Sinn féin won’t work. The Italians have work to do but it has to be in the context of a pan European drive out of the mess.

    It is still in large part a problem of inter-European imbalances.

  49. Shay Begorrah Says:

    One way in which the European Union was genuinely unlucky with the global financial crisis was having Olli Rehn as the Commissioner for Reactionary Economic Policy Implementation rather than someone with a more post-diluvian view on economic policy. It also illustrates the dangerous way in which unelected officials wield political power for five years at a time in the EU regardless of how poor their performance is.

    The comments thread in this Jonathan Portes “Not the Treasury View” blog post gives a little detail on why having this particular Finn in a position of power during a financial crisis was likely to involve much unnecessary pain.

    He has form.

  50. seafóid Says:

    @ Shay

    It’s bigger than Olli. He seems to have been a passenger much of the time and didn’t drive the whole process. Someday maybe we will have an intellectual history of the crisis which could explain why certain decisions were made and what it took to get to plan B.

  51. seafóid Says:

    Martin Wolf’s money shot

    “By adopting OMT earlier, the ECB could have prevented the panic that drove the spreads that justified the austerity. It did not do so. Tens of millions of people are suffering unnecessary hardship. It is tragic.”

  52. Tull Mcadoo Says:

    Seafoid,
    Indeed. Back in the 1980s, when the EU was in recession, the peripherals including the French urged the Germans to adopt a cooperative growth strategy, which loosely translated meant putting their balance sheet on the line to bail the rest of the EC out. They did not do it then and I doubt they will accede to it now. That recession ended with a global economic recovery and a raft of devaluations by the now Peripherals.

    If KW and KOR proposals for a fiscal stimulus do not happen, it seems to me that devaluation may be the other escape valve. Leaving the euro (and the EU) may be the only way out. Of course the Germans might change their minds and give us a cheque or a write off.

  53. David O'Donnell Says:

    Europe Frets over Italy: ‘Two Clowns Won the Election’

    Global investors have made it clear that the Italian election result is not to their liking, with Moody’s even threatening a rating downgrade. European politicians are also unimpressed and fear the euro crisis may soon return. Some comments have been surprisingly undiplomatic.

    “We finished first, without winning.” That’s how Democratic Party head Pier Luigi Bersani on Tuesday summed up the results of the Italian election, one which left his center-left camp with an edge in parliament but without sufficient leverage in the Senate. What he didn’t say is that the biggest loser ultimately might not be in Italy at all. The biggest loser could be Europe and its efforts to finally emerge from years of crisis.

    http://www.spiegel.de/international/europe/european-union-leaders-worry-that-italian-election-may-spur-crisis-a-885816.html

  54. David O'Donnell Says:

    Stalling for Time

    Greek Reform Effort Slows to a Crawl

    The troika is back in Athens this week and with all eyes on Italy, Greece feels it has little to fear. But important reforms have stalled and the government’s belt-tightening efforts seem paralyzed. Politicians are playing for time and hoping for fresh money.

    [...] But such complacency seems unfounded given the situation on the ground. The Greek economy remains mired in recession, and is expected to contract by another 4.5 percent of gross domestic product in 2013. The latest statistics show that 27 percent of Greeks are unemployed, and among those under the age of 24, that figure is 62 percent. Many are already fearful of the “Bulgarian syndrome,” a reference to the street violence and anti-austerity protests that have shaken the government in Greece’s northern neighbor.

    Furthermore, it has become increasingly clear that the government in Athens is failing to implement promised reforms:

    http://www.spiegel.de/international/europe/reforms-stall-in-athens-as-troika-considers-next-aid-tranche-for-greece-a-885723.html

  55. Eureka Says:

    The German commentary suggests that their tendency for superiority group-think is as it was 70 years ago.
    There’s another Spiegel article comparing the Italian electorate to insolent children.
    The commentary suggests a lack of capacity to empathise and a tendency to dismiss rather than to serk to understand.
    The group think which leads to economic efficiency is the one that leads to the destruction of Europe over and over again.
    There is a reason societies have not evolved to be maximally competitive and efficient – it’s because it’s the pointless waste of times that give life it’s true meaning

  56. David O'Donnell Says:

    German Press Review; World from Berlin: ‘Europe Can’t Afford an Ungovernable Italy’
    … hints of a Plan B

    European leaders are nervous Rome might flout economic reforms and reignite the euro crisis as a result of the political stalemate which emerged from Italian elections. German commentators suggest that now might be a good time to consider policy changes on both sides.

    http://www.spiegel.de/international/europe/german-press-urges-italian-politicians-to-think-of-euro-zone-a-885889.html

  57. Ernie Ball Says:

    The commentary suggests a lack of capacity to empathise and a tendency to dismiss rather than to seek to understand.

    Among the Germans? Never!

  58. Michael Hennigan - Finfacts Says:

    @ seafóid

    It is still in large part a problem of inter-European imbalances.

    The big problem is that the private cross-border capital flows have plunged and this is in trillions — which not even Germany can cover.

    Eurozone banks have reduced cross-border lending and other claims by $3.7tn since 2007, and central banks now account for more than 50% of capital flows within the region.

    These private sector flows are not going to resume.

    Foreign direct investment continues and individual countries have to fight for that.

    Italy has a strong primary surplus and low household debt.

  59. seafóid Says:

    @ MH

    Demand is on the floor. Animal spirits are in the shed.
    Banks are addicted to CB funding.

    But if growth returns things will look different. It won’t be like 2007 but it will be a big improvement on the current situation.
    Expecting countries to sort out their own problems on their own is not going to fly. The other thing is that they need time to sort things out.

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