Wednesday, 6 February 2013

Always darkest before the dawn? The uncertainty of the new Italian political landscape

When Berlusconi stepped down as PM in favour of Mario Monti, there were scenes of jubilant celebration throughout Italy. In front of Parliament, hordes of citizens uncorked bottles of champagne in a symbolic gesture of celebration.
One year on, the partys have died down. The Monti government's insistence on pushing austerity have lost his government favour with young graduates and the unemployed. His willingness to cut spending has not translated into the political sphere: The costs of maintaining politicians in Italy continues to be the highest in Europe, and highly criticized privileges and golden pensions have not been seriously tackled. Albeit all the statements he made when first appointed PM, the costs of maintaining our political class has not significantly diminished (Auto blu scandal link).
His ministers have done nothing to help his cause. Initially gaining wide consensus from the electorate, they have managed to tarnish their reputations and their approval ratings through constant indecision and poorly planned actions. Passera (Minister for Economic Development) has been seen as a pawn of the banking elite, pushing favourable legislation in favour of Unicredit and others. Interior Minister Cancellieri was heavily criticized in November for not adequately punishing policemen who attacked peaceful protestors last year in Rome. Basic requests, which include the the mandatory police badge numbers fell on deaf ears and further worsened her image in the eyes of younger generations. Elsa Fornero (Minister of Labour) added insult to injury to a nation with 34% youth unemplyoment when she claimed that youngsters must not complain when they are laid off but rather see it as an opportunity to try their hand at something new.
The unpopularity of Monti's ministers dont seem to have rubbed of on Monti himself. A report by Ipr Marketing shows how the approval ratings for the Monti government have fallen from 58 % in November 2011 to the current 32 %. Monti's personal approval rating has only dropped by 4% from November 2011, from 52 to 48 %.
These approval ratings give plausability to rumours that Monti is set to remain PM in case the national elections in 2013 dont give any party a clear majority. The logic behind this reasoning is that without a clear majority, any party will find it incredibly difficult to govern and continue passing reforms in line with the EU austerity guidelines. This uncertainty would further destabalize the markets and cause the Spread (difference between Italian and German treasury bonds) to increase back to pre-Monti levels.
Such reasoning would make sense in the current Italian political landscape which has been redrawn after the demise of Berlusconi. The Cavaliere's party, PDL, is struggling to find a charismatic successor that can capture the masses' imagination in the same way Berlusconi did. Furthermore, they are uinevitably bound to loose a mountain of votes even from hard core supporters who are disgusted with Berlusconi;s scandals and view him as at least partly responsible for the dire situation Italy finds itself. His successor will have to be skillful in uniting a party in chaos while distancing himself from the Cavaliere. At the moment, there is no such candidate. As a result, many votes are likely to be dispersed amongst minor center-right parties.
The main opposition party, the PD, is in better conditions but with multiple problems of their own. They are currently in the process of holding primaries and as it stands the current party secretary, Bersani, is set to be their front runner in the national elections. He has a narrow margin over the rising superstar of Italian politics and current mayor of Florence Matteo Renzi. Bersani will undoubtably capture the elderly vote, but will also alienate younger generations who see him as a member of the old political cast and would have preferred a more youthful option such as Renzi.
Moving away from the centrist parties, the "Movimento 5 Stelle" (M5S) led by popular comedian and political satirist Beppe Grillo is bound to pick up the majority of the radical votes. They are also likely to pick up votes from youngsters who have difficulty relating to Bersani or other elderly politicians, and see this as a chance to upset the political establishment.
Given these considerations, it is unlikely that the threshold to obtain a relative majority will be reached. The landscape is uncertain, with the only absolute truth being that the PDL will lose their privilieged position in Italian politics
A second Monti term thus seems to be on the horizon, to the tiepid dissapointment of Italians and outright joy of EU leaders.

Wednesday, 27 June 2012

What ails the Serie A? Explaining the downward spiral of Italy's top league

Italian football is going through its lowest point in memorable history, with apparently no end in sight. From being the undisputed number one league in Europe in the 80's and 90's, it now lies below the Bundesliga and far behind both La Liga and the Premiership in the UEFA Ranking. How did it come to this? The politics of Italian football are complex beyond belief. But they mirror the general situation of the country, and understanding the Serie A's downfall gives us some insight into understanding some of the problems that plague the country more generally. I will attempt to briefly outline the main factors that are keeping the Serie A back, and why the situation seems unable to change.

Lack of privately owned stadiums. Juventus is currently the only team in the Serie A that owns and operates their own stadium, which was completed in September 2011. Ever since its construction, the media and experts alike have been quick to praise Juve for taking this "innovative" step. Having a privately owned stadium is destined to give Juve a massive competitive advantage over its rivals for years to come. It means that Juve retains all the profits from their stadium and no longer have to pay rent to the municipality to play there. Furthermore, Juve can reap the profits from the shopping mall in the stadium which is open 7 days a week, thus diversifying their revenue base. Other Italian stadiums are open only on match days, and have no shopping malls or other revenue-generating venues attached. Given all these benefits, why haven't other teams followed the root paved by Juventus?

The answer lies in the many obstacles and interests involved that prevent the construction of new stadiums. The municipalities own and operate the stadiums, and rent them to teams for a relatively large sum. They would stand to lose one of their biggest revenue streams if privately owned stadiums became the norm. As a result, they use their resources to lobby the government to ensure that legislation that would favour the construction of new stadiums is blocked. Such a law has been the subject of debate in the Senate for over 3 years(!), grounded by the many interests and bureaucracy which seek to keep it at bay. Without such a law, building a stadium from scratch to finish is estimated to take around 8-10 years due to the bureaucratic obstacles involved in obtaining permits and licenses. It took Juve around 8 years, from when they first came up with the idea in 2003 to the inauguration ceremony in September 2011.
Such an estimate is only hypothetical since all the teams so far have seen their requests for building permits denied by the very municipalities. The consequence of this is that not only does it prevent new stadiums from being built, but is also makes it so the municipalities have no incentive to renew and modernise the existing ones. By controlling the licensing of permits, they can make it so no new stadiums are built. This forces teams to play in the existing, municipality-owned ones. Since the teams are only renters, they cannot renew or modernise the stadiums. And since the municipalities control the only available stadiums, they have no incentive to modernise because the teams are forced to play there whether they like it or not. This helps explain the sorry state of Italian stadiums, some completely dilapidated and barely functional. The Sant' Elia Stadium of Cagliari is a telling example: Built in 1970, the stadium received little upkeep work in the course of its existence until it was finally declared a risk hazard in 2012, and Cagliari Calcio were forced to migrate to Trieste for their home games.

The Stadio Sant'Elia of Cagliari: Not the finest example of Italian architecture

The Juventus case is an exception as it was only possible due to Torino hosting the 2006 Winter Olympics. The municipality granted Torino Fc the use of the newly renovated Stadio Comunale and gave sole ownership of the Stadio Delle Alpi (now Juventus Stadium) to Juve. Furthermore, indiscretions have it that Juve used its political influence to push the city council to sell them the stadium at a knock-down price (around 1 Million Euros). This case is therefore an exception because not every Italian city can host an international sporting event, and not every Italian team has the political and economic might of Juventus FC.

Lack of sustainable business plans. Italian teams dominated in the 80's and 90's because they were the richest teams. Berlusconi in his hayday could outspend just about anybody, and Moratti at Inter and the Agnelli at Juve were close behind. During these golden years, they should have focused on developing a sustainable business plan and investing heavily in merchandising to ensure the teams could finance themselves and not depend on their owners to cover the debts. Unfortunately, they proved to be shortsighted and spent minimal effort in doing this. At the same time, top European teams such as Bayern and Real were investing heavily in promoting their brand overseas and began to reap the benefits of this.
In 2011, Real recorded profits of € 480 million, up from € 192 million in 2002. AC Milan, in comparison, recorded profits of €240 in 2011, up from €200 million in 2002. Inter and Roma all show similar trends, with profits increasing only marginally during this time period. (Juve is a slightly different case as the Calciopoli scandal eroded their business attractiveness). The comparison is embarrassing, and shows how Milan and Italian teams in general have overlooked the business aspect, relying on wealthy owners to keep them competitive. Once the owners closed the faucets, the glory days ended.

High levels of corruption which discourage foreign investment into the Serie A. Italy is synonymous with corruption, and this effects the Serie A as well. Wealthy sheikhs and Russian petrol barons are unwilling to invest in a league riddled with corruption and has a reputation for match fixing and bribery. Instead, they have turned to "cleaner" pastures such as the Premier League, Liga, and even the Ligue 1.
The Serie A is also a hard league to invest in, as historic oweners such as Moratti and Berlusconi are unwilling to give up even a minority stake in their clubs to outsiders. This parochialism has made it so AC Milan is struggling to cvoer its debts, while teams with no history such as PSG and Man City can pull their weight on the transfer market fueled by petrodollars.

Little investment in youth systems Italy truly is a country for old men, and the Serie A is no different. Large clubs invest relatively little in their youth academies, and rarely promote players from the youth team to the senior squad. They have historically preferred to invest in big names or in foreigners (especially from Brazil and Argentina). The Inter lineup resembles that of the Argentinian national team, and AC Milan consistently snubs Italian youngsters in favour of burnt out Brazilian stars (Ronaldinho, Cafu and Ronaldo dicit).

I am, however, confident that there are signs that some change could occur in the near future. The aforementioned Stadium Law, after years of delay, finally seems to be on the verge of being approved in the Senate. Club owners finally seem to have realised the importance of privately owned stadiums and have themselves organised to lobby the government. People like Moratti, who years ago undermined the importance of a new stadium are now coming up with projects of their own.

Juve's brand new stadium inaugurated in September 2011

The crisis of Italian football is also forcing teams to invest in their youth academies and promote youngsters to the first team at a rate which was unknown in the last decade. Unable to sign big names, clubs must now rely on their youth academies to stay competitive. This has always been the strategy of the Bundesliga, and it has allowed the German national team to benefit from this wide array of homegrown talents and boast one of the consistently best national teams in the world. England, by comparison, relies heavily on importing top players from abroad which undoubtedly makes the Premier League the world's best, but leaves the national team lacking in talent and with a disappointing track record in international competitions.
The takeover of AS Roma by an American consortium is also a crucial step for the rebirth of the Serie A. They bring with them not only much needed cash, but also new ideas and a new take on how to run a sports club. Italian teams could do a lot worse than imitate the branding and commercial strategies of American sports teams.
The problems of the Serie A reflect the problems the country as a whole faces: overbureacratization, narrow special interests, corruption, and slow generational turnover. These are enormous challenges to overcome, but there are signs that something is changing, starting with Juventus. The Serie A is now fighting for its survival as a league. Either radical change occurs, or it will permanently fall into oblivion and be of no use to anyone.

Thursday, 3 May 2012

Corruption?What the EU can do

Corruption is everywhere in Italy. Rarely a day goes by that one does not hear about a new scandal involving some politician who pocketed a kickback in exchange for rigging a lucrative construction contract. Every time a scandal breaks out, politicians rolling over each other to condemn the people involved, claiming that they are “bad apples” and portraying the image that it is just a few isolated cases in Southern Italy, mainly involving blue collar criminals. If this was the case, as it is in countries such as France, Germany, the UK and Spain, corruption and organized crime would play a marginal role in the societal structure. In Italy, it is an endemic problem that has played a central role in its history. But allow me to start from the beginning.
In his brilliant book, Il Ritorno del Principe (The Return of the Prince), Roberto Scarpinato points to Italy’s roots to explain the phenomenon of corruption and mafia. He claims that the basis of political and morale thought in Italy were centred on the ideals of Machiavelli’s The Prince, where the ends justify the means and political power is to be internalized for personal gain and aggrandizement. Rulers of the city states, from Cesare Borgia to Lorenzo de Medici and especially the Popes (pretty much all of them, but especially Alessandro IV) embodied this ideal. Actions that we would nowadays consider nepotistic, acts of patronage, or outright criminal where the norm. While other European states experienced a Cultural Revolution where ideas of englightment and democracy spread, Italy remained dominated by despotic rulers from the Pope in Rome to the various feuding princes in the North. Italy’s historical legacy as a colonized territory with Bourbon kings ruling Naples and its surrounding territories further worsened the situation.
To add to a desperate picture, the “unification” was seen as an invasion of the Piemontesi of Southern lands. They levied higher taxes, treated the Southerners savagely, and imposed that they could only buy products produced by the Piemontesi at protectionist prices. In essence, they were treated like an occupied territory. Any activity which was in defiance of the occupiers, such as tax evasion, was seen as patriotic and morally acceptable.
The mafia grew out of this context. The Sicilian mafia, arguably the most famous, was created not be roughnecks and violent criminals, but by the elite of Sicilian society who created a system where corrupt activity became institutionalized in the very structure of society. The ideals of meritocracy and the free market were supplanted to the principles of nepotism and crony capitalism. Magistrates and politicians who did not follow this line were either excluded (…..) or murdered (Falcone, Borsellino, etc)
What the EU can do
The EU can serve as a guardian against this epidemic. It has in the past. The Maastricht Treaty excluded Italy from the Community due to its spiralling debt, which had reached a peak of 118% of the GDP. To be able to re-join, government officials had to massively reduce spending and cut “inefficient” programs that the state could no longer support. It had become common practice for the state to use the mechanism of inflation to “compensate” for corrupt practices. Under the new EU regime, this policy was no longer an option.
Chancellor Kohl of Germany was another advocate of stronger debt control and anti-mafia measures. Kohl was inequivocable when he stated that Italy should only be able to join the then-newly formed EU if they passed more stringent anti-mafia legislation. His fear was grounded in the thought that a single market and currency would make it infinitely easier for laundered money to travel around Europe, virtually without leaving traces.
States and people grow when they are exposed to foreign influence and ideals which then become integrated into their own. Not all are good, but this process is necessary for a society to gain new insights and new customs. For Italy, this opportunity presents itself in the form of the EU, for better or worse. Strict impositions on national debt and anti-mafia legislation are features in which the EU can be a powerful ally. In the EU, honest, hard-working Italians can find a powerful ally which shares the same goals, albeit for different reasons
Italy’s history is different from that of other Western European States. The imperfect unification and rememants of the Wild West city state mentality is still embedded in the ruling class who have been unable to progress socially as the ruling elite in other countries have. Italy needs an ally for this fight which has crippled the whole Southern portion and left more dead than…. The EU can be that ally. They have played an important role in the past and can do it again.

Monday, 26 December 2011

The EU Austerity Policy and Why it Won't Work

By Roberto Marinucci

Italy is going through the second austerity package in 4 months- Greece has had countless of those, France has done some light versions, but ultimately the question is: will it work? Unfortunately, the answer is no. No matter how many austerity moves will be done, there is no way that any of these is going to take the EU out of the crisis. There will be more social unrest, recession and potentially depression in several countries and an acceleration of wealth moving out of EU. There is consensus that ,in fact, these tough measures will only have a positive impact if they are followed by growth stimulus. The conventional wisdom is that EU needs to fix the debt before it tackles growth. For example, Italy is going through a “tears and blood” budget, where the Government is trying to collect some €30bn to be able to use part to cut the public debt and part to fund growth. Unfortunately, the odds are that after some relief to the spread – behind the brief market celebration at the Italian plan—the spread will be back up and the money originally foreseen for the growth will be used to cover higher interest rates. So, a second budget correction will be necessary, and so it goes.

This situation reminds me of the “strategy” of many companies when they are in a bad financial situation: to soften the blow with Wall Street, they announce massive layoffs. For a week Wall Street rewards them with higher stock value, but ultimately the analysts realize that these measures are not sufficient in absence of a credible plan to grow sales profitably. No company has ever become rich only through cost savings, and no country has ever grown out of austerity packages.

The critical issue for EU countries, particularly those at the periphery, is how to create the conditions for growth. Here I just would like to offer a few considerations:
  • We need to eliminate the conditions to speculate on EU interest rates. Currently, the swing in interest rates for countries like Italy is similar to the fluctuations of stocks. This cannot be right. A country needs to have stable access to credit, and to have a Central Bank which could use its ability to create liquidity as a way to balance the effect of different forces. So  far, the ECB can only be the defence against inflation. But it can’t intervene to buy countries’ debt, like all the other central banks, like in US, China, Britain etc. This leaves weaker countries totally unprotected from speculation. The first condition for growth is to give the power to the ECB to buy public debt at 1% rate.
  • The above will also have the effect of easing liquidity. The lack of growth in peripheral countries is also driven by the credit crunch.
  • Countries need to foresee a significant investment in infrastructures. This is a major opportunity to modernize Europe and to increase its competitiveness within the global market.
  •  Last but not least, the EU needs to exercise a central drive and control on at least three major areas. The first is to use a central commission to control that the public funds are well spent. Unfortunately, we have witnessed in the past the bad use of money in several countries, and the EU needs to ensure that this won’t happen again. This is particularly important in countries with high level of corruption. The second is to create a pan-EU policy on liberalizations and common ground for competition law. The third is to have the same fiscal policy. The fiscal rules needs to be much simpler than today but need to apply for the whole of the EU.

Unfortunately, right now, Germany and France are trying to exercise their leadership only on the budget deficit, no matter how this is obtained, and are missing the much bigger picture. We are missing an opportunity to turn this crisis into what EU was meant to be:  the drive towards the United States of Europe. 

Sunday, 4 December 2011

The Importance of Euro Devaluation (and Good Politics)

By Roberto Marinucci

Since the official start of the global economy in late 80’s, we have witnessed the rise and burst of several bubbles—in fact bubbles have been a component of globalisation. The new economy and the dot.coms, then the commodities, the real estate and finally the currency markets. Globalisation and the digital revolution have made available for banks and other investors huge amount of money to be moved quickly. So, banks (among others) stopped doing the traditional banking job and became speculators. The value of companies, commodities, etc. was not anymore linked to the normal process of demand and supply but to broker intervention. This had a dramatic impact on the (economic) life. Companies had to deal with this phenomenon and so did everybody else. Imagine oil moving in the space of a few years from $80 to $140 and back to $60 and then to $100, what impact might have had on company’s pricing policies, on inflation in general and on consumers.

The latest addition to the speculation chain was the currency bubble. And, the Euro was a relatively easy target. The European currency in its conception was meant to be pegged to the US Dollar, but after a slow start, it went well beyond the parity hovering above 1.20/1.30 with peaks at 1.5 before the 2008 crisis. The Euro was not created to be devalued: the role of the ECB, which had to only combat inflation with no possibility to print money, the German primacy in influencing the EU monetary policy (whose cultural aversion to inflation is deeply rooted), the lack of political integration among Member States, and the relatively high interests compared to USA and Japan made the Euro an attractive currency to create a bubble. Another indicator that the bubble was in development was that despite the Euro revaluation, the economy in the EU has been growing less than in the US and Asia.

Devaluation can be good. When you are in the midst of a bubble, it can help cool down markets and reach a better equilibrium. It can also help the economy by making your exports more competitive. This is what it has done in countries like China, Switzerland, and US. These are all very respectable States. Today, in the middle of the Euro crisis, we must devalue- it’s only a question of when. The discussion to give power to the ECB to print money to buy the member States’ debt at low interest rates is exactly that: devaluation, using a convoluted language. The austerity measures to reduce the debt are going to be useless, as long as the money will come from the market, because the market in one day can send interest rates soaring through the roof and  render all the sacrifices to no avail, swamped by the higher rates.

There are many arguments against devaluation, and in normal circumstances are valid. One is that it creates inflation. This is true. But there are a few considerations to be made in these crises circumstances. First, the alternative of gigantic austerity, high interest rates and collapse of the banking system are even less desirable circumstances . Said another way, the money that inflation is going to take from people will be generally less than  the combination of taxes, high rates to be paid to banks for mortgages and credit and lower levels of public services. Second, we could argue that the impact of the inflation will not be huge considering that EU is the largest trading area in the world, and that a large portion of EU commerce comes from within EU. Third, it will send the strongest possible signal to the markets that new bubbles will be faced, with injections of money at low interest rates—and that is probably most scary for them.

There is an ideology that says that Italy, Greece and Spain deserve all this because of their huge public debt. I believe that it’s only part of the truth. As an Italian, I believe that the problem for us is not just the debt-however big—as after all the US also has a huge debt (as do so many other countries). Our problem is that we squandered the money, as instead of building infrastructures, investing in education and in the health system we have created a mammoth bureaucracy that eats the country’s wealth with unproductive expenses. So, Italy deserves the bad things that are affecting it, but for different reasons, and can never fix the debt without growth allowing to redeploy people in the public service to other more productive sectors. This won’t happen with austerity packages alone. And that will require access to low cost borrowings, … and good politics (for once) in Italy.

Wednesday, 30 November 2011

Italy's window of opportunity

The fall of a democratically elected government and its substitution by a technocratic, unelected one presents a huge opportunity for Italy. True, it was not chosen by the people and true, it is pretty much at the beck and call of the European Central Bank. But this could be a unique opportunity to pass much needed reforms which have failed to go through during the Berlusconi and Prodi governments. But it is also a situation which has an interesting  historical antecedent.
In the 1990's, Italy underwent massive privatization and economic reforms which boosted overall competitiveness, achieved monetary stability and massively reduced corruption following the Mani Pulite Scandal. Inefficient state-owned firms such as Telecom Italia were privatized.
These reforms were not the ingenious idea of some political party. They were pushed through by the European Union so as to ensure Italy met the criteria necessary to join the European Monetary Union. Reforms came to a halt and were in part reversed with Berlusconi because liberalization reforms were seen to undermine his personal business monopoly as well as eliminate a highy profitable source of rent-seeking. Cioffi and Hopner summarize this point exquistly when they claim that "the right-wing Berlusconi government appeared to embrace and embody the incestuous alliances and interrelationships between business and political elites". (
As a result, Italy has sat stagnant for close to 20 years. Italian GDP growth has averaged around 0.3% over the last 10 years. And patronage, inefficient monopolies and unemployment have run rampant once again.
We now have a unique opportunity to push through much needed reforms because of the external influence of the EU and the bipartisan political climate which has developed in Italy as a result of the crises. This opportunity cannot go wasted and Mr Monti appears to understand this. Of course, even if these reforms are effective, they must be safeguarded against future bastardization. We cannot return to business as usual once the economic situation improves or when Mr Monti's mandate ends in 2013. If history has taught us anything, it is that vigilance on behalf of a citizenry cannot only take place in times of crises. Repeating the mistakes of the past is simply not an option
To conclude, this article does not want to suggest that all the reforms that Monti has proposed will be effective. Some, like the ICI, are dubiously effective at best. But the general climate is moving in the right direction. There is a need to reform the deeply flawed economic system which has proven to not work in the interest of the Italian people. Monti can push forward unpopular pension, trade union and cost cutting reforms using scare tactics. This is obviously not an ideal situation, but in Italy sometimes its the best you can hope for.

Sunday, 27 November 2011

What are Eurobonds and why are they so important?

In the last couple of days, the term "Eurobond" is one that has been bounced around continuosly by the media. The news is that Germany opposes the issuing of Eurobonds, while France and (especially) Italy are favourable to them. But just what are they?
A eurobond is a debt obbligation which is issued by the Eurozone as a whole rather than from individual countries. Germany opposes the issuing of Eurobonds, despite the fact many economists say it is the most effective way to resolve the eurozone's financial troubles. The German finance minister, Woflgang Schauble, claims that eurobonds would not solve Europe's problems but rather divert attention from enacting real reforms in Europe's troubled economies.
In this, I agree with Schauble in that the problems affecting countries like Italy and Greece cannot be solved in the long run by joint bond sales. Structural problems led these countries to the brink, along with mismanagment and enormous levels of corruption. Eurobonds might well relieve market pressures for the moment, but it would allow also relieve pressures on these goverments to enact reforms and bring about long term change. At a time when Mario Monti's economic reforms are picking up consensus all over Europe as well as the markets (slowly) regaining some lost faith in Italy, it seems that Eurobonds might distract and ultimately lead Italy and other countries to commit the same mistake that brought them into the crisis in the first place: Value short term fixes rather than long term solutions.