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. 

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.

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". (http://pas.sagepub.com.gate2.library.lse.ac.uk/content/34/4/463.full.pdf+html)
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.

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.

The "auto blu" scandal

The Italian government is expensive to maintain. Way too expensive. In a recent article on the Corriere della Sera, one of Italy's main newspapers, a research showed that there are 72,000 ministerial cars in use by politicians of all ranks. In Italy, these are known as "auto blu" and in recent years have come to symbolize the absurd privileges politicians give themselves using tax payer's money. The article went on to do a comparative study with the UK and discovered that there are only 296 "auto blu" available to British politicians!!Continuing with this embarassing study, the article calculated that the overall maintenance and driver costs for the British government amounted to £7 million. In Italy? Around 1,000,000,000 Euros.

How can this be? The answer is simple: The Italian Government is not an instution whose goal is to serve the people. Rather, it is a mechanism through which favours can be dispersed, rents and bribes can be obtained and personal interests pursued. It serves the interests of a few elites to such an obvious degree that I struggle to find parallels with any other Western democracy, with the exception of Greece.

At a time when the government is asking the people to make sacrifices and "roll up their sleeves" to survive the current crisis, the government should start by setting an example and cutting absurd spending. But then again, that would mean working towards the public good, and I doubt most politicians can remember what that means.

Hi everyone!Welcome to our blog!
We set out to create this blog with very clear intention in mind: to illustrate the situation in Italy in its post-Berlusconi phase. A new government has been enacted with the arduous mission of saving it from the brink of catastrophe that Berlusconi and others before him have led the country into. In this blog, with the help of major newspapers and media sources, we aim to outline the failures, hipocracy and negligence of Berlusconismo and follow the situation in Italy as it unravels. We aim to post new articles on a weekly basis and keep you informed, offer stimulating topics of arguement offer what we believe are some solutions to Italy's woes.