Les Jeux Sont Faits

Yes gentle readers, les jeux sont faits. Italy has entered the election season, and this time the game is for real. The outcome of this election, and the decisions which are subsequently taken will be important not just for Italy, but for the whole EU, and the stakes are not small ones: the whole European process is in play. (This post needs to be read in conjunction with the last one from Alex, and contsitutes the start of our campaign: Italian elections 2006. Incidentally, since none of us are in Italy, and since I for one tend to see everything Italian through a Spanish filter, if there is anyone out there in Italy reading this, and who fancies their hand at some guest blogging during the Italian campaign, then please consider yourself invited to contact us directly to talk about this.)

The starting point for getting a handle on Italian Elections 2006 is undoubtedly a blog post from the US economist Nouriel Roubini following an amazing outburst at the recent Davos forum by Italian economy minister Guilio Tremont (also see here).

Wolfgang Munchau takes up the issue in an FT article today.

There was a revealing incident at the World Economic Forum in Davos this year. Nouriel Roubini, the New York-based international economist, took part in a panel discussion during which he raised questions about Italy’s future in the eurozone. A fellow panellist was Giulio Tremonti, the Italian finance minister. Professor Roubini wrote in his web log* that his presentation “caused a stir with Minister Tremonti who interrupted me in the middle of my remarks, went into a temper tantrum and shouted: ‘Go back to Turkey!’ I happen to have been born in Istanbul.”

Perhaps one should not conclude too much from this incident, but it does show one thing: European officials are getting nervous about the future of the euro. A few years ago, no one would have raised an eyebrow.

Now Munchau’s focus is Spain, but Spain and Italy here are but two sides of the same coin, the existence of low, and thoroughly inappropriate, interest rates. In the one case it is the private individual who is hopelessly in debt, in the other it is the state. Now as Munchau states:

Italy is often mentioned as the country most likely to leave the euro. I disagree. Leaving the euro would not solve any of Italy’s problems. Since Italy’s debt is mostly euro-denominated, Italy would be facing an Argentinian-style debt crisis.”

This is undoubtedly true. Leaving the euro would clearly leave Italy facing a horrible mess, of gigantic proportions, but it ducks one key question: will Italy be able to stay inside? It may well be that Italy would never ‘choose’ to leave, but can Italy find a sustainable path to maintain its membership? That is the real question, and I, for one, have serious doubts on this, doubts which I have never really tried to hide. In the face of Italy’s inability or unwillingness to correct its course, the issue is, as Roubini himself asked in an earlier post, in the game of chicken which is now being played between the Italian state and the EU institutions who will be the first to blink? Certainly no-one here has a very viable exit strategy to hand. The latest news on the current attempts to reign in the debt is certainly far from reassuring.

So, to start the ball rolling, here are a number of the key issues as I see them:

1/. The existence of a huge and unsustainable public debt, no clear evidence that anything is going to be done about this, and the accompanying serious policy headache both for the EU Commission and the ECB.

2/. The presence of a high level of private saving, coupled with a far from dynamic internal economy.

3/. The fact that Italy has one of the lowest fertility rates in Europe which make the population pyramid unsustainable in the long term together with a lack of the real resources needed to introduce a programme of public policy to address this problem.

4/ The presence of strong xenophobic attitudes among leading members of the Berlusconi government (and here) which makes recourse to serious immigration as a paliative to the demographic problems extraordinarily complicated while at the same time making the conduct of EU foreign policy even more of a headache.

5/ A long and complicated history of corruption at many levels of private (and here) and public life (and here), and a complete lack of infomational transparency in dealings with the EU.

6/. The presence of a heavily ‘familiaristic’ approach to public policy which prevents realism and objective debate in looking for solutions to Italy’s long term structural difficulties.

7/. The existence of a strong sense of denial inside Italy itself about the scale of the problems and a real and present willingness to blame the euro itself for all the problems.

This list of headaches is undoubtedly long enough already, and undoubtedly more topics could quickly be added, they do howvere form a starting point for a full and frank dicussion of the problem. Let the games commence!

This entry was posted in A Fistful Of Euros, Economics and demography and tagged , , , , , , , , , by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

27 thoughts on “Les Jeux Sont Faits

  1. You forget 8)

    The very large difference in income between the north (one of the richest parts of the Union) and the south (one of the poorest parts)

  2. And don’t forget no.9, a sharp rise in the trade deficit.

    The Italian elections are going to be quite a show, that is certain.

    “less than two months before national elections, the rise in the cost of importing oil and gas in 2005 has led to a 10 billion euro Italian trade deficit.

    According to ISTAT, the Italian statistics office, it is the rise in oil and gas prices that is the reason behind the 850% increase in the country’s trade deficit compared with 2004. The last time Italy had a deficit of this magnitude was back in the 1980s.”

    http://www.euractiv.com/Article?tcmuri=tcm:29-152769-16&type=News

    Back in the 1980’s, how did they get out of that one?

  3. Most of the Munchau article in the FT is about SPAIN. He jumps from Italy to Spain. Of both countries, he says that their upcoming debt- and inflation-crises will probably NOT make them leave the Eurozone. What the Eurozone needs, is a harmonisation of national economic policies, in order to prevent Italian and Spanish – like developments.

  4. “The very large difference in income between the north (one of the richest parts of the Union) and the south (one of the poorest parts)”

    Well, Charly, this point needs qualifying. Back in the 1980s Italy had a very dynamic and in some ways much envied economy, at least from where I was sitting at the time: in the United Kingdom. In particular the north of Italy was getting to be richer than the UK. Since the early 1990s however Italy has gone backwards. A decade of very low growth has meant that Italy has gone steadily backwards in income per capita terms. The question is why.

    Clearly the euro is only one part of a very complex picture here. The question is: is the euro helping Italy to correct course? I would argue that, as things stand at present it isn’t.

    Spain’s case is different. Per capita incomes have been rising steadily. But the issue still is, does losing control over your own currency and you own monetary policy help a poor country to become rich: I think it doesn’t.

    @ Huib

    “Most of the Munchau article in the FT is about SPAIN. He jumps from Italy to Spain.”

    Oh yes, I completely agree, but I think, in fairness his article is about Spain, not Italy.

    “Of both countries, he says that their upcoming debt- and inflation-crises will probably NOT make them leave the Eurozone.”

    This is his opinion. My opinion is that a decade from now they will both be out. Italy will be forced, one way or another, to leave first, whilst Spain will find itself with no real alternative following what is going eventually to be a very serious housing crash. Spain could survive inside if the housing issue was the only one, but what happens to Italy will inevitably affect how people see Spain, and will create a situation where it will become very difficult to maintain membership.

    Two points here are very important. CapTVK mentions one of them: the trade deficits. Spain has also a balooning trade deficit. Not having your own currency to devalue makes it very difficult to correct this. So the euro has two negative consequences for the conduct of economic policy in these two countries. The lack of capacity to set appropriate interest rates, and the inability to take corrective measures to remedy a trade deficit. These are very serious failings.

    The second point relates to the ‘corrective action’ which is available to the two of them under something like the eurosystem. I very much agree with Nouriel that the only real policy option left for these two countries is strong and systematic deflation (ie the Argentinian medicine). This means sytematic reductions in wages and prices to restore competitivity. Having a comparatively strong currency, and one which is constantly bouyed up by continuing dollar weakness really offers them little alternative. But this kind of policy means very weak internal demand, and the need for export driven growth. As we saw in Argentina, this is very difficult to handle politically. Basically voters don’t like it, and I can understand why.

    This was the problem (in the context of the then gold standard) that Keynes spent the best part of half a life battling against. I was brought up agreeing with him, and I still do.

    “What the Eurozone needs, is a harmonisation of national economic policies, in order to prevent Italian and Spanish – like developments.”

    Well quite, but I think that this harmonisation, and federalisation, should have come before, not after, monetary union. I think we have to deal with the world as it is, and not as we would like it to be. The no vote in the EU constitution referendums last summer have set a framework where the political harmonisation which would make the economic convergence possible has been pushed back significantly. This is the world in which countries like Italay and Spain (and lets not forget Portugal and Greece) have to survive. That is the real world, and the background against which the drama we are about to watch unfold will take place.

  5. does losing control over your own currency and you own monetary policy help a poor country to become rich: I think it doesn’t.

    Hmm. Explicitly dollarized poor-country economies — Ecuador and Costa Rica — have grown faster than their neighbors, and faster than they grew before they dollarized.

    On the other hand, the two poor-country Euro-ized economies — Montenegro and Kosovo — have not stunned the world. Though I suppose you could argue that Montenegro is middle-income not poor.

    Other-other hand, poor-country pegs abound, and are associated — ceteris paribus — with somewhat better growth. Though there may be a selection effect here; a country should be in decent monetary shape before it attempts a peg.

    Doug M.

  6. “Hmm. Explicitly dollarized poor-country economies — Ecuador and Costa Rica — have grown faster than their neighbors, and faster than they grew before they dollarized.”

    OK, fair point. Loose wording on my part. Here we are talking about really poor. Countries without the institutional stability to be able even to handle their own currency. The Lev-Euro peg in the Bulgarian case has been almost another one of these.

    I am not at all arguing that a peg at some point might not be useful to a country to offer stability, but what I am saying is that it shouldn’t be turned into a dogma. (With the accompanying mantra “this has been a unique success story).

    One good case right now is of course China: I think most reasonable people agree that it was useful for China to peg to the dollar at some stage, but that now is the time to get off gently.

    The problem for the really poor is the exit strategy, how you get your independence back. I’m not very convinced we might see the sort of issues which came up in Argentina arising in Bulgaria at some stage.

    So the peg might be appropraite for a Less Developed Economy as it makes the transition to a Developing one. Then it needs to ease off. Turkey is certainly benefiting from not having a peg. India too.

    Although it should be noted that in the case of Ecuador dollarisation seems to be leading to a situation where the countries real export is its people (maybe it has been fully ‘dollarised’) and the country more or less lives on the money they send back, some of which, of course, is now earned in euros.

    In fairness the whole euro situation is very different from this, since we are talking about poor in a relative sense, and by no stretch of the imagination can you consider Spain and Italy to be Less Developed Countries.

    Also I am arguing for pragmatism, and for flexibility, and of course neither of these are built into the euro, or even could be built in, since it is an all or nothing situation. If the euro was part of a very active proces of creation of a United States of Europe (and here all the comparisons with the US case would be valid) as Huib is suggesting then things would be very different. We wouldn’t be talking about virtual pegs, but one state with one money. But that is precisely what we don’t have.

  7. “Countries without the institutional stability to be able even to handle their own currency. ”

    Or as Italian banker Corrado Passera said “The euro is the instrument through which an undisciplined country like ours benefits from interest rates such as those one finds in the disciplined countries”

  8. “. My opinion is that a decade from now they will both be out. Italy will be forced, one way or another, to leave first, whilst Spain will find itself with no real alternative following what is going eventually to be a very serious housing crash.”

    When you say forced out, what do you mean?

    I think countries wil only leavevoluntarily, and if for example german political elites make subtle or unsubtle noises about Italy leaving, it will only deacrease the likelihood of it happening.

    It will take a serious economic crisis to make a country’s political elites give up on the euro. Unfortunately, it doesn’t seem out of the question.

  9. “[T]he political harmonisation which would make the economic convergence possible”

    Could even EU statehood really do that? Look at east ern Germany. Actually, even Germany does have a functioning common labour market; I don’t know if a USE could achieve all that much labour mobility when the cultures and languages are so different.

    Obviously having common texes and expenditures would help in lots of ways, but would a USE be a economicalyy sound idea?

  10. “Could even EU statehood really do that? Look at eastern Germany”

    But this is the point, the German state makes the necessary transfer payments. Whether all Germans are happy with that is another matter. But I don’t seriously see the younger European states (in median ages) subsidising the pension systems in the relatively older ones, and this is what is needed for the euro to work. The so-called theory of asymmetric shocks, yes, demographic ones.

    “I don’t know if a USE could achieve all that much labour mobility”

    I don’t think at the end of the day the labour mobility issue is as big as it is made out to be. In Spain there is little internal labour mobility (for eg). Of course I’m not against it.

    “would a USE be a economicalyy sound idea?”

    I don’t think this is the way to look at it. Politically it would be a bloody good idea, a USE based in its regions (like US states, Catalonia, Flanders ha, ha , ha) and not on the old sclerotic nation states.

    If we got the small pieces loosely joined politics fixed, I think the economics could be made to work just fine.

    “When you say forced out, what do you mean?”

    I mean that I don’t see any serious way that they can, with a declining and ageing workforce, and possibly sustained negative growth associated with this at some stage, I don’t see any way they can ever realistically pay off the debt (the low inflation environment is another part of this, without inflation, which the ECB will not permit, they cannot monetise the debt).

    So really it is only a matter of time before the markets wake up to what I can already see. Then people may start to bet on the possibility that Italy might have to leave, or might decide to leave. Once the betting starts it effectively becomes a fait accompli. There is no stopping it.

    Ironically news may come at some point from Japan which will accelerate this doubting. If Japan fails one more time to take off, some people may start really asking serious questions. Japan can’t really pay up either, but Japan is much richer than Italy. Funnily enough they can’t monetise either because they simply cannot generate inflation.

  11. If Italy and/or Spain were to leave the euro area, is there any reason to think that they would have central banks that would then make independent interest-rate policy? Isn’t the lesson of the early Miterrand experiment that none of the continental economies is large enough or separate enough to pursue an interest-rate policy that is at odds with German policy?

    My actual experience on this issue is mostly mid-90s, so I am asking to see whether someone with a longer memory can enlighten me. But if what I’m saying is true, then interest rates for Europe (x-UK) will be set in Frankfurt, by the ECB if the euro holds, by the Bundesbank if it doesn’t. I can see Italian (and other) governments reasoning, better it be done by the ECB, where at least we have a seat on the board, than by the Bundesbank.

    So the lack of ability to set interest rates independent of Germany pre-dates the euro and would not be affected by a departure. Thus all that remains are the other ‘corrective measures’ that Edward mentions.

    (Whether the Frankfurt lock-in is a function of ERM is an interesting question, as are the consequences of a market in which the ‘new lira’ had fluctuations against the euro as large as, say, dollar-yen or dollar-euro fluctuations have been over time. This looks increasingly like recreating all of the problems that the euro was brought in to cure.)

  12. “because they simply cannot generate inflation”
    Bullshit. Give everybody a million-dollar tax rebate and watch the fireworks.
    Point being that central banks do not “print” money – treasuries do (at least in the nonliteral sense of the word that economists are concerned with).
    “Once the betting starts it effectively becomes a fait accompli.”
    Wonderful. Edward should do a little betting from time to time. I guess he doesn´t precisely because he fears that it might turn out to be anything but.
    “I don’t seriously see the younger European states (in median ages) subsidising the pension systems in the relatively older ones”
    No? Why is it that Japanese are going to work in other Asian countries? Dto. with Germans in lots of English-speaking countries, Scandinavia, the Netherlands etc.
    There always is a common labour market. There even was a common labour market between the U.S. and Europe in the 19th century. Either the rich countries create the money they need to pay those pensions or they export the pensioners as labourers. Probably they´re going to do both.
    “a lack of the real resources needed to introduce a programme of public policy to address this problem”
    What could these real resources be? Allegedly there are not enough FINANCIAL resources to pay all those teachers, nurses, doctors etc. Those professionals are real enough, and lots of them are looking for work. In fact, a look at China teaches us that the new middle class is willing to pay heavy fines in order to be able to raise that forbidden second child. Create prosperity first, and the demographics will take care of itself automatically. People don´t want to be financed for being parents – they want to be free to take decisions for themselves, and these decisions invariably follow the economic trend rather than creating it.

    Edward just can´t stop arguing against having high savings rates in countries with an ageing population. What a curse! Why must people save first and spend afterwards? Why can´t they learn to do it the other way round?
    Brecht once proposed that the government should elect itself a new electorate. Economists now appear to tread in the footsteps of those governments Brecht was talking about. And the Western elites are far too gullible not to take the prescribed medicine. (Didn´t some well-known Briton recently say that the problem with Blair´s proposal of building a Transrapid somewhere in Britain was not having one thousand hungry Chinese workers at hand?)

  13. “Isn’t the lesson of the early Miterrand experiment that none of the continental economies is large enough or separate enough to pursue an interest-rate policy that is at odds with German policy?”

    I’m afraid I agree with David, and look at eg Sweden now.

    There is a separate issue about the extent to which any single country can push up long term interest rates in a globalisd world. Look at the difficulties the US is having right now. The difference is that in the US the fundamentals are perceived as healthy. This would not be the case in a post-euro Italy.

  14. David’s right about the rates, and I’m glad to have a second chance to express myself more clearly.

    While the countries in ERM2 did have varying interest rates (as indeed the Central European countries who are now in ERM2 and working toward joining the euro zone, lest we forget), they tended very strongly to move in lock-step with the German rate. That is, anytime the Bundesbank made an interest rate move, the central banks in France, Holland, Belgium and others (Denmark and Spain, I think, others I tended to follow less) imitated the move almost immediately. Sometimes in a matter of minutes, lest the arbitrage possibilities in the bond markets become too tempting.

    So France was perceived as being X basis points more risky than Germany, but X tended in the first half of the decade to be constant, with the actual value of the interest rate moving 25 basis points here or there depending on what the Bundesbank did. In the second half of the decade, as it became clearer that the euro would launch, X converged to zero, as the 10-year bonds in several markets became the functional equivalent of the 10-year bund. Now, some years into monetary union, it’s apparent to bond markets that the 10-year Italian bond is not quite the same as the 10-year bund, and convergence has unwound a little bit. (Without access to a Bloomberg, I can’t rapidly say how much.) The open question is whether this unwinding is the functional equivalent of different bond prices for US states, or whether it is the reappearance of sovereign risk in the euro market.

    Is there a good, web-based time series of Swedish rates vs ECB rates that we could all look at?

    Also, Edward, just to make sure I understand: Your view is that the Bank of Italy could pursue an interest rate policy different from an ECB/Bundesbank policy without significant losses in the bond markets. Or is it that the losses involved in such a policy would be part of the necessary restructuring that Italy has to do?

  15. “So France was perceived as being X basis points more risky than Germany, but X tended in the first half of the decade to be constant,”

    I think this is the point. I think this is what Nouriel is referring to when he talks about the game of chicken. At some point someone is going to have to move a piece here, either the ECB or the Italian government. At that stage X starts to grow significantly. Then things will start to move since the Italian government really can’t afford to service this volume of debt with such a high risk differential. (Well, its more complicated than that, but I hope you can see the point).

    During the 90s X was falling as the risk differential was perceived as steadily reducing. When Italy loses any element of A grade status the ECB will have to decide.

    We are about to see divergence bigtime.

    “Your view is that the Bank of Italy could pursue an interest rate policy different from an ECB/Bundesbank policy without significant losses in the bond markets.”

    Well I think we need to distinguish here between short and long rates. They can set the short rates they like, but on the long rates they are going to be takers not givers, as they will have to accept the appropriate rates to stop capital flight and wholesale ditching of their bonds.

    And of course we are talking about during the crash, and what they can do later. Initially they won’t be setting any independent rates, but I think in Argentina they are now increasingly able to set their own monetary policy, certainly much more than they could ever hope to do during the late 90s.

  16. @ Joerg

    These are all very interesting points. I have one simple question: how do you imagine Italy ever being able to pay off the debt?

  17. “While the countries in ERM2 did have varying interest rates (as indeed the Central European countries who are now in ERM2 and working toward joining the euro zone, lest we forget), they tended very strongly to move in lock-step with the German rate. That is, anytime the Bundesbank made an interest rate move, the central banks in France, Holland, Belgium and others (Denmark and Spain, I think, others I tended to follow less) imitated the move almost immediately. Sometimes in a matter of minutes, lest the arbitrage possibilities in the bond markets become too tempting.”

    This was a fairly common argument in 1998 or so, and I think some people thiought of it as a major argument in favor of the euro, rather than a marginal one or a quip – it’s great as a quip.

    In the 90s countries had largely the interst rate that was right for them. EMU means they almost never will. Secondly, there was nothing that would have stopped them from responding to a sudden major downturn (or upturn).

  18. Italy has a debt that is slightly more than 100% of GDP. I assume that the Italian state has an annual “turnover” of 40%. Paying a real interest rate of 3% on it doesn’t sound to difficult to me and i doubt it will ever be that high as long as we don’t get into deflation.

    About longterm Italian debt:
    Sadly Italy is known for the fact that everybody pays their taxes but if that wasn’t the case than i would sell longterm debt and promise that anybody caught with undeclared money wouldn’t have to pay a fine over money they hold in longterm Italian bonds as ;long as they can proof that they own it for more than two years.

    ps. I assume that the longterm italian debt plan is not in accordence with EU rules but there are ways around it especially when it is also in the interest of the EU

  19. “This was a fairly common argument in 1998 or so, and I think some people thiought of it as a major argument in favor of the euro, rather than a marginal one or a quip – it’s great as a quip.”

    Actually, by Jan of 1998, the introduction of the euro was a completely done deal from the point of view of the governments and the financial markets. This is a point that I have made to Bob B on numerous occasions, whenever he brings up the German economists’ plea for an “orderly delay.” At that phase, the parties involved were so strongly committed to monetary union that you could have order, or you could have delay, but you could not have both. (One of the things I think that Edward is trying to wrap his mind around is how much disorder Italy’s fiscal problems are going to cause; will that be enough to bounce the country from the euro-zone; what are the consequences if it is not)

    The lock-step movement was pretty thoroughly entrenched by at least March of ’96. That was when I took a job in the financial sector and started watching these things on a daily basis. I don’t know in any great detail how long it was in place before that. My impression was that the first few years of Miterrand (’81-’83, say) had convinced the French establishment that fiscal and monetary policies significantly at odds with those across the Rhine were folly.

    The question of whether a country has interest rates that are perfect for its present situation is not the only question related to monetary union. (And indeed, having a national central bank is no guarantee that a country will have perfectly suited interest rates, infallibility being a scarce good even among central bankers.) The question going in is whether the acknowledged costs are worth the benefits that accrue. On the other hand, if a country (and for country, read policy-makers, interested parties and opinion leaders) spends much of its time debating whether or not joining is a good idea, it’s likely to lose credibility on actually making the project work. This is one of the UK’s long-term liabilities in the Union as a whole, of course. But this has taken us a long way from Italy’s issues.

  20. Look everyone,

    I think this thread is fascinating, for the issues it raises. I think the point about Munchau’s article is that he has a point of view, but that he and Nouriel are also opening a debate. Daniel Gros likewise:

    http://ceps01.link.be/Staff.php?staff_id=14&researcher=1&

    See also the Ceps publications that can be linked to from this page:

    http://ceps01.link.be/Default.php

    Joaquim Fels would be another ‘node’ here:

    http://www.morganstanley.com/GEFdata/digests/20050419-tue.html#anchor0

    http://www.morganstanley.com/GEFdata/digests/20050531-tue.html#anchor1

    For an intelligent pro-Euro view see Paul De Grauwe (various articles and papers across his site):

    http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/

    The point is that for the first time we can really see the possibility of a rational discussion of the pros and cons of the euro. Of course people have differing points of view. This is healthy. What is important is that everyone can state their views clearly, without an emotive slanging match where people simply restate their prejudices. We will only get to see who is right as the situation unfolds.

    “One of the things I think that Edward is trying to wrap his mind around is how much disorder Italy’s fiscal problems are going to cause; will that be enough to bounce the country from the euro-zone; what are the consequences if it is not”

    This is the core of the situation. Basically I think the 90s interest rate convergence was posited on a point John made earlier:

    “Or as Italian banker Corrado Passera said “The euro is the instrument through which an undisciplined country like ours benefits from interest rates such as those one finds in the disciplined countries””

    The question is whether the ECB or the Bundesbank will withdraw the support and guarantees that have made this possible. This is Nouriel’s ‘blinking’ argument.

    Charly:

    “Paying a real interest rate of 3% on it doesn’t sound to difficult to me and i doubt it will ever be that high as long as we don’t get into deflation.”

    Well there are several assumptions here, the issue is whether those assumptions are well-founded. This we will only get to know going forward….as the song says “the future’s not ours to see, que sera, sera”.

    You have a legitimate point of view. Let the debate continue!

  21. In re the size of the debt, didn’t we have a conversation about what Belgium did to get out of its debt problems? IIRC, debt was about 120% of GDP going into monetary union, but obviously it’s somehow become less of an issue between then and now. How? Can Italy repeat same?

  22. Belgium has the Flanders/Walon problem (if one has a sea rescue team than the other needs a sea rescue team to even though they are not on the sea) and that wastes a significant amount of money (a few % of GDP). That waste is not only larger than normal but also much easier to corrected than in normal states so they have a bigger capacity to repay while in Italy they have to find real cuts to lower state expenditure

  23. “These are all very interesting points. I have one simple question: how do you imagine Italy ever being able to pay off the debt?”
    At two points in 20th-century history, the U.S. was about to start to pay off the public debt. At these two junctures, stock market crashes ensued, followed by the Great Depression in the first instance and by one of the most remarkable episodes of deficit spending in history in the second (Bush´s reversal of Clinton´s policies).
    The moral of the story? Even the global economy´s top dog can´t pay off its debt. I don´t imagine Italy paying off its debt any other way than Turkey, e.g. (which reformed its currency and slashed off a few of the trailing zeroes, making it seem much smaller). Since Italy is a member of the Eurozone, though, that part of the story has already been told. The next act of the drama can be understood better by looking at Germany. Germany sort of “pre-nationalized” the debt that would have been incurred by its Eastern states if it hadn´t instituted a massive program of resource transfers. Similarly, in case of an emergency, Europe will have to kind of “de-nationalize” (“europeanize”) Italian debt. That´s part of the parcel that is the Euro. Obviously I would argue for Italy to have to pay a price in terms of addressing those of your points that are clearly valid. What you seem to be missing, though, is the fact that although the U.S. has been a unified currency area for a very long time, it clearly didn´t have “big government” before WWI. Similarly, Europe doesn´t have anything approximating “big government” in Brussels yet. While Bernanke has to testify before Congress, Trichet doesn´t have any comparable political chore, etc. Obviously, there is some obnoxious over-regulation emanating from Brussels, but – compared to environmental regulation in Britain, e.g. – there is also some economically highly significant under-regulation. If Maastricht is going to be adhered to, “real” deficits á la Bush or Japan – which Europe may or may not have a need to create now but might urgently have to in 2030 – could only originate from Brussels/Strasbourg. Europe would have to become more like the U.S. U.S. states are restricted to incurring not more than 2% of debt. Basically, that is a Maastricht-type of rule. So the tradeoff is obvious: either factually eliminate Maastricht or transfer more fiscal authority to Brussels – without attaching a Maastricht-like rule to that authority. Anybody choosing the first over the second please tell me if they believe the League of Nations would have done a better job of handling the Great Depression than Roosevelt and the leaders of those few small countries that did fairly decently under the circumstances at the time.
    (Of course, if I had wanted to restrict myself to a rhetorical answer to your question – “how do you imagine Italy ever being able to pay off the debt” – I´d have asked if you´d imagined Russia paying down its debt as it does now ten years ago. I wouldn´t want to mitigate unjustified fears by creating unjustified hopes though.)
    As for Nouriel Roubini – apparently his views about Italy echo his concerns about the dollar. Surely that´s a position that must be immediately evident even to the intelligent layperson. After all, Bush and Berlusconi share three letters of the alphabet, and the last letters in their respective names are immediately adjacent to each other in the alphabet. All that symbolical cohabitation has to have some real-world reference, doesn´t it?

  24. “Even the global economy´s top dog can´t pay off its debt.”

    Ok. But we at least have a consensus that the US shoul be reducing the current deficit, and at some stage, even if this be under the next presidency, there is some expectation and hope that this will happen.

    Perhaps the words ‘pay off’ were ill chosen. I mean obviously any national government will have some sort of debt, and no-one is expecting that this is ever paid off completely.

    The point is when the debt rises as a % of GDP and there is no end to this process in sight. The latest version of the stability and growth pact sets a target of 60% of GDP and this seems eminently reasonable. This then allows for the transitory expansion of the debt in bad times, or difficult demographic moments, and the subsequent paying down in better periods.

    But this doesn’t seem to be the case with Italy. There is no evidence of any commitment or intention in this regard. The deficit as a % of GDP may well then just grow and grow, and this is the problem. This is what is not sustainable.

    In Italy’s case the situation is even more problematic than most since during the coming decade (and possibly beyond) Italian GDP growth is going at least to be weak and may even turn slightly negative (assuming that there is no ‘crisis’ in finances which would of course only make a bad situation worse).

    “Similarly, Europe doesn´t have anything approximating “big government” in Brussels yet.”

    Well yes, I think this is an important point. And last year’s votes on the constitution mean that this is a situation we may well have to learn to live with for some time to come. This is one of the ‘facts’ of the situation. A given.

    “Similarly, in case of an emergency, Europe will have to kind of “de-nationalize” (“europeanize”) Italian debt.”

    Again, well yes. In fact I would go even further, for the eurosystem to survive Europe will have to denationalise itself completely. I am ready for that, but I have the strong impression that the majority of my fellow citizens are not convinced of the need for or desireability of this (and the best and most recent example is the debate about ‘national champions’).

    Charly also says this:

    “Belgium has the Flanders/Walon problem”

    Well, as they say, this isn’t part of the problem, this is part of the solution. Lets get rid of Belgium. Then lets get rid of France, Germany, Spain, Italy etc. People aren’t ready for this many will say (they just did in the referendums). Well then they aren’t ready for the euro I say. This is my whole point of view. The labour mobility issue is a side problem. We have a national champions mobility issue to address first. What we need isn’t just labour mobility it is mobility (mental mobility, flexibilisation, not just of labour markets but of everything, especially of feelings up an abstraction notch) tout court. We are living in the past, not in the future.

    Again this is why I back the Catalans with their statute (although, please note, they are the ones who are the most furious about the Eon takeover bid, Gas Natural/Endesa was supposed to become the first ‘champion’ for the new nation. Here I have little sympathy). Basically I agree with what Robert said in some earlier comments (the Toglodytes Making Waves post): what the hell if some US county really wanted to create its own ‘state’. The irony is that so many who argue the pro-euro case like to cite the US as a role model of how the euro is supposed to work. The US is *not* composed of nations, it is composed of states, and these states are administrative units.

  25. well, another issue is that of the dubious future sustainablity even of the current, poor economical level. private investments in research & development are becoming scarcer and scarcer. the (relatively) low unemployement rate should be compared with the stunningly low *employment* rate at 57,4%.

    ps i’m italian, although a german resident. if you wish, i could gladly help you somehow with italian political situation.

  26. The people who live now are not ready but the next generation will be so you only have to wait to this one dies out.

    Also inner European labour mobility is now much higher than it used to be a generation ago.

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