tag:blogger.com,1999:blog-82849549716213655992024-02-02T06:36:04.609-08:00southern europe crisisJonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comBlogger80125tag:blogger.com,1999:blog-8284954971621365599.post-71613957545873558992015-02-10T09:43:00.000-08:002015-02-11T01:00:22.270-08:00Be careful what you wish for: or how Germany's blame game has backfiredThe election of a <a href="https://www.jacobinmag.com/2015/01/phase-one/">Syriza-led government</a> in Greece and its subsequent <a href="http://www.zerohedge.com/news/2015-01-31/caught-tape-dijsselbloem-varoufakis-you-just-killed-troika">stand-off with Greece's creditors</a> has disrupted Europe's preferred approach of kicking the can down the road. My colleague <a href="http://personal.lse.ac.uk/woodruff/">David Woodruff</a> is <a href="http://politicaleconomyinpublic.blogspot.co.uk/2015/02/can-greece-escape-ultimatum-game-and-no.html">not optimistic about Greece's bargaining position</a>. Germany clearly has every incentive not to cave in to Greece's requests, not only because they prefer not to admit that <a href="http://www.zeit.de/wirtschaft/2015-02/yanis-varoufakis-greece-finance-minister-eng/komplettansicht">Greece is insolvent</a>, but also for fear of the ramifications a Greek win could have elsewhere.<br />
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Spain will vote in 2015, and <a href="http://www.bloomberg.com/news/articles/2015-02-04/podemos-widens-lead-over-rajoy-in-spanish-state-pollster-survey">current opinion polls gave Podemos, a party just past its first birthday, the lead</a> over Spain's traditional governing parties, the Partito Popular and the Socialists, who <a href="http://politica.elpais.com/politica/2015/02/04/actualidad/1423040956_503954.html">together barely muster half of voter preferences</a> in a recent poll. The failure of austerity has created a fertile terrain for alternative political forces, especially in the Southern periphery.<br />
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<a href="http://en.wikipedia.org/wiki/File:The_Grasshopper_and_the_Ants.png#mediaviewer/File:The_Grasshopper_and_the_Ants.png"><img alt="The Grasshopper and the Ants.png" src="http://upload.wikimedia.org/wikipedia/en/4/4f/The_Grasshopper_and_the_Ants.png" /></a><br />
"<a href="http://en.wikipedia.org/wiki/File:The_Grasshopper_and_the_Ants.png#mediaviewer/File:The_Grasshopper_and_the_Ants.png">The Grasshopper and the Ants</a>" by Source. Licensed under <a href="https://en.wikipedia.org/wiki/File:The_Grasshopper_and_the_Ants.png" title="<a href="//en.wikipedia.org/wiki/Wikipedia:Non-free_use_rationale_guideline" title="Wikipedia:Non-free use rationale guideline">Fair use</a> of copyrighted material in the context of <a href="//en.wikipedia.org/wiki/The_Grasshopper_and_the_Ants_(film)" title="The Grasshopper and the Ants (film)">The Grasshopper and the Ants (film)</a>">Fair use</a> via <a href="https://en.wikipedia.org/wiki/">Wikipedia</a>.<br />
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But there is a further reason for the success of new political forces such as Syriza, Podemos and Italy's Five Stars Movement. The dominant narrative of the Euro crisis is that of the Ant and the Grasshopper: unlike the virtuous North, who saved for the winter by running balanced budgets and reforming their economies to make themselves more competitive, the South overspent, overborrowed and failed to reform, leaving their economies vulnerable to downturns. Their politicians <a href="http://www.theguardian.com/world/2014/dec/02/spain-carlos-fabra-begins-jail-term-ghost-airport">wasted money on pointless airports</a> (although, see also <a href="http://www.dw.de/berlin-airport-the-five-biggest-mistakes/a-17740584">Berlin's new hub</a>), protected <a href="http://www.theguardian.com/business/2010/may/07/greek-debt-crisis-jobs">rent-seeking groups</a> and often <a href="http://www.bbc.co.uk/news/world-europe-12403119">lined their own pockets</a>. In a more sophisticated version of this story, <a href="http://www.nber.org/papers/w18899">Jesús Fernández-Villaverde and colleagues argue that credit booms</a> have an effect analogous to expansionary monetary policy, masking political incompetence in the eyes of voters and allowing corrupt politicians to claim credit for illusory economic growth.<br />
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Southern European politicians probably are exceptionally venal: <a href="http://www.transparency.org/">Transparency International</a> <a href="http://v/">certainly thinks so</a>. But blaming poor governance in the debtor nations handily shifts the focus away from the structural flaws in European Monetary Union that made such a crisis likely however well Southern European countries had been governed. <a href="http://www.economonitor.com/blog/2014/08/can-pedro-sanchez-save-spains-socialist-party/">German surpluses, in a monetary union, had to roll up somewhere</a>, and they rolled up in the Eurozone's weakest economies, because that is where opportunities for investment appeared greatest.<br />
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The '<a href="http://www.amazon.com/Blaming-Victim-William-Ryan/dp/0394722264">blame the victim</a>' narrative has been effective up to now in distracting attention from the structural failure of EMU. So effective in fact, that it is widely believed in Southern Europe too: support for established political elites, the (mostly) men responsible for presiding over the disaster, has collapsed. Now that the credit taps have been turned off, Southern European voters have, albeit a little late in the day, reacted to the corruption and incompetence shown by the likes of Papandreou, Samaras and Berlusconi by turfing the rascals out. So now they will see sense and elect politicians that embody the austere virtues of Angela Merkel. Right?<br />
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Wrong. The elites that governed the South in the first decade of the euro may have been corrupt and incompetent, but they were committed to euro membership and (formally anyway) its rules. When the Troika came knocking, its recommendations - despite there being good reasons for thinking they would make matters worse - were accepted and largely implemented. Just as they escaped the blame for their own errors in the pre-crisis period, they are now crucified by their voters for policies decided elsewhere. And rather than turning to incorruptible experts to implement the austerity regime, Southern European voters now turn to politicians who would rather ditch that regime altogether. As Silvio Berlusconi's star waned, Italy voted not for the sober, Davos-attending former Eurocrat Mario Monti, but for rabble-rousing anti-euro comedian <a href="http://www.beppegrillo.it/">Beppe Grillo</a>. And the Papandreou dynasty has been replaced by the tie-less Tsipras and Varoufakis.<br />
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The ant and the grasshopper indeed. Perhaps another fable is more appropriate here: <a href="http://www.aesop-fable.com/tortoise/the-tortoise-and-the-eagle">the Tortoise and the Eagle</a>. Or be careful what you wish for: you might get it.<br />
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<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-44252356273551476712013-11-12T02:17:00.001-08:002013-11-12T02:17:06.722-08:00A message from Germany: Not my problem<a href="http://krugman.blogs.nytimes.com/2013/11/12/germanys-lack-of-reciprocity/?smid=tw-share" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Paul Krugman complains</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> (again) that Germany's tough line towards the South fails to appreciate how much its own relative economic success in recent years is the flip side of the Mediterranean countries' failure. By refusing to allow a higher eurozone inflation rate, Germany is effectively denying the South the chance to realign its relative costs in the same way Germany was able to do in the first years of the Eurozone. As Krugman shows in his post, Germany's success in holding down its labour costs was spectacularly successful precisely because the South did not manage to achieve zero real wage growth, and therefore provided a ready market for German products (not to mention an outlet for German financial surpluses). Resolving the crisis requires Germany to return the favour.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">I'm always puzzled, looking at things from the perspective of the UK and Southern Europe, how it can be domestically politically impossible to persuade Germans to spend money. After all, the easiest solution to the crisis has always been that Germans dipped into some of their trade surplus to enjoy the South's warm beaches and hospitality, or maybe even buy a few second homes on the shores of the Mediterranean. It looks like a win-win solution. Yet, the hair-shirted Prussians prefer to stick it all under the mattress, and invite Southern Europeans to do the same, even if this does actually shrink the economy and put German savings at risk.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">This can be seen as a cultural or ideological problem. In many ways, the discourse of belt-tightening on the European level has a quasi-religious quality. We need to suffer, and those who have least should suffer particularly, since being poor they probably deserve it. The poor, </span><a href="http://en.wikipedia.org/wiki/The_Protestant_Ethic_and_the_Spirit_of_Capitalism" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Weber would say</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, lack a </span><i style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">beruf </i><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(calling), whilst the parsimonious rich are blessed and will be rewarded in the afterlife. The crisis </span><a href="http://krugman.blogs.nytimes.com/2010/09/28/economics-is-not-a-morality-play/?_r=0" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">becomes a morality play</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. Easy answers, like inflation or fiscal stimulus, must be wrong, because the crisis is a clear sign we have sinned and must atone.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">I can't help thinking that it would be easier to convince Germans to adopt a more constructive attitude if Southern Europeans didn't enjoy such an enviously pleasant climate and physical environment. Whilst Germans have to endure long cold winters, the South basks in sunshine - no wonder they don't work so hard. Of course, as has been well documented by now, the average Southern European worker has a</span><a href="http://www.bbc.co.uk/news/magazine-17155304" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;"> much longer working week</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> than the average German, and </span><a href="http://www.gfmag.com/tools/global-database/economic-data/12065-household-saving-rates.html#axzz2kQCAS7jW" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">savings rates are also actually quite high in the South</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">:</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br />
<div class="separator" style="background-color: white; clear: both; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_x_D6wZIMC-_yIU2zKZtjnH4CZP8Llcg7ppF_vrJ2kyDAH8P4vm3LmHR2z3X7SDoV-UNg_t6YcsDYXYqQQzRLOKtScZNyO_djt2nnZYmUX9ZeMqNv1KnNeZlhV4JMbJ7zdJgmgBE3HPw/s1600/Screenshot+2013-11-12+09.25.18.jpg" imageanchor="1" style="color: #4d469c; margin-left: 1em; margin-right: 1em; text-decoration: none;"><img border="0" height="196" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_x_D6wZIMC-_yIU2zKZtjnH4CZP8Llcg7ppF_vrJ2kyDAH8P4vm3LmHR2z3X7SDoV-UNg_t6YcsDYXYqQQzRLOKtScZNyO_djt2nnZYmUX9ZeMqNv1KnNeZlhV4JMbJ7zdJgmgBE3HPw/s1600/Screenshot+2013-11-12+09.25.18.jpg" style="-webkit-box-shadow: rgba(0, 0, 0, 0.2) 0px 0px 0px; background-color: transparent; background-position: initial initial; background-repeat: initial initial; border-bottom-left-radius: 0px; border-bottom-right-radius: 0px; border-top-left-radius: 0px; border-top-right-radius: 0px; border: 1px solid transparent; box-shadow: rgba(0, 0, 0, 0.2) 0px 0px 0px; padding: 8px; position: relative;" width="320" /></a></div>
<br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">The truly profligate are the Anglo countries, with clearly lower savings rates than continental and Southern Europe.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">The morality tale of Southern Europe's decline doesn't really fit with the facts, but my guess is that it is simply easier to digest for Germans than the harsh truth, which is that European Monetary Union was designed and is being governed in line with German interests. In other words, the moralistic tone of the Eurozone policy discourse is a cultural problem founded on a very real set of material advantages.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">EMU was an extension of the process of market integration in Europe, removing one of the last remaining barriers to trade - national currencies. By creating a single currency, competitive devaluations became impossible. The usual beneficiaries of such devaluations - the weaker currency nations of Southern Europe - were prepared to sacrifice this competitive advantage in exchange for the inflationary anchor provided by Germany's dominance of the new currency union. What they didn't perhaps anticipate was quite how exposed they would become to Germany's extraordinary capacity to control price and wage rises, and how little help they would get from the ECB, which shaped monetary policy around the needs of slow-growing Germany, leaving the fast-growing periphery to inflate itself into an uncompetitive real exchange rate. And now, the only way back for the South is a brutal internal devaluation which, as well as closing off the labour market to anyone below the age of 35, will make debt servicing next to impossible.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Despite recent optimism about</span><a href="http://online.wsj.com/news/articles/SB10001424052702304799404579153050564052022?mod=WSJEurope_hpp_LEFTTopStories" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;"> financial flows returning to Spain</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, this process of internal devaluation is far from complete, and there are incipient signs of deflation across the South, hence the ECB's increasingly desperate attempts to use monetary stimulus to get the economy moving. Still Germany protests that all of this has nothing to do with them, and refuses to play any part in raising internal demand in the Eurozone. But politics has an awkward habit of raising its ugly head in these situations. There will be elections in Spain within 2 years, and almost certainly in Italy and Greece even sooner. The problem will not go away, and Catalan nationalists and left populists in Spain, the Five Stars movement in Italy, Golden Dawn and Syriza in Greece, are all waiting in the wings. Barry Eichengreen established that you </span><a href="http://www.amazon.co.uk/Golden-Fetters-Depression-1919-1939-Development/dp/0195101138" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">can't run a gold standard in a democracy</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. Is Europe trying to test this theory to destruction?</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-3097179015915951412013-08-02T03:18:00.001-07:002013-08-02T03:25:42.729-07:00To Catch a Thief: What the Berlusconi sentence tells us about ItalySo finally, after 52 trials the communist judges that have infiltrated the Milanese courts and ultimately spread through the system all the way to the Cassazione (Italy's highest appeal court) have got their man. Berlusconi is convicted at the third and final level of judgement of a tax fraud committed some two decades ago and receives a prison sentence, although for a variety of reasons (age, an amnesty law, the possibility of 'alternative measures') he will not set foot in any jail.<br />
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The response from the convicted criminal himself was <a href="http://www.repubblica.it/politica/2013/08/01/news/mediaset_cassazione_condanna_berlusconi_reazioni-64138690/?ref=HREA-1">predictable enough</a>: he has long argued that he is innocent of all charges and that his many trials are the result of left-wing judges trying to use the law to achieve a political end of eliminating the most popular politician in the country. What amazes many people outside Italy, and particularly in Northern Europe and the English-speaking countries, is that so many Italians still support him. After all, in some democracies the merest whiff of legal trouble or sexual scandal is enough to end a political career - British politician Chris Huhne was <a href="http://www.bbc.co.uk/news/uk-22507000">recently jailed </a>and his political career terminated for evading a speeding ticket. Why do Italians seem so forgiving?<br />
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Let's try and get into the mind of the Berlusconi-supporting voter. First, there is the traditional deference with which many Italians view the rich and powerful - even Berlusconi's opponents refer to him as 'Il Cavaliere', after the honour of 'Cavaliere del Lavoro' (similar to our knighthood for services to industry) was bestowed on him by his friend Bettino Craxi back in the 1980s. Berlusconi plays to this role of the rich benefactor, <a href="http://www.euronews.com/2009/09/30/birthday-boy-berlusconi-gifts-quake-victims/">giving supplicants gifts such as watches, jewels, apartments or simply money </a>in the style of the traditional 'notables' of pre-democratic times. Of course, his TV channels are very helpful in cultivating this image.<br />
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But let's not assume that most of Berlusconi's support comes from these quarters. If there is one thing you can say about Italians, it is that they do not like to play the sucker. And in a country with such a Baroque administrative and legal culture as Italy, obeying the law and paying your taxes is fraught with danger. At best, you can end up out of pocket knowing that many others are cheating on their taxes. At worse, you can find yourself penalized for doing the right thing, since tax law is complicated and unpredictable, and very often tax levels are set on the assumption that citizens will indeed not report their full income. Not surprisingly, an <a href="https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIPF66&paper_id=246">estimated 13.5% of income </a>is not declared to the tax authorities. More generally, Italy's legal system is exceptionally complex, with a much larger number of laws and regulations than other democracies, many of which are in flagrant contradiction with each other.<br />
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So when Berlusconi talks of the injustices he has faced at the hands of judges and the state administration, this chimes with the experiences of most if not all Italians. And those most likely to sympathize with him are to be found in the very large section of Italian society that owns property or their own business, or is self-employed. Sure, many Italians believe that the best way to deal with the problem would be if everyone paid their taxes and respected the law. Others take the view that that will never happen, and therefore the law should be applied in the most relaxed manner possible. When Berlusconi talks of 'liberty', he effectively means 'impunity'. Since the state and the law don't work properly, punishment is illegitimate, verging on totalitarian. This fits in nicely, of course, with Berlusconi's strident anti-communism.<br />
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In the end the saga of the justice system is representative of the broader problem of the development of the Italian state. The Piedmontese nation-builders of the late 19th century attempted to create a unified Italy on the basis of a French-style administration, in which local resistance to state power would be overcome by the imposition of a systematic, uniform set of laws to be implemented by a centralized bureaucracy. Unlike in France, the Italian state never quite succeeded in turning 'peasants into Italians'. The state remains, for many Italians, an unloved and even loathed presence, tolerated for providing tangible benefits such as jobs in the public sector, state pensions, and healthcare, but not respected. In large sectors of Italian society the state has failed to establish itself as a necessary framework for civic coexistence or an efficient and fair economic system.<br />
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For this reason, we can get rid of Berlusconi (perhaps), but it is much harder to overcome <i>berlusconismo</i>.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-23675275121317907652013-04-06T01:19:00.001-07:002013-04-06T01:19:17.944-07:00The Grasshopper and the Ant Revisited<span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Some interesting posts on debt from </span><a href="http://fatasmihov.blogspot.it/2013/04/gross-mistake.html" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Antonio Fatas</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> and </span><a href="http://noahpinionblog.blogspot.it/2012/10/debt-and-burden-on-future-generations.html" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Noah Smith</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> which I'd recommend to anyone tempted to believe that debt is necessarily a bad thing (also Krugman </span><a href="http://krugman.blogs.nytimes.com/2013/04/03/america-the-debtor/" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">here</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, </span><a href="http://krugman.blogs.nytimes.com/2013/04/04/thinking-straight-about-debt/" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">here</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> and</span><a href="http://krugman.blogs.nytimes.com/2013/04/03/debt-and-david-stockman/" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;"> here</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> making similar points after </span><a href="http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html?src=me&ref=general&_r=1&pagewanted=all&" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">David Stockman's rant</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">). Noah Smith's post is headed by a picture of Aesop's fable of the Grasshopper and the Ant, a typical metaphor used by the debt phobic.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Just in case you want the short version, the story is basically that headline debt figures don't tell us that much about their consequences, and we have to consider two important variables: what the debt is actually spent on (Smith), and the ratio of assets to liabilities (Fatas). Put simply, getting into debt to finance consumption probably places a burden (in the form of lower than otherwise consumption) on future generations, but doing it to finance investment all else equal has the opposite effect.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Drawing on Smith's analysis, we can see that the remedy of debt reduction can end up being more damaging than the debt itself. The UK, for instance, has succeeded in cutting its government borrowing only </span><a href="http://notthetreasuryview.blogspot.co.uk/2012/05/four-charts-and-why-history-will-judge.html" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">by cutting government investment</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, which in the current climate means cutting investment in the economy generally (given the private sector's pro-cyclical reluctance to invest). This reduces the productive capacity of the economy in the future, reducing future consumption. In this case then, debt reduction, not debt itself, is what is placing a burden on future generations, since George Osborne is (rightly) preserving the current consumption of the growing elderly population, which constitutes the lion's share of social spending.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Fatas' point about balance sheets is another way of making the same point. Debt corresponds to assets; or as Krugman keeps pointing out, at the level of a whole economy debt is largely money we owe to ourselves. We can see that clearly enough by looking at Germany, whose headline gross debt number is actually pretty high, but whose net external investment position is comfortably in the black. Ignoring the assets that correspond to liabilities is like equating a student loan with credit card debt to pay for a holiday.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">So the emphasis on debt is missing the point. It is investment that is important for future generations, not debt. And of course, by squeezing current consumption debt reduction in a recession squeezes current production, reducing the ability to pay off the debt without unnecessary pain. In the periphery countries of the eurozone, unemployment is driving the young - the future productive workers - to migrate, perhaps never to return, whilst the old - who are current consumers, but relatively unproductive - remain. In Aesop's terms, austerity kills the ants, leaving only the Grasshopper, sitting unhappily under a leaking roof. Why are we doing this to ourselves? Well that's for a future post.</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-63909483530388934232013-03-18T03:57:00.001-07:002013-03-18T03:57:33.640-07:00The Euro Crisis as 'Cheese Touch'<span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">My favourite scene in the first 'Diary of a Wimpy Kid' movie is the '</span><a href="http://www.youtube.com/watch?v=73DxZPhVOYc" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">cheese touch'</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. A piece of mouldy cheese is left in the schoolyard, and the kids keep well away from it as it gets greener and slimier. Until, one day, someone touches it - and they are ostracised until they can pass it on to someone else who will get the same treatment. The cheese touch is passed around the school, creating horror and fear in everyone. It's kind of Camus' </span><i style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">La Peste </i><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">for pre-teens.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">The euro crisis is starting to look a bit like the cheese touch. The banking crisis of 2007-8 created a financial blackhole, and at some point we are going to have to come to terms with the losses and start from scratch. But of course none of us want to take the losses ourselves. In the absence of some kind of sensible and credible agreement to spread the pain, each group/nation/individual has to try to protect themselves from taking a disproportionate share of the losses, and assume others will do the same. In short, we'll keep well away from whoever has the cheese touch. Today, it's the</span><a href="http://www.ft.com/cms/s/0/f890566a-8f24-11e2-a39b-00144feabdc0.html#axzz2NsazVc2E" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">unfortunate small savers of Cyprus</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">The answer has got to be that the burden of adjustment is shared. This is for moral, political and economic reasons. Morally, because, well, life isn't fair but it shouldn't be Mad Max. Politically, because unless we give up on democracy, the victims of adjustment will protest and remove representatives who impose unfair burdens. And economically, because the weakest groups politically tend to be the weakest groups economically, and they simply can't take the losses - witness the brutal yet futile welfare reforms in the UK.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Who decides how to share the pain of adjustment? In </span><i style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Wimpy Kid</i><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, the responsible adult - the school janitor - is also disgusted by the mouldy cheese and sweeps around it. The EU is probably our demotivated janitor. And in </span><i style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Wimpy Kid</i><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, the cheese touch's journey around the school ends when it lands on Dieter Muller, a German exchange student. Baffled by zey cheese touch, </span><a href="http://www.imdb.com/title/tt1196141/quotes" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Dieter takes it with him back to Dusseldorf</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. My guess is that ultimately the euro crisis will end the same way.</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-28295677923451219792013-02-26T02:53:00.001-08:002013-02-26T02:53:06.206-08:00The Italian Election: Why it's Actually Good News<span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">So, with all the usual commonplace reactions to the Italian election: '</span><a href="http://www.telegraph.co.uk/news/worldnews/europe/italy/9893630/Italy-pitched-into-chaos-as-Berlusconi-makes-election-comeback.html" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">chaos</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">', '</span><a href="http://www.bbc.co.uk/news/world-europe-21586338" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">ungovernable</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">', and so on - it's time for a contrarian view. In a number of ways this is a great outcome.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">First, Berlusconi will be happy with the result for sure, because it gives him huge bargaining power - no majority in the Senate is feasible without him. But let's remember that his coalition won only 29% of the vote, down from 47% in 2008, and his party, the PDL, won 21%, down from 37%. So the worst expression of Italian corruption and conservatism took a battering in the polls. Italians are not as forgiving as we feared.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Second, the two parties that represented continuity in sticking to the absurd commitment to austerity - the PD and Monti's Scelta Civica - both performed way below expectations. Monti's result is hard to read as anything but a rejection of European technocracy and its perverse insistence on pain and sacrifice as the way to recovery. Greece and Spain have largely caved, Italy, the biggest and most important Southern economy, and probably the most self-confident despite its problems, has said 'basta'. This has got to be good for Europe - better we accept this now, then have to wait for Golden Dawn to win in Greece.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Third, Italy's venal and reactionary political class is obviously a huge problem, and the amazing performance of Beppe Grillo's Five Stars Movement - at 25% the most voted individual party - shows that many Italians, and especially the young, have had enough of their politicians. Again. Of course, Berlusconi himself emerged out of the ruins of the last exercise in eliticide, back in the early 1990s. He then proceeded to piece together a new regime of rent-seeking and policy paralysis which is responsible for Italy's long-term decline. Grillo may have no policies, but as a protest vote you can't get much better than that. If nothing else, Grillo sends a clear signal to the crooks that a large number of Italians have had enough of the stealing and incompetence.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Now, this does not mean I'm optimistic. But if we add this result to the steady shift in the debate towards the inescapable conclusion that austerity is a disaster (even Olivier Blanchard </span><a href="http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf" style="background-color: white; color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">thinks so</a><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;"> now), then perhaps Europe will edge towards some more sensible approach to preserving the euro. Will this solve all our problems? No. But if Merkel wants the euro to survive, she'll have to start listening to Southern European voters as well as her own.</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-6033983830421974052013-01-25T00:58:00.001-08:002013-01-25T00:58:49.637-08:00New paper! The Trouble with Economic Reform in Southern Europe<br />
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<b>The Trouble with Economic Reform:<o:p></o:p></b></div>
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<b>Understanding the Debt Crisis in Spain and Italy<o:p></o:p></b></div>
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Jonathan Hopkin</div>
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<b>Introduction</b></div>
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The ‘great recession’ of the late 2000s began as the collapse of the ‘Anglo-Saxon’ model of highly leveraged capitalism, but the countries that have suffered most have been the Southern European democracies, often referred to as the ‘PIGS’<a href="http://www.blogger.com/blogger.g?blogID=340615335576468640#_edn1" name="_ednref" title=""><span class="MsoEndnoteReference">[i]</span></a>. The transformation of what started as a banking crisis into a sovereign debt crisis has ended up engulfing countries who, for the most part, were not particularly associated with the financial excesses of the boom years, and has allowed debate to move away from reform of the financial system in the Anglo-Saxon countries to the sustainability of government spending in Europe, and particularly Southern Europe, and the future of the euro currency.</div>
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To read the full paper, click <a href="http://personal.lse.ac.uk/hopkin/Hopkin%20Economic%20Reform%202013.pdf">here</a>.</div>
Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-45016611248905360242012-12-28T02:51:00.001-08:002012-12-28T02:51:38.836-08:00Grillo ergo sum
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So in reply to Monti's <a href="http://www.agenda-monti.it/"><span class="s1">Agenda</span></a>, Beppe Grillo has decided he also ought to come up with a programme. Grillo's '<a href="http://www.gadlerner.it/2012/12/28/i-16-punti-dellagenda-grillo"><span class="s1">16 points</span></a>' is a pretty depressing read, confirming the total lack of any innovative thinking on the Italian political scene at the moment. Grillo's party basically represents the traditional 'antipolitica' - populist, pseudo-Poujadiste hatred of the political class - which has long been a powerful force in Italy, coexisting oddly with what has actually been a very stable party system for a most of the post-war period.</div>
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Italians have comparatively very low levels of trust in their political leaders, yet take a very long time to replace them. The last big political earthquake was in 1992-94, when the post-war political elite revolving around Giulio Andreotti and the slightly younger cohort of Bettino Craxi and Arnaldo Forlani was swept away by the <i>Tangentopoli </i>revelations of entrenched and often spectacular corruption. After the 1994 elections, a new elite based around Berlusconi's dominance of the right (alongside the former Fascist Gianfranco Fini and the Northern separatist Umberto Bossi), former Christian Democrats Romano Prodi and Pierferdinando Casini in the centre and the d'Alema generation of ex-communists on the left, took control and remained at the commands until now. A TV news programme in the UK in 1994 would have featured figures such as John Major, Michael Heseltine, Tony Blair and Gordon Brown. Italian <i>telegiornali </i>still revolve around Berlusconi, Fini, and Casini on the centre-right, and Bersani was already a minister in the first Prodi government elected in 1996.</div>
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The forthcoming elections look likely to change all this, with Bossi now off the scene (largely due to illness)) and Berlusconi fighting a last battle to remain relevant. But the novelties on the political scene - Grillo and Monti - seem themselves to be fighting the battles of the past. Monti, himself just short of 70, represents the generation of Eurocrats responsible for designing European Monetary Union, determined to apply the orthodox medicine of austerity to reassure the markets and senior European partners that Italy will keep its side of the eurodeal. Grillo, a comparatively youthful 64, proclaims a sweeping condemnation of the entire Italian political class, and offers a programme in which 10 of the 16 points are focused on reducing the financial costs of professional politicians and eliminating political parties from the decision-making process. On the economy, Grillo suggests a referendum on the euro, a guaranteed minimum income (in which currency?), a stop to big infrastructure projects and a vaguely defined programme to help small and medium-sized businesses. As an economic programme, this could have come straight out of the vague <i>autogestionaire</i> thinking of 1970s eurocommunism.</div>
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Faced with this choice, emigration looks the best bet for Italians who have not yet claimed their pensions. Torn between a dour and self-interested technocracy and an opportunistic and ignorant populism, the only viable choice is Bersani's stale recipe of timid liberalization and maintenance of a notoriously unjust and unbalanced welfare state. More than ever, Italy is suffering from its failure to develop a mainstream, social democratic, egalitarian and pro-market party on the left. The PD is trying to become this, but remains trapped by its conservative Catholic wing on the right and its traditional communist wing on the left, neither of whom seem to understand how markets need to be regulated in the modern age.</div>
Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-21373663093271428162012-12-27T09:48:00.001-08:002012-12-27T09:48:22.217-08:00Privatize and be damned
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The Italian elections are looming, and amidst the chaos of elite manoeuvrings there is the glimmering of a policy debate (a bit of a rarity in Italian election campaigns). Mario Monti, despite announcing he would not personally stand in the elections (being a life senator, he will be in parliament anyway) has nailed his colours to the mast publishing an '<a href="http://www.agenda-monti.it/"><span class="s1">agenda</span></a>' (basically a manifesto) and inviting party lists to commit to electing him Prime Minister once the new parliament is formed.</div>
<div class="p2">
<br /></div>
<div class="p1">
Interestingly, Monti's programme has already been <a href="http://www.corriere.it/editoriali/12_dicembre_27/troppo-stato-in-quell-agenda-alesina-giavazzi_8161faf2-4fec-11e2-a2f4-57facfb76e8a.shtml"><span class="s1">condemned as 'statist'</span></a> by Alberto Alesina and Francesco Giavazzi, the economist duo that have spent the last few years vainly demanding liberalization and reform of the Italian economy. Alesina and Giavazzi's argument is that the Italian state acts as a break on economic activity, and a large-scale programme of privatization is needed to liberate Italians from one of the heaviest tax-burdens in the OECD. Rather than taxing the income of productive sectors and then giving them free services, for A % G richer citizens should be offered lower tax rates and invited to take out private insurance policies for healthcare and pay market-based fees for school and university. Mmm, it would be fascinating if that had ever been tried somewhere - then we could maybe get to see what would happen! Of course we have the natural experiment of the US, whose healthcare system is the most expensive and almost certainly the least efficient of any advanced nation. And sure, it has great universities, but I can't remember any studies showing US private high schools as being better than the largely state-funded systems in Europe.</div>
<div class="p2">
<br /></div>
<div class="p1">
But actually it's even worse than that. Privatization can be at best a modest improvement (for instance, airlines in the 1980s and telecoms, for the most part), a lot of the time, pretty disappointing (utilities without adequate regulation), and sometimes, totally catastrophic (UK railways, Russian... well, just about everything). The point being that even if you believe the market is likely to perform better than the state, privatization isn't enough on its own - it needs to be done properly. And the institutions that determine whether or not a privatization is done properly are precisely the same ones that determine whether or not a state company will fail. So privatization and liberalization in themselves don't solve anything, unless you manage to solve the original problem which is the failure of the political system to nationalize or privatize, regulate or liberalize, efficiently.</div>
<div class="p2">
<br /></div>
<div class="p1">
So to take an example, cited in the comments to A & G's article, car insurance in Italy before 1994 was a cartel regulated by the state, which fixed prices and allowed insurance companies to enjoy profits without competitive pressure. Then, liberalisation came along with the removal of price controls, and hoopla! Italian car insurance prices increased by 464% in less than two decades. The reason presumably being that the state failed to regulate competition properly in the market, and therefore the removal of price ceilings left the insurance companies free to fix prices at a higher level.</div>
<div class="p2">
<br /></div>
<div class="p1">
What makes Alesina and Giavazzi sure that privatization in Italy would not be just as bad as statism? No idea. But the fact is that wholesale privatisation - especially of delicate sectors like healthcare and education - would be an accident waiting to happen unless Italy manages to reform its politics. And pushing hard for American-style solutions, precisely when the US is in almost as bad a mess as Italy, doesn't seem politically smart to me.</div>
Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-75551715010586317742012-11-28T03:32:00.003-08:002012-11-28T03:32:32.968-08:00Catalonia: First Step Towards Independence?Some more thoughts on Catalonia, this time on the LSE EUROPP blog:<br />
<br />
<a href="http://blogs.lse.ac.uk/europpblog/2012/11/27/catalonia-election/">http://blogs.lse.ac.uk/europpblog/2012/11/27/catalonia-election/</a>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-8478555011398163682012-11-24T04:17:00.001-08:002012-11-24T05:17:24.655-08:00Catalonia: a nation with a state?After spending the last few weeks observing the slow-moving collapse
of the Spanish state, the time has come to put down my thoughts on the idea of Catalan independence. Like in any debate on
nationalism, these thoughts are part rational, part emotional, and like
in any debate relating to identities, someone will probably be offended
(for this reason I never blog on the Middle East). So here goes.<br />
<br />
The first point is that there is something vaguely insane about using the term '<a href="https://www.evernote.com/shard/s227/sh/cadabc19-08e1-44e5-bdfd-5022f871652d/76db06ae8bd243807dbdae52dc696e58">independence</a>'
to describe the putative creation of a Catalan state. As a small
European economy, Catalonia would be totally dependent on its neighbours
for trade, and assuming it is allowed to seamlessly remain in the
European Union, it will have little to no real decision-making power
over the issues of the future of the Eurozone and the European
integration process in general. Even more than that, nearly four
centuries of political integration into the rest of Spain has meant that
the Catalan economy is deeply interconnected with the rest of Iberia.
Again, decisions made outside Catalonia - potentially by a bitter <a href="http://politica.elpais.com/politica/2012/11/23/actualidad/1353697164_273465.html">Spanish electorate sour at the 'divorce'</a> - will have a major effect on its future.<br />
<br />
That
of course doesn't mean Catalonia can't be a successful state in
economic terms. Given the Catalans' famed parsimony, it was predictable
that the debate on 'independence' has actually revolved around the
economic consequences of the split with Spain. As one of the richer
regions in Spain, located closer to the main European markets than other
regions, there is every chance the Catalan economy will do just as well
if not better outside of Spain. But here's the rub - Spain is in
colossal economic trouble, and Catalonia, notwithstanding the supposed '<a href="http://economia.elpais.com/economia/2012/10/05/actualidad/1349467455_178571.html">fiscal dividend</a>'
it would gain from no longer subsidizing poorer Spanish regions, is not
significantly less exposed to the problems facing the Southern
eurozone. Like the rest of Spain, it had a housing boom and bust, its
government has racked up huge deficits since the crisis, and its wage
costs are uncompetitive. However well the secession negotiations could
go, the new Catalan state will remain in the group of troubled Eurozone
economies, and all the signs are that these economies will take a very
long time to return to growth. NB, no Catalan nationalists are
advocating leaving the euro or defaulting on their share of the debt.<br />
<br />
The
economic crisis has clearly acted as a trigger for the calls for
independence, but of course Catalan nationalism has long been about much
more than economics. The centrality of the Catalan language and
hostility to the reactionary nationalism of the Spanish right have been
if anything more important in the period since Franco's death, in which
Catalonia, like other 'historic nationalities' in Spain, has acquired
significant powers of self-government. The autonomy enjoyed by the
Catalan government, the Generalitat, has allowed it to push hard on
linguistic policy, ensuring that recent generations of Catalans have
been educated in the Catalan language (as well as learning a
Catalan-centric version of Spanish history). Until recently, most
Catalans were quite happy with their status as a decentralized region
within Spain, which correponded to the largely dual national identity of
the population (which the plurality of Catalans regarding themselves as
both Catalan and Spanish in some measure). The push to independence
marks a significant radicalization of Catalan national claims, and
although it has clearly been building as a strand of Catalan identity
over the past couple of decades, the shift towards independence of the
centre-right CiU party led by Artur Mas is a major departure.<br />
<br />
So
the elections will be worth watching for signs of hesitation amongst
the electorate. It is true now that a sizable majority of parties
currently present in the Catalan Parlament are advocating independence,
but these parties represent a percentage of the electorate which is
clearly superior to the numbers expressing support for independence in
the opinion surveys we have available. So the question is, will CiU be
able to drag its more conservative electorate to the pro-independence
camp? The weakness of the two main anti-independence parties - the
Spanish Popular Party and the Catalan affiliate of the Socialist Party -
makes them unlikely beneficiaries of any hesitance in the Catalan
nationalist electorate. But it will be worth taking a close look at
turnout. The Catalan population is actually fairly divided between a
majority of Catalan speakers and a large minority of Castillian
speakers, many of whom are now migrants from Latin America, rather than
from Southern Spain as in the past. Will Spanish-speaking or
Spanish-identifying Catalan citizens really want to go for an
independent state? Will the older generation of Andalusian-born
immigrants who have historically supported the Spanish national level
parties really accept independence? It is true that Catalan nationalism
is more civic and inclusive than, say, Basque nationalism, but how would
non-Catalan speakers feel about the official status of Castillian in a
new independent state?<br />
<br />
The debate so far has barely
registered these themes. In fact one of the oddest features of the
campaign has been the intervention of overseas-based academics, most
notably the economist <a href="http://salaimartin.com/">Xavier Sala-i-Martin</a>, becoming vocal and emotive advocates of Catalan 'patriotism', revealing an uncharacteristic lack of <i>seny</i>
(Catalan for a kind of pragmatic common sense). Nationalism is
ultimately an emotive construct which fits ill with rational debate. For
this reason, debate around identities is rarely conducive to sensible
decision-making, as the history of the last couple of centuries has
clearly established. Catalonia does not have to fall into the kind of
disastrous traps of other secession processes, but the insouciance with
which such a major change is being contemplated suggests a lack of
awareness or a short historical memory.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-8572620262616898422012-10-15T01:06:00.001-07:002012-10-15T01:06:59.188-07:00The Economist discovers social democracyInteresting to see The Economist lauding <a href="http://www.economist.com/node/21564412">Sweden: The new model</a>. Sweden has a generous welfare state, strong trade unions, and high living standards. What's more, at the moment Sweden is one of the few advanced democracies that is growing and has a budget surplus. So it's about time some of the mainstream commentariat starting to notice what was going on.<br />
<br />
In fact Sweden is not really an outlier or an exception. If we look around the advanced democracies, the best performing countries have been those with the most generous welfare states and most entrenched trade unions (Sweden, Netherlands, Finland, and of course Germany). In contrast the countries with deregulated financial markets, weak trade unions and limited welfare states are mostly suffering, and the PIIGS of the Eurozone periphery, despite popular myth, also have weak unions and patchy social coverage.<br />
<br />
So the crisis, in fact, has exposed the bankruptcy of the free market, anti-social model that has dominated politics and economic policy since the 1980s. Strangely, political leaders have failed to catch on, and continue to plug the same snake oil, in the guise of 'structural reform', which has brought disaster. The misery of the current recession, instead of sparking a search for equitable solutions, has instead led to a descent into masochistic and self-defeating austerity policies, with a bit of free market liberalism thrown in. After 2-3 years of this medicine has failed to turn around any of the economies it has been applied in, a rethink is overdue. Unfortunately it will probably take total social breakdown (probably in Greece and/or Spain) before the humble pie is consumed.<br />
<br />
<a href="https://chrome.google.com/webstore/detail/pengoopmcjnbflcjbmoeodbmoflcgjlk" style="font-size: 13px;">'via Blog this'</a>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-28936717795512952242012-10-01T08:07:00.001-07:002012-10-01T08:07:57.035-07:00Stress-testing European democracy<br />
One thing we have learned so far in the Great Recession is that <a href="http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf">stress tests for banks</a> are pretty much a waste of time, because nobody seems to take them that seriously. Like all other estimates of the depth of our financial crisis, the stress tests understate the scale of banking losses and overstate their ability to withstand further shocks. Current estimates of Spanish banks' shortfall - around 60 billion euros - are scarcely believable, given that the collapse of the housing bubble in Ireland - a country with a tenth of the population of Spain, was over <a href="http://www.cfr.org/spain/spain-doubles-down-austerity/p29172">50 billion</a>. So much for stress tests for banks.<br />
<br />
But we are doing quite a lot better at stress-testing the democratic regimes of periphery countries. Yes, that's right, those countries with the most recent experience of dictatorship, the ones whose democracies are scarcely two generations old. Greece, Spain and Portugal began the 1970s, the last great economic crisis, as authoritarian regimes of varying degrees of brutality. By the time the years of stagflation were over, dictators had been booted out of all three countries and replaced by democracies which, on the whole, have been as successful as anyone observing events in the 1970s could have hoped.<br />
<br />
Until now. Unemployment of 25% in Spain and Greece, well over 50% youth unemployment, a total GDP contraction in Greece of 25% since 2007, and more austerity to come.<br />
<br />
I'm still pretty confident of democracy in Spain and, as far as I can tell, Portugal. And I think Italy, with all its huge failings as a political system, has far too powerful a democratic majority to regress to where it was in the 1930s.<br />
<br />
But Greece, I have to say, really worries me now. <a href="http://www.ft.com/cms/s/0/7f797fde-f778-11e1-ba54-00144feabdc0.html#axzz283br1M7F">Stories</a> of the police referring citizens to the viligante arm of Golden Dawn, and the<a href="http://www.nytimes.com/2012/10/01/world/europe/amid-greeces-worries-the-rise-of-right-wing-extremists.html?pagewanted=all&_r=0"> recent polls</a> placing the thugs as third party ahead of PASOK, set my hair on end. In Spain, democracy is being stressed in different ways - not only on the streets, with increasingly tense demonstrations by the real victims of the crisis, the young <a href="http://ccaa.elpais.com/ccaa/2012/09/26/madrid/1348680731_595925.html">(and a nostalgically brutal response by the police)</a>, but also with the Catalan challenge to the 1978 constitutional settlement, which has the potential to create political chaos.<br />
<br />
Not only are we unlearning the economic lessons of the 1930s, as <a href="http://www.chron.com/opinion/outlook/article/Paul-Krugman-Unlearning-the-lessons-of-the-1930s-1712919.php">Paul Krugman keeps reminding us</a>, we are also unlearning the political ones. When placed in an impossible situation, there is no guarantee voters will respond with trusting patience in the established elites when there are political entrepreneurs out there with easy solutions to their problems. So far, only Angela Merkel amongst major European leaders has survived an election since 2008. In Greece, rapid turnover has decimated the party system and opened up a huge space for the worst kind of racist nationalist demagoguery. And the worst thing is, that the mainstream parties are, generally speaking, at a loss to respond to the crisis, so we can hardly blame people for turning to the alternative.<br />
<br />
There's more at stake here than economic growth. The EU elites need, as <a href="http://www.wptv.com/dpp/news/world/samuel-l-jackson-wake-the-f-up-youtube-video-attempts-to-get-obama-voters-motivated">Samuel L. Jackson might say, to 'wake the f*** up'</a>.<br />
Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-7457298936503008562012-08-03T01:18:00.005-07:002012-08-03T01:31:36.008-07:00Italy and the EU debt crisisCommentary on the Euro crisis to be published in the autumn:<br />
<br />
<br />
<div class="MsoNormal">
In 2012, the Eurozone crisis has begun to follow a
predictable script. First, a member state begins to show signs of financial
stress, with a growing public deficit and debt burden alarming markets. The
spike in borrowing costs sparks a policy response by the member state
government, raising taxes and cutting public spending, which depresses economic
activity further. The resulting poor growth data leads to further increases in
borrowing costs. When these costs hit an unsustainable level, the European
Union institutions intervene by lending the struggling country bailout money,
in return for further commitments to reduce the deficit. A further fiscal squeeze follows, sending
the debtor nation into what economist Paul Krugman describes as a ‘death
spiral’.</div>
<a name='more'></a><div class="MsoNormal">
By July 2012, Greece, Portugal, Ireland and Spain had all
reached the final stage of this process. The three smaller countries were the
first to be bailed out, and although the sums involved appear staggering, the EU
had little trouble raising funds to sustain public borrowing in countries whose
GDP amounted to less than a tenth of the Eurozone total. But the financial
troubles of Italy and Spain, the third and fourth largest economies in the
Eurozone, are of an entirely different order. Like the large investment banks
at the centre of the financial meltdown of 2007-8, Italy and Spain are widely
seen as ‘too big to fail’, since their national debts are so large that default
would likely trigger a financial collapse of incalculable scale. At the same
time, they are also ‘too big to bail’, since covering their borrowing costs for
any significant period of time would require vastly greater resources than
those provided for the smaller periphery economies.</div>
<div class="MsoNormal">
This uncomfortable dilemma is at the heart of the Euro
crisis, and explains why it is taking so long to resolve. Bailing out the
periphery countries would be enormously expensive, and countries such as
Germany, Netherlands and Finland fear that a bailout would create a lasting
relationship of dependency of the debtor nations on their more creditworthy
neighbours. Not bailing them out, however, would risk bankrupting financial
institutions not only in the Eurozone periphery, but also in the creditor
countries of Northern Europe: after all, the debts run up by the periphery
correspond to the financial surpluses built up over the past decade by the Eurozone
core. Faced with a choice between such unpalatable courses of action, European
summits have chosen to patch together short-term measures which stave off the
inevitable reckoning without providing any definitive solution, a technique
observers have christened ‘kicking the can down the road’.</div>
<div class="MsoNormal">
For Italy and the other Southern European countries, this
impasse has vast economic and political costs, which cannot but have profound
consequences not only for the periphery countries themselves, but for the
Eurozone and the European Union as a whole. This article will discuss the
economic and political implications of the Southern European crisis with
particular focus on Italy, the largest debtor nation. It proceeds as follows:
the first section examines the roots of the crisis in the design of the Euro
and Italy’s efforts to join it, the second section examines the way in which
monetary union paved the way for the debt crisis in Italy and the rest of
Southern Europe, the third assesses the response to the crisis, and the final
section discusses the political sources of Italy’s economic problems.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>The Roots of
Austerity: Maastricht, the Euro and the Convergence Criteria<o:p></o:p></b></div>
<div class="MsoNormal">
The global financial crisis which began in 2007 has been the
subject of a vast amount of analysis and discussion, in the traditional media,
in business circles, in academia and, most fascinatingly, in the emerging new
social media which have provided an innovative channel for popular input into
the debate. Unlike the previous major crisis affecting western economies in the
1930s, today we benefit not only from decades of research in economics and the
other social sciences, but also an unprecedented amount of information and
analysis available to not only policy-makers, but also to any interested
citizen possessing a networked computer. The experience of the 1930s, the
Keynesian revolution in economics that resulted from it, and the more recent
examples of financial crises and their consequences in countries as diverse as
Argentina, Russia, Japan and Sweden, should have made governments more prepared
than ever to deal with this kind of situation. Yet the advanced countries are still
in the grip of a deep recession, five years on, and the policies followed in
the Eurozone seem almost designed to make things worse.</div>
<div class="MsoNormal">
Although there is legitimate debate to be had on the
different remedies to our economic problems, it is difficult not to see the
current mess in the Eurozone as a political, rather than a policy, crisis. The
policy response of delay and denial followed by conditional bailouts which
obstruct economic recovery certainly corresponds to the economic thinking of
influential figures in the financial community and in key institutions like the
European Central Bank. However, the inability of European policy makers to move
beyond these policies, even when their failures become evident, is a direct
consequence of the way the Euro was constructed. In order to understand the
policy response, we need to briefly revisit the policy dilemmas addressed at
the very beginning of the process of monetary integration, over two decades
ago.</div>
<div class="MsoNormal">
The creation of the Euro was the culmination of two decades
of attempts to revive the kind of exchange rate stability that had underpinned
the Golden Age of European growth in the 1950s and 1960s, the so-called Bretton
Woods system. The collapse of Bretton Woods, formalized by the United States’
decision to float the dollar in 1973, left the European nations facing an
increasingly unstable monetary environment, with currency parities increasingly
impossible to maintain. Germany, with its independent Bundesbank tasked with
the job of ensuring price stability, was able to keep inflation under control,
reinforcing the Deutschmark. Italy, along with other European countries
including the United Kingdom and France, found it impossible to put a lid on
inflation, as oil price rises fed through into higher wages and yet further
price rises. The result was a series of devaluations of the weaker currencies,
disrupting trade between European nations and undermining governments’ attempts
to stabilize prices.</div>
<div class="MsoNormal">
The idea of monetary union was a response to this turbulent
period, but the differences in the inflation rates of different European
countries were a serious obstacle to a single currency. German policymakers,
and in particular the Bundesbank, were reluctant to compromise the
anti-inflationary credentials they had carefully built up through the post-war
period. Pooling their monetary credibility with other weak currency nations
would inevitably put it at risk, and Italy, as the most inflation-prone of the
largest European economies, was the most obvious threat. Concerns about Italy
and the other Southern European member states were a key reason for the
Maastricht Treaty establishing strict convergence criteria which countries had
to meet to be admitted to the Euro. As well as achieving inflation rates close
to those of the other participating countries, qualification for Euro entry
also required a fiscal deficit below 3% of GDP, and total government debt no
higher than 60% of GDP. The usefulness of the criteria in preparing countries
for monetary union was contested by many economists, but these tough
requirements were crucial in overcoming resistance to the Euro in Germany, and
particularly in the Bundesbank.</div>
<div class="MsoNormal">
At the time of the Maastricht summit, Italy was a long way
from meeting any of the convergence criteria. Inflation, interest rates, budget
deficits and public debt were all far higher than the Maastricht limits. But in
just a few short years, Italy had qualified for participation in the first wave
of monetary union. How was this possible? In the 1970s and 1980s Italy had
managed its economic problems through a combination of frequent currency
devaluations, to maintain competitiveness when wages rose more quickly than
productivity, and deficit spending, which allowed government to buy social
peace. By the 1990s, the essential unsustainability of this model had become
clear, and Italy experienced a deep economic crisis which brought sweeping
changes to its political system, but also paved the way to its successful bid
to enter the Euro.</div>
<div class="MsoNormal">
The trigger for the crisis of the early 1990s was the
reunification of Germany, which disrupted the system of adjustable exchange
rate pegs adopted by most EU countries, the European Monetary System (EMS).
Italy had participated in the EMS ever since 1979, but after 1990 the lira came
under heavy pressure because of the Bundesbank’s concerns about inflationary
pressures building in the newly reunified German economy. German interest rates
were ramped up to keep prices under control, forcing other EMS member countries
to either match this tough contractionary policy – which would bring an
economic slump – or allow their currencies to devalue against the Deutschmark,
jeopardizing their membership of the system. Italy’s high inflation and
budgetary weakness placed it under particular pressure and it, like Britain,
left the Exchange Rate Mechanism of the EMS in September 1992.</div>
<div class="MsoNormal">
The Italian economic crisis of 1992 coincided with a
dramatic political crisis which brought about the wholesale replacement of the
political class that had governed the country for decades. The Christian
Democratic-Socialist coalition, led by such historical figures as Andreotti and
Craxi, collapsed in the wake of the economic slump, the rise of the populist
Northern League, and a determined anti-corruption campaign waged by reformist
magistrates in Milan, Palermo and elsewhere. This political crisis brought to
the fore a new political elite: on the right, new populist forces led by Silvio
Berlusconi replaced the Christian Democrats and Socialists, whilst on the centre-left,
the former Communists in the ‘Left Democrat’ (DS) party formed an alliance with
reformist Christian Democrats and technocrats associated with prominent Italian
exporters and the Bank of Italy. This centre-left grouping, under figures such
as Giuliano Amato, Carlo Azeglio Ciampi and Romano Prodi, spearheaded Italy’s
push to reform its economy in preparation for Euro membership.</div>
<div class="MsoNormal">
The changes in Italy were welcome to European policy elites,
as they signaled the country’s determination to adhere to the strictures of
monetary union. German fears that Italy’s presence would undermine the single
currency were assuaged by the tough measures adopted by Prodi and others to
bear down on inflation, reform budgetary practices, and stabilize the lira.
Social pacts between government, business and the major trade unions secured
worker wage restraint, administrative reforms and judicial pressure curbed
wasteful and corrupt government spending, and revenue collection was tightened
up to combat tax evasion. All of these measures contributed to improving
Italy’s reputation as a reliable partner in the Euro enterprise, to such an
extent that Italy’s Euro entry was approved by its European partners despite
the failure to reduce public debt below the required 60% of GDP. By joining the
Euro, it was believed that Italy had secured a permanently stable exchange rate
with its main trading partners, a lower inflation rate (thanks to Germany
sharing its anti-inflationary credibility with the other EMU members) and
cheaper borrowing costs. So why is Italy now suffering its worse economic
crisis since the Second World War?</div>
<div class="MsoNormal">
<b>The Euro’s First
Decade: A Disaster in the Making?<o:p></o:p></b></div>
<div class="MsoNormal">
The first few years of the Euro’s operation – beginning in
1999, with the irrevocable fixing of exchange rates and the entry into circulation
of Euro coins in 2002 – hardly presaged the crisis to follow. For Italy, the convergence of interest
rates around the core European economies continued to such an extent that the
spread with German treasury bonds (the differential between the perceived risk
of Italian government debt compared to German government debt) became
negligible. For Italy, a nation with the second highest national debt/GDP ratio
in the advanced world (after Japan), the resulting reduction in debt servicing
costs brought huge savings for the government. </div>
<div class="MsoNormal">
The reduction in interest rates was a key benefit to Italy
of Euro membership. Outside the single currency, Italy’s history of high
inflation, its volatile exchange rate and the poor international credibility of
its governing elites would have kept interest rates high, damaging business
investment and significantly increasing the risk of default on Italian treasury
bonds. With public debt peaking at 121% of GDP in 1994, markets would have been
ultra-sensitive towards any signs of fiscal laxity, compelling Italian
governments to run a tight fiscal policy which would dampen economic growth.
The benefits of convergence for debt management were clear; the debt/GDP ratio
fell consistently until 2004, dropping to 103%, still high but on a trajectory
towards sustainability.</div>
<div class="MsoNormal">
Subsequent events have shown that the benign effects of Euro
membership were more questionable. Hindsight provides us with the evidence that
major problems were brewing, despite the apparently favourable economic
climate. The European single market in general, and Euro membership in
particular, made Southern European countries financially far more integrated
with the other EU member states than had been the case in the past. Capital
controls were abolished as a requirement of the Single European Act of 1986,
totally freeing up capital movements between EU member states. But European
Monetary Union also significantly enhanced the effects of the removal of
capital controls, by reducing the transaction costs involved in transferring
funds across borders, and changing the perception of country risk. In the early
years of the Euro, markets began to see Euro membership as an irrevocable step,
implying that exchange rate risk had all but disappeared. The perceived safety
of Euro-denominated assets sparked massive capital flows, from which Italy and
the other Southern European countries initially benefited. But these capital
flows set the stage for the subsequent crisis by encouraging the accumulation
of greater external debt.</div>
<div class="MsoNormal">
As a wave of capital headed South from the exporting
economies of Northern Europe, economic growth rapidly picked up in peripheral
economies such as Ireland, Greece and Spain. These capital inflows had
different effects on different countries: in Ireland and Spain, the money was
to a significant extent recycled into property speculation and construction,
and through that into consumer spending. The result was rapid growth and an
explosion of private household debt. In Greece, on the other hand, much of the
inflow went into government debt, and the government exploited its sharply
improved risk profile to increase spending, in part investing in public
infrastructure (notably, the 2004 OIympics), in part by fuelling a
clientelistic expansion of public sector employment. By the time of the
financial crisis of 2007-8, these three countries had accumulated significant external
liabilities and trade deficits, leaving them dangerously exposed should the
flow of capital reverse.</div>
<div class="MsoNormal">
The picture in Italy was different. As a more mature
industrial economy, it was less prone to capital flows attracted by the
prospect of rapid ‘catch-up’ economic growth. Italy in fact had suffered from
very low growth ever since the onset of the crisis of the early 1990s. Moreover,
the Italian authorities appeared reluctant to encourage such capital inflows:
the opacity of the Italian financial system, the close relationships between
financial actors and industrial companies, and the notorious complexity of
Italy’s administrative and judicial systems, all acted to discourage inward
investment. However, Italian public debt had become more attractive to
international investors. Like in the other Southern European countries, the
apparent elimination of currency risk meant that Italian bonds seemed a good
investment, offering higher rates than German bunds, but almost the same
default risk. As a result, the profile of holders of Italian debt
internationalized, to the point that less than half was owned by domestic
investors. </div>
<div class="MsoNormal">
The Italian economy benefited initially from these benign
conditions, and growth picked up from the stagnant levels of the 1990s, albeit
remaining well below the EU average. Italian exporters enjoyed a more stable
exchange rate with their main trading partners, a key gain for the Northern
manufacturing industries which were closely integrated into core Eurozone
production processes. But the Euro also exposed some of the weaknesses of
Italy’s economic institutions. Although inflation had dropped markedly through
the 1990s, converging at close the Eurozone average, the introduction of Euro
coins and notes in 2002 was widely perceived by the Italian population as
sparking inflation, as opportunistic businesses converted their prices into
Euros at rate of 1000 lire to the new currency, rather than the official rate
of almost 2000 lire. Although official statistics did not confirm any
significant increase in prices, the public perception of a squeeze on living
standards was strong. Certainly in some sectors where market competition was
ineffective and cartel-like behaviour entrenched, there were opportunities for
price hikes.</div>
<div class="MsoNormal">
It is not clear whether the phenomenon of Euro inflation
impacted on wage bargaining, but it became evident over the subsequent decade
that Italy, like the other Southern European countries, saw a substantial
increase in their relative labour costs as a result of Euro entry. The formal requirements of the
Maastricht Treaty and the Stability and Growth Pact, which focused on fiscal
policy levers controlled by governments, perhaps distracted European
policymakers from the other potential sources of instability which lay outside
government control. As well as financial flows, labour market institutions were
also fundamental to economic management within the constraints of the Euro. By
tying Eurozone countries to an irrevocable fixed exchange rate with other
member countries, monetary union removed forever the strategic tool of
competitive devaluation, a tool deployed frequently by Italy over the postwar
period. Because relative inflation could no longer be addressed by allowing the
currency to slide, Eurozone member states needed to ensure wage costs did not
increase at a constantly higher rate than their neighbours.</div>
<div class="MsoNormal">
This proved difficult, because the Southern European
countries lacked the tradition of stable corporatist bargaining entrenched in
the successful Northern European states. In Germany in particular, trade unions
had accepted in their negotiations with employers significant constraints on
real wage growth, in exchange for job security. Italy and Spain both achieved
high levels of industrial coordination in the 1990s, with trade unions
accepting wage restraint in order to facilitate Euro entry, but once monetary
union had been achieved, bargaining patterns reverted to the more inflationary
patterns of the past. The perceived pressures on prices, the low rate of
productivity growth, and the more tense political climate after Berlusconi’s
victory in 2001, all contributed to the breakdown of industrial peace. Although
wage rises were not dramatic by historical standards, in a context of a fixed
exchange rate and tough wage restraint in the Eurozone core, Italian unit
labour costs quickly rose relative to Germany, threatening competitiveness.</div>
<div class="MsoNormal">
As well as declining competitiveness, the government’s
fiscal health began to deteriorate soon after monetary union. The austere
policies followed by the technocratic and centre-left governments of the mid-
to late 1990s were significantly relaxed once Euro entry was achieved. The
election victory of Silvio Berlusconi’s centre-right coalition in 2001, won
with promises to cut taxes (but no real commitments to cut spending), marked a
shift in emphasis. Italian public debt maintained its downward trajectory until
2004, when it reverted to an upward trend. Although this trend was briefly
halted by Romano Prodi’s short-lived government elected in 2006, by 2008 the
effects of the financial crisis had blown a hole in the Italian government’s
finances, and by 2011 public debt was back up to 120% of GDP, the level reached
in 1994. After little more than a decade, Italy’s fiscal progress had been
wiped out.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>From Here to
Austerity: Italy Responds to the Crisis<o:p></o:p></b></div>
<div class="MsoNormal">
The global financial crisis sparked off by the collapse of
the sub-prime mortgage market in the United States had dramatic effects in the
Eurozone. However, initially the periphery countries did not seem to be
affected any more than the stronger core economies: output dropped in 2008-9
(Q1 2008-Q2 2009) by 6.5 % in Italy, and 6.3 % in Germany. But as governments
across the advanced world allowed budget deficits to grow as unemployment rose
and tax revenues fell, the vulnerability of the Southern European countries
quickly became evident. The rapid increases in public debt resulted from high
and sustained deficits reminded markets that government bonds did carry an
element of default risk, and investors quickly concluded that this risk was
much higher for the periphery countries than for the Eurozone core.</div>
<div class="MsoNormal">
Initially Italy appeared better placed to address the crisis
than its Southern European neighbours. The focus on Greece, whose chaotic
finances and history of unreliable accounting made Italy’s fiscal policy appear
comparatively robust, and Ireland, whose crisis was at first a banking rather
than a fiscal crisis, gave Italy valuable breathing space. The third Berlusconi
government, unlike many other Eurozone gpvernments, shunned expansionary fiscal
policy as a route out of the crisis, and maintained a primary budget surplus
even as the collapse in output tore through revenues. According to OECD
figures, Italy had the smallest deterioration in its fiscal balance between
2009 and 2011 of any Eurozone country, in stark contrast to Northern European
countries such as Germany, the Netherlands and Finland, which rolled out
stimulus packages adding between 5-15% of GDP to their public debt. Due to the
limited nature of Italian unemployment support, even the ‘automatic
stabilizers’ allowed to function by the Berlusconi government had a much
smaller effect than in countries with more generous welfare provision. </div>
<div class="MsoNormal">
This early resort to austerity helped stave off the pressure
on Italian public debt. As the crisis of confidence in Eurozone government
paper spread to Portugal and Spain, which had much smaller debt levels, Italy
maintained a strict fiscal stance, aware that any sign of fiscal weakness could
lead to a rapid increase in the spread between Italian and German bonds. The
eventual breach of Italy’s defences had a number of causes. First, as more
countries struggled to contain the interest rates on new issues of debt,
markets developed an increasing fear of contagion, exacerbated by the limited
response of the European Central Bank and the clear signs of divisions between
Eurozone governments on how to deal with the crisis. Italy, with its
exceptionally large stock of debt, began to be identified as the next weak link
in the Eurozone, and investors in the bond markets factored this fear into
their trading behaviour. To that extent, Italy’s slide into debt crisis was in
part the result of a self-fulfilling prophecy triggered by broader fears about
the future of the Euro.</div>
<div class="MsoNormal">
But Italy had specific problems of its own that enhanced its
vulnerability. Its economic weakness over the preceding two decades, with
economic growth the lowest of any of the Eurozone countries over the 1990- 2012
period, suggested that even if the global crisis were to resolve, Italy would
still struggle to return to healthy rates of growth. With a debt burden larger
than GDP, economic growth would have to be higher than the cost of debt service
if debt were to be reduced, and any spike in borrowing costs would destroy any
hope of this. In the absence of recovery, markets would have to believe that
the Italian government would deliver harsh austerity measures in order to
protect its budget position. Here the poor credibility of Italy’s political
leadership became a major burden. After the brief interlude of centre-left
government under Prodi ended in 2008, the Italian government was once again in
the hands of Silvio Berlusconi, whose chequered business career and tax-cutting
rhetoric proved less than reassuring. Berlusconi’s success in engineering a
return to power did not ensure a strong government, since his increasingly difficult
relations with his coalition allies, particularly Gianfranco Fini, meant the
government would have an unstable parliamentary support base.</div>
<div class="MsoNormal">
The ‘political risk’ associated with Berlusconi brought about
a dramatic change in leadership at the end of 2011. Weakened by further
scandals, Berlusconi could not deliver any coherent response to the rise in the
bond spread through the second half of the year, and an ebbing of support in
the parliament led to his resignation. His replacement by Mario Monti, a former
European Commissioner but not a member of any political party, appeared to
mirror the imposition by EU leaders of a technocratic government in Greece
earlier the same year. Berlusconi’s tenuous grip on the political situation had
generated uncertainty about Italy’s resolve to keep control of its finances,
and the European Central Bank’s letter to the Prime Minister in July 2011
demanding a series of measures in exchange for central bank support confirmed
that the Italian government was increasingly subject to outside supervision in
the main areas of economic policy.</div>
<div class="MsoNormal">
But although Monti’s ascent to the Prime Minister’s office
was certainly a result in part of direct pressure from the ECB and other
European leaders, it was far from unprecedented. The crisis of the early 1990s
ushered in a period in which a series of partially or fully technocratic
governments were charged with managing Italy’s financial and economic problems.
In 1993, as the leaderships of the major governing parties were decimated by a
wave of corruption investigations, Carlo Azeglio Ciampi, a central banker,
replaced Socialist Giuliano Amato until new elections could be held. After the
first Berlusconi government collapsed after only eight months, Lamberto Dini,
another central banker, replaced him until the election of a centre-left
government under Romano Prodi in 1996. Although Prodi’s first government was
formally a partisan administration, with the Prime Minister having stood for
election at the head of a coalition of parties, he assigned key roles to
technocrats in his cabinet, with Ciampi taking over the Treasury and Dini
acting as Foreign Minister.</div>
<div class="MsoNormal">
These dynamics suggest a broader interpretation of the ways
in which Italian politics has shaped the nature of the current economic crisis.
The tensions between political forces – a powerful Communist Party and trade
union movement in the postwar period, pitted against a fragmented coalition of
Socialists, Christian Democrats and a variety of minor parties – have hindered
the formation of stable governments capable of adopting coherent and
far-sighted policies. The accumulation of public debt over the period from the
1970s through to the early 1990s was in part an expression of the difficulties
involving in holding together heterogeneous governing coalitions whilst keeping
the industrial peace: deficit spending appeared as an early, national
manifestation of the current European strategy of ‘kicking the can down the
road’. When Italy’s economic problems reached crisis point in 1992, the
existing array of political parties proved incapable of generating any serious
response, and instead collapsed under the weight of their history of systematic
corruption. But instead of paving the way for a more effective party system,
the changes of the early 1990s did little to provide Italy with stable and
sustainable government. The final
section examines why.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>From First to Second
Republic: The Leopard Changes Its Spots<o:p></o:p></b></div>
<div class="MsoNormal">
The adoption of a new electoral law, based in part on the
‘first past the post’ system used in most English-speaking countries, did
succeed in addressing one of Italy’s secular problems: its high government
turnover. The new electoral system forced parties to form pre-electoral, rather
than post-electoral, coalitions, and to stand for election under a de facto
Prime Ministerial candidate. So after the rapid collapse of the first
Berlusconi government in 1995, the Prodi government lasted from 1996-99, and
the same broad coalition sustained two further centre-left governments in
1999-2001. The Berlusconi government elected in 2001 lasted, with few changes,
until 2006, and his third government from 2008 to late 2011. But this increase
in the duration of Italian governments (which before 1994 averaged around one
per year), the ability of these governments to deal with Italy’s most pressing
structural problems has not shown the same improvement.</div>
<div class="MsoNormal">
One reason for the failure of the reformed political system
– sometimes referred to as the ‘Second Republic’ – to address Italy’s economic
decline, is that the new political parties that emerged from the crisis of the
early 1990s have proved incapable of building coalitions for economic reform.
The complexities of winning over the myriad interests and lobby groups needed
for success in the new, more presidentialist pattern of political competition
hinder the construction of broad programmes of reform. This has meant that
narrow interest groups opposed to reform have achieved a degree of veto power
over the political process. On the right, representatives of the sheltered part
of the economy – small retail interests, taxi drivers, construction firms –
have enjoyed a sympathetic hearing from centre-right governments, making a
mockery of Berlusconi’s early stated ambitions to spearhead a liberalizing,
pro-market revolution in Italy. On the left, trade unions representing largely
older, stably employed production workers have been able to resist calls for
greater labour market flexibility, whilst public sector employees and
pensioners have sufficient weight in the centre-left parties to block radical
reforms and spending cuts.</div>
<div class="MsoNormal">
This problem is not limited to the ‘partisan’ governments of
the left and right – Mario Monti too has faced similar pressures, with an
attempted labour market reform being watered down after union protests, whilst
education policy, whilst parliamentarians from Berlusconi’s Pdl party
threatened to block Monti’s ratification of the EU Fiscal Compact. Any
government, whether technocratic or party political, is subject to the
constraints imposed by the composition of parliament, and the Italian electoral
process has yet to deliver a parliament which could bring about a coherent
programme of reform. One reason for this is the low esteem in which politicians
are held in Italy: in the context of declining loyalty towards party labels and
ideologies, many politicians win election through the exercise of classically
clientelistic or corrupt methods, offering to defend the interests of narrow
but well organized and financed groups, rather than those of more diffuse
social constituencies. The lack of faith in the political class as a whole, not
surprisingly, undermines appeals to support reforms which may be initially
costly and would only bear fruit in the long run.</div>
<div class="MsoNormal">
The lack of confidence in politicians is a long-standing
problem in Italy, but has taken a curious turn in recent years. First, the
emergence of Silvio Berlusconi onto the political scene in 1993 was a quite
dramatic and innovative phenomenon, with a business leader exploiting a gap in
the ‘political market’ to win power himself, building a political party in the
space of just a few short months. It became apparent, once Berlusconi had won a
strong mandate to govern the country, that his main preoccupations lay in the
passage of legislation which directly affected his own industrial interests or,
most frequently, the management and reform of the judicial processes to which
he was subject through his many indictments for corruption, fraud and tax
evasion. Of course, Berlusconi could not ignore his electorate and simply focus
on his own affairs, and he developed a secure support base of small business
people, the self-employed, pensioners and housewives, through astute use of his
media resources and the trading of favours.</div>
<div class="MsoNormal">
More recently, the Beppe Grillo phenomenon has confirmed
Italy’s disgruntled attitude towards its political establishment and its
willingness to support non-traditional politicians. Grillo, a successful
comedian with a specialism in populist rants and conspiracy theorists, has
promoted a grassroots political movement – the Movimento Cinque Stelle (Five
Stars Movement) – which has few clear policies, but a very clear
anti-establishment and anti-party theme. Grillo’s political activity was
initially greeted as another quirky addition to Italian politics, but the
success of the Five Stars Movement in the 2012 municipal elections – winning
around 15% of the vote, and electing the Mayor of the city o Parma – suggested
that, like Berlusconi, Grillo could be a serious contender for political power.
</div>
<div class="MsoNormal">
The success of figures such as Berlusconi and Grillo reflect
the increasingly beleaguered status of conventional political parties in Italy.
This raises the degree of uncertainty around Italy’s future as part of the
Eurozone. As suggested at the beginning of this article, the main obstacles to
a resolution of the Euro crisis are political, rather than technical, and uncertainty
about future government policies is at the heart of this political impasse. If
Germany and the other Northern European countries are to accept a more
integrated fiscal and monetary union, in which they are to pool sovereign risk
with less credible governments, then they will demand guarantees about the
future conduct of these governments. The lack of a stable party system in
Italy, the reputation for corruption and opportunism of much of its political
class, and the strength of populist forces which, from Berlusconi through to
Grillo, are increasingly questioning the Euro project, are a long way from the
kind of reassurance that European policymakers crave. </div>
<div class="MsoNormal">
<br /></div>
<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-24214843808933632862012-07-01T22:44:00.002-07:002012-07-01T22:44:13.244-07:00A footballing lesson<span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">So </span><a href="http://www.huffingtonpost.com/2012/07/01/spain-beats-italy-euro-2012-final-score-goal_n_1641553.html" style="color: #4d469c; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; text-decoration: none;">Spain </a><span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">triumph again.</span><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Not just triumph, but crush an Italian side that in turn had crushed the fancied Germans the other side. Maybe a game too far for the </span><i style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">azzurri</i><span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">, they looked tired and barely got into the game. But how on earth do you play against this team?</span><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">And team is the operative word. Great international sides of the past have often been associated with one great player: Pelé's Brazil, Maradona's Argentina, Cruyff's Holland, Zidane's France and so on. And sure, Xavi and Iniesta have stood out in particular. But what is striking about Spain is that they could probably put out two elevens that would give any other team a game. Villa breaks a leg? Never mind, there is Jordi Alba. Torres is out of form? Who cares, we'll just play 8 attacking midfielders and let Fabregas and Silva score the goals. Puyol injured? No worries, play Arbeloa alongside Piqué and Ramos. If Casillas ever got hurt, you would get Pepe Reina, maybe the best keeper in the Premiership. Arsenal's Arteta doesn't even make the squad. In the end, Italy's players expended so many resources to get to the final they had little energy left, Spain could rotate and give key players a break without missing a kick.</span><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">God knows what would have happened had England encountered this team.</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-46334702796061560012012-06-15T04:25:00.001-07:002012-06-15T04:25:19.076-07:00So much for dynamic provisioning<br />
Nice piece in Bloomberg by Jonathan Weil (<a href="http://www.bloomberg.com/news/2012-06-14/the-eu-smiled-while-spain-s-banks-cooked-the-books.html">The EU Smiled While Spain’s Banks Cooked the Books</a>), pointing out the perverse effects of the Spanish regulatory practice of demanding that banks adjust their accounts for the potential vagueries of the economic cycle ('dynamic provisioning'), supposedly giving them a buffer against downturns.<br />
<br />
Turns out that Spanish banks were able in this way to hide their losses from the popping of the housing bubble until quite recently. Has this helped smooth the financial consequences of the downturn? No need to answer that question.<br />
<br />
All this goes to show that tweaking accounting practices is never going to achieve much if the financial system is based on the kind of Ponzi schemes we've been seeing in the past two-three decades. Governments are going to have to start getting on top of what banks do, and providing better regulatory and fiscal incentives to real investment in real productive activities. How do they do this? Don't ask me, I'm not an economist.<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-47727375507750145222012-06-12T03:05:00.001-07:002012-06-12T03:05:20.167-07:00From technocracy to populismA blog post for the <a href="http://blogs.lse.ac.uk/europpblog/">LSE's EUROPP blog</a>:<br />
<br />
<br />
<a href="http://blogs.lse.ac.uk/europpblog/2012/06/12/austerity-elections-populism/#more-3604">In upcoming elections across the Eurozone periphery, voters are likely to react to austerity by replacing technocracy with populism | EUROPP</a><br />
<br />
"<span style="background-color: white; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px;">As Spain lurches into economic and financial collapse only months after electing a new government with a landslide majority, the difficult relationship between crisis management and democratic politics once again comes into view. Spain’s rapid descent into economic meltdown has been greeted by anti-austerity commentators such as </span><a href="http://krugman.blogs.nytimes.com/2012/06/06/doing-their-best-to-destroy-europe/" style="background-color: white; border: 0px; color: red; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px; margin: 0px; padding: 0px; vertical-align: baseline;">Paul Krugman</a><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px;"> and </span><a href="http://www.ft.com/cms/s/0/74f3017e-ac15-11e1-a8a0-00144feabdc0.html#axzz1x1TdUrr9" style="background-color: white; border: 0px; color: red; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px; margin: 0px; padding: 0px; vertical-align: baseline;">Martin Wolf</a><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px;"> as further evidence of the need for fiscal and monetary expansion on a massive scale in the Eurozone. But it also has important implications for the nature of democracy in the European Union...."</span>Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-3232110306233126572012-06-09T11:19:00.000-07:002012-06-09T11:19:28.483-07:00The myth of moral hazard, or why punishing debtors is futile<br />
This crisis, and its Eurozone variant in particular, is teaching us an awful lot about the political economy. Sadly, most of what we are learning is entirely at odds with the conventional wisdom which still informs policy. And a good part of the wrongheadedness that we are subject to revolves around the concept of moral hazard.<br />
<br />
The plausible expectation of bailouts creates moral hazard, we are told. Yes, it does. There is plenty of evidence that big financial institutions take risks because they expect governments to pick up the pieces if everything goes pear-shaped. Certainly, if top bankers are anywhere near as smart as their paypackets suggest, they should lever up and max on risk, confident that governments will plug the gap if their bets go bad.<br />
<br />
Trouble is, we also know that finance is also prone to bouts of irrational exuberance and panic. Moral hazard may exacerbate the exuberant parts of the cycle, but it also mitigates the panic when things turn bad. Part of (maybe most of) the reason that the Eurozone periphery is in such a self-fulfilling debt trap is that there isn't enough moral hazard around - investors are terrified that if their paper goes bad, they will lose everything. And so the downward spiral accelerates, making bailout infinitely more expensive as panic sets in.<br />
<br />
What about governments? Well here the virtuous Northern economies in the Eurozone are afraid that bailouts now will encourage Southern sovereigns to ignore their fiscal problems in the future, leaving Germany and the others on the hook forever. Moral hazard here gives politicians an incentive to run deficits and buy popularity, whilst others pick up the tab.<br />
<br />
The trouble with this one is that the politicians that are punished are not usually the ones who exploited moral hazard. <a href="http://www.guardian.co.uk/world/2012/jun/08/spain-bailout-agreed-week">Mariano Rajoy</a> took over when Spain's fiscal situation was already out of control, yet he is the politician being exposed to popular anger now. For the anti-bailout policy to work, voters would have to be sophisticated enough to gauge how likely it is that a party's fiscal proposal at time <i>t</i> will result in another party having to impose brutal austerity at time <i>t + </i>1. Very often, as in Greece, successive alternating governments are responsible for the fiscal mess. How can voters cast a partisan vote that sends the correct signal to politicians, so that the risk of irresponsible policy is averted? Do we really think that if this crisis ever ends Greek voters will become eager observers of fiscal rigour on the part of their politicians, anxious to avoid this all happening again? For this to happen some Greek politicians would have to offer voters fiscal prudence whilst others stuck to deficit-fuelled patronage politics, making elections a clear choice between happiness and hazard. That's rarely the way politics works.<br />
<br />
In short, moral hazard is a red herring, and theorizations of its role in the crisis are crude, confused and make no historical sense. In the real world of politics and markets, when you get to the point where bailouts are necessary, it's far too late to worry about moral hazard. <a href="http://www.bbc.co.uk/news/world-europe-18350017">This</a> is what we should be worrying about.<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-73035753956686323112012-06-06T14:37:00.001-07:002012-06-06T14:44:41.366-07:00Angela's dilemmas and the nightmare scenario<br />
<br class="Apple-interchange-newline" />The FT has a nice piece today about <a href="http://www.ft.com/cms/s/0/533541e8-afce-11e1-a025-00144feabdc0.html#axzz1x1TdUrr9">the loneliness of Angela Merkel</a>, torn between seeing the Eurozone fall apart and taking decisions that would rescue the periphery but provoke a furious backlash at home. It is indeed easy to <a href="http://krugman.blogs.nytimes.com/2012/06/06/doing-their-best-to-destroy-europe/">criticize Merkel for her cagey approach</a>, which given the fear in the markets seems almost designed to make the costs of rescue as high as they could possibly be. I agree completely with these criticisms, but what people like Martin Wolf and Paul Krugman often miss - focused as they are on debating the stupid austerian policies advocated by many economists - is that this is a political process.<br />
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Merkel is not doing what is necessary, but the reason may not be just that she doesn't know what she's doing. First, she is a government leader in a consensus-oriented democracy, with coalition government and federal institutions, and like any other party leader she faces the constant threat of dissent from within her own party. Juggling these various threats to her position are probably her main concern, regardless of how much she understands about the nature of the Euro crisis. It could well turn out that a plan for economic recovery, involving massive bailouts, permanent ceding of German fiscal autonomy, and the collapse of the Euro's monetary conservatism, would cost her her job.<br />
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Second, even if Merkel understood what Krugman and Wolf eloquently argue day after day, and had the political authority to convince the German political class and electorate of what needed to be done, she would run into another problem - the European-level <a href="http://en.wikipedia.org/wiki/Joint_decision_trap">joint decision trap</a>, Fritz Scharpf's well known conceptualization of the restraints on policymaking in federal states like Germany and intergovernmental organizations like the European Union. What if the European Commission, the ECB and the other Northern Euro member states said no? Merkel would have blown her political clout in Germany for nothing. Getting anything through the European institutions is complicated and time-consuming. Add the permanent subsidizing of the hapless 'Club Med' nations by the virtuous Weberians of Northern Europe, and you get a recipe for the worst kind of Euro-paralysis.<br />
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Finally, we get to a further dimension to the politics of crisis that has been widely ignored, even by the smartest commentators - democracy and the people (easy to forget about, I know). Even if all the dilemmas outlined above could be resolved, there is no way a solution to the Euro mess can be sustainable if it doesn't have popular support. So far, this point has been made most obviously in the struggling periphery, where elections have wiped out the governments responsible for crisis and austerity in Ireland, Spain and Greece, whilst Berlusconi has been forced out in Italy. Yet the same problem could easily arise in the North, as Geert Wilders' recent departure from the Dutch governing majority shows. If Merkel signs up for a Eurozone welfare state, there's every chance that an electoral earthquake could shake the German party system just as it already has in Greece.<br />
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Which brings me to my nightmare scenario. I still believe that politicians will blink before allowing the Eurozone to implode, wreaking havoc all around. The reason for this is that I think most policymakers are sufficiently aware of what the consequences could be, and are rightly terrified. But democratic elections are a cruder instrument for making decisions. Greek and German voters, exercising the democratic right to express their outrage, could place Europe in an impasse which would lead inevitably to the catastrophe we all fear. Popular pressure for intransigence in the North, to match popular pressure against austerity in the South, could place Europe's leaders in a <a href="http://en.wikipedia.org/wiki/Chicken_game">chicken game</a> that will end badly for everybody.<br />
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The only way out is leadership. Come out, explain to people what is going on, and hope for the best. But that has never been the way European integration works.<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-61565224655306676892012-05-31T09:18:00.001-07:002012-05-31T09:18:14.621-07:00The Eurozone: an economy without a state<br />
In today's FT <a href="http://www.ft.com/cms/s/0/4fe89d8c-a8df-11e1-b085-00144feabdc0.html#axzz1wSmAwJZ7">Martin Wolf, as ever, nails it (The riddle of German self-interest - FT.com</a>). One of the peculiar features of the crisis is that the Euro was created with the express purpose of facilitating financial and commercial integration, and yet at the first crisis the Eurozone institutions have refused to backstop the cross-border financial commitments that have been made, leading to a flight for safety which has created havoc. Didn't anyone think this could happen?<br />
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Certainly the history of financial globalization offered a few hints. Eric Helleiner's excellent book <a href="http://books.google.co.uk/books/about/States_and_the_Reemergence_of_Global_Fin.html?id=jcg6YICLiIYC&redir_esc=y">States and the Emergence of Global Finance</a> details the myriad ways in which governments backstopped the increasing financial integration of the period after the 1970s, most notably by stepping in to halt financial crises with bailouts. These bailouts confirmed governments' commitments to the newly integrated financial order and gave investors the confidence to continue treating the global financial arena as a properly functioning market.<br />
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The saddest thing about this whole crisis is that it underlines the fatal lack of understanding on the part of policymakers, and the academics who advised them, of how markets actually work. They designed institutions which essentially, like in Alan Greenspan's 'flawed' model, relied on market participants behaving rationally (whatever that means). Rational behaviour is, of course, difficult to define and operationalize, but one thing that we know for sure is that piling money into indebted states with a history of reneging on commitments and overinflated real estate markets was obviously outside any meaningful theory of the self-regulating market. It's time to recognize that the theory was wrong, and that the Eurozone, like any other economy, needs a government.<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-43262721629177009742012-05-30T04:52:00.001-07:002012-05-30T04:52:41.037-07:00Why Spain is bust and Italy is simply broke (again)Despite a <a href="http://www.ft.com/cms/s/0/19d4923a-aa3f-11e1-899d-00144feabdc0.html#axzz1wLu0hvn7">bad auction today</a>, Italy seems overall in better shape than the rest of Southern Europe <a href="http://blogs.ft.com/brusselsblog/2012/05/are-italy-and-spain-decoupling/#axzz1w9O9at9Q">as the FT recognized today (Are Italy and Spain decoupling? | Brussels blog</a>). It has run a primary deficit ever since the early 1990s, something way beyond the abilities of the other periphery countries at the moment. The reason for this is, ironically, the fact that Italian public debt has been at crisis levels for a couple of decades - Italy faced a huge fiscal crisis back in the early 1990s, which was resolved thanks to fiscal reforms and spending adjustments pushed through by more or less technocratic governments headed by Giuliano Amato, Carlo Azeglio Ciampi and Romano Prodi. Italy would never have qualified for the Euro had it not made this herculean effort. And although Berlusconi failed to maintain this downward pressure on the debt, his governments continued to run primary surpluses up until the crisis of 2008.<br />
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Clearly Italy has intractable structural weaknesses and the future is far from rosy. But at least it didn't delude itself with a glorious decade of debt-fuelled growth, like its Mediterranean neighbours to the East and West. This made the reckoning a lot easier to cope with, particularly since Italian banks don't seem to have abandoned their traditional caution when it comes to home loans and consumer credit. Things are bad, but not as bad as they could be, and if Italy is dragged into default, it will largely be the result of Eurozone-wide contagion, rather than its own specific weaknesses.<br />
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Anyway, the point of this post is largely to crow about the fact that <a href="http://jonathanhopkin.blogspot.co.uk/2010/05/why-spain-is-bust-and-italy-is-only.html">I made this point a couple of years ago</a>.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-73549473456297017762012-05-28T02:48:00.001-07:002012-05-28T06:30:04.760-07:00Spain heading for bailout<br />
It's hard to imagine anything more inevitable than <a href="http://www.ft.com/cms/s/0/27f29710-a8a3-11e1-a747-00144feabdc0.html#axzz1w9f4Fg6h">Spain needing a bailout, and soon</a>. The Rajoy government's latest trick - <a href="http://www.ft.com/cms/s/0/90b3aaae-a818-11e1-b8a9-00144feabdc0.html#axzz1w9f4Fg6h">recapitalizing a bankrupt bank, Bankia, with bonds from a near-bankrupt state,</a> Spain, is probably the final straw for investors who are paying attention. Bankia, in turn, has been suggesting that <a href="http://economia.elpais.com/economia/2012/05/27/actualidad/1338120519_482439.html">one way to return to profitability is to reduce its tax liability</a>: in other words, to help the Spanish government get its money back, they will endeavour to pay less money to the Spanish government.<br />
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This is what hiring the likes of <a href="http://es.wikipedia.org/wiki/Luis_de_Guindos">de Guindos </a>achieves. After all, employees of institutions like Lehman Brothers are essentially trained to make money through tax avoidance/arbitrage and clever accounting, rather than generating real wealth through smart investment. The Spanish government is now in the hands of people whose ignorance and arrogance led the country into this mess, in both the political and the financial institutions. Rajoy turned a blind eye whilst corrupt regional leaders like Camps and Aguirre fuelled real estate booms which paid for their vote grabbing and created the conditions for today's tragic scenario.<br />
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Now it's all down to Europe. Will they blink, or will they bail? Almost certainly they will bail, just like in Greece, but in such a way as to make recovery impossible. If they let Greece go, who will buy into Spain? The endgame approaches.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-18000078853149757202012-05-22T07:44:00.001-07:002012-05-22T07:44:41.784-07:00No democracy please, we're Europeans<br />
So David Cameron <a href="http://www.guardian.co.uk/politics/2012/may/21/david-cameron-defends-greece-warning-euro?intcmp=239">wades in on the Greece crisis</a> - sense of irony failure there I think.<br />
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Anyway, the Greeks are coming under pressure to vote for mainstream, pro-austerity parties, despite having voted for something else less than a month ago. This tells you everything you need to know about the role of democracy in the Eurozone.<br />
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In fact, the decline in democratic accountability is not an accident: it is the result in part of a certain demobilization of mass electorates in western countries, which has a variety of structural causes, but in part also of the determination of powerful interests to remove popular consent from a range of key economic decision making arenas. This, in turn, exacerbates the trend towards popular apathy, or at least resignation.<br />
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So currently, a set of institutions of 'governance' in the Eurozone have not only allowed a disaster to take place, but have also blocked any proper discussion of alternative ways out of the disaster. So the key actor in the management of the crisis is the ECB, an entirely unelected and unaccountable body with a tight connection to the world of finance, and largely impermeable to other interests. What makes you think that an institution like the ECB would ever be inclined to adopt policies in the interests of the non-rich majority of the Eurozone population?<br />
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The role of electorates, in the ECB/Merkel view, seems to be to elect governments that will follow policies the ECB, and by extension financial interests, want, even if this is going to lead to all of the burden of adjustment falling on the bottom 90-odd%. The Euro system was deliberately designed in this way to avoid politicians responding to popular demands for spending and low taxes. Clearly popular policies are not always in the long term interests of an economy, but surely it is the job of the democratic institutions to determine what those are?<br />
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What we have now is a technocratic approach to government which is not only democratic, it is very likely applying the wrong policies. If we have to have wrong policies, let's at least choose them through democratic means. And who knows, given the chance people might surprise the political class and the economics profession by choosing governments and policies that work in their interests.<br />Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-50153704791310121742012-05-18T09:53:00.001-07:002012-05-18T09:53:55.829-07:00The impossibility of austerityOne of the best pieces I've read on the Southern Europe debt crisis: <a href="http://www.economonitor.com/blog/2012/05/europes-depressing-prospects-two-reasons-why-spain-will-leave-the-euro/">EconoMonitor : EconoMonitor » Europe’s Depressing Prospects: Two Reasons Why Spain Will Leave the Euro</a><br />
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The following (a quote from <a href="http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100016130/spanish-epiphany-as-depression-deepens/">Ambrose Evans-Pritchard</a>) is particularly eloquent:<br />
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<em style="background-color: #f6f5f1; border: 0px; color: #222222; font-family: 'Helvetica Neue', helvetica, sans-serif; font-size: 14px; line-height: 22px; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">Berlin seems to think it can lock in a current account surplus with Club Med in perpetuity. Clearly, such as an arrangement is mathematically impossible within a currency union – unless Germany is willing to offset the surplus with flows of money for ever, either through fiscal transfers or loans or investment. These flows have been cut off.</em><br />
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So simple, and yet so difficult for many powerful people to grasp.<br />
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I still think Germany and the EU powers that be will blink first. But if they don't change course soon this will be a catastrophe.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.comtag:blogger.com,1999:blog-8284954971621365599.post-51688858633385333132012-04-27T04:59:00.001-07:002012-05-28T02:48:59.733-07:00Politics against markets - again<br />
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With the imposition of technocracy in the Southern periphery of the Eurozone and the challenge from extreme right parties in France and Holland, commentators are starting to notice that there is a legitimacy problem in European politics (for instance, Tony Barber <a href="http://www.ft.com/cms/s/0/4e2c793c-8d50-11e1-8b49-00144feab49a.html#axzz1tA2Q7smP">Europe must confront crisis of legitimacy - FT.com</a>). Political parties were accepted by mass publics in the postwar period because they guaranteed economic progress and security through the welfare state; the turn to austerity breaks this pact and throws the party system into disarray.<br />
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To which I might add - welcome to the real world. The crisis of legitimacy in mainstream party politics is not a novelty, but represents trends that have been present for quite a while (even a quarter of a century in some cases). Parties are challenged because of two parallel and inter-related trends: the decline of mass participation through political parties, and the success of an economic theory that was inimical to the idea of popular intervention in economic policy. Markets would provide individuals with choices, but collective action to shape markets should be minimized, and where possible, eliminated.<br />
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In response to the depoliticization of economic policy through institutions like independent central banks, fiscal rules and European-level regulation, demands for popular participation in the management of the economy could no longer be articulated through the mainstream parties which had, almost without exception, bought into the new model. Not surprisingly, voters that were unhappy with the new arrangements turned to 'outsider' parties, and outsider parties, again unsurprisingly, tended to be populist and often extremist. A common theme in the populist turn, above and beyond the ignorant racism to which they often appeal, is the demand for an end to the <a href="http://personal.lse.ac.uk/HOPKIN/HopkinCES%202012.pdf">'cosy cartel' of the mainstream parties</a>, and protection against markets (usually in the form of opposition to globalization and immigration).<br />
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So the trend towards populism has old roots, although the crisis and the absurd reliance on austerity to respond to it has thrown fuel on the fire. In dire economic times, governments tend to be thrown out. If oppositions offer no alternative to incumbents, then populist success is to be expected. If anything, it's surprising that Marine Le Pen won only 2-3% more votes than her father had in much happier economic times a decade ago.<br />
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All this points, at least for me, to one conclusion: that the attempt to take the politics out of economic policy has failed. It has failed economically, that much is obvious, but it has also failed politically, by alienating people from a political process that they sense is designed to ignore their views. The crisis is not just the result of reckless greedy private bankers, it is also a failure of the central bankers who were protected from democratic pressures because that was supposed to allow for better policy.<br />
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We need new economic institutions, and we need to build popular support for these new institutions. Politics and markets have got to be made to coexist.Jonathan Hopkinhttp://www.blogger.com/profile/03957119720206563131noreply@blogger.com