Grillo ergo sum

So in reply to Monti's Agenda, Beppe Grillo has decided he also ought to come up with a programme. Grillo's '16 points' 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.

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 Tangentopoli 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 telegiornali 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.

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 autogestionaire thinking of 1970s eurocommunism.

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.

Privatize and be damned

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 'agenda' (basically a manifesto) and inviting party lists to commit to electing him Prime Minister once the new parliament is formed.

Interestingly, Monti's programme has already been condemned as 'statist' 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.

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.

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.

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.

Catalonia: First Step Towards Independence?

Some more thoughts on Catalonia, this time on the LSE EUROPP blog:

http://blogs.lse.ac.uk/europpblog/2012/11/27/catalonia-election/

Catalonia: 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.

The first point is that there is something vaguely insane about using the term 'independence' 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 Spanish electorate sour at the 'divorce' - will have a major effect on its future.

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 'fiscal dividend' 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.

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.

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?

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 Xavier Sala-i-Martin, becoming vocal and emotive advocates of Catalan 'patriotism', revealing an uncharacteristic lack of seny (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.

The Economist discovers social democracy

Interesting to see The Economist lauding Sweden: The new model. 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.

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.

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.

'via Blog this'

Stress-testing European democracy

One thing we have learned so far in the Great Recession is that stress tests for banks 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 50 billion. So much for stress tests for banks.

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.

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.

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.

But Greece, I have to say, really worries me now. Stories of the police referring citizens to the viligante arm of Golden Dawn, and the recent polls 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 (and a nostalgically brutal response by the police), but also with the Catalan challenge to the 1978 constitutional settlement, which has the potential to create political chaos.

Not only are we unlearning the economic lessons of the 1930s, as Paul Krugman keeps reminding us, 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.

There's more at stake here than economic growth. The EU elites need, as Samuel L. Jackson might say, to 'wake the f*** up'.

Italy and the EU debt crisis

Commentary on the Euro crisis to be published in the autumn:

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’.