Opinion

Anatole Kaletsky

Venice’s renaissance shows a path for European revival

Anatole Kaletsky
Jan 23, 2014 15:45 UTC

“I have seen the future and it works,” said Lincoln Steffens, a left-wing American journalist, on returning from the Soviet Union in 1919. After a weekend in Venice at a seminar organized by the Italian ambassador to Britain, I found myself struck by the same thought, which is not exactly the reflection that the world’s most perfectly preserved medieval city is supposed to inspire. Venice is a clichéd metaphor for “Old Europe” — a sclerotic old continent fixated on its past and now retiring to become a museum society, destined gradually to sink beneath the sea. But should we perhaps be inspired, not depressed, by the thought of Venice, the ultimate “museum city,” as a microcosm of Italy and even of Europe as a whole? After all, Venice is still standing, not sinking into the sea, and after 500 years of supposed decline it is still stunningly beautiful. Maybe Italy and Europe, instead of sinking, will also prove their resilience and make a comeback?

An event this week that pointed to this conclusion was the deal on electoral reform announced by Italy’s two biggest political parties: Matteo Renzi’s governing socialists and the opposition led by Silvio Berlusconi. This pact, which should create stronger majority governments, was significant — not just for Italy but for all of Europe, because quite modest policy reforms would be sufficient to revive the Italian economy and transform economic policy debate across Europe. For example, a broad consensus now exists for moderate labor reforms, for big reductions in the employment tax burden, for dismantling overlapping layers of government bureaucracy and for shifting welfare spending from over-generous pensions to education, training and active measures to help the unemployed. But none of these “supply-side” reforms would achieve useful results unless supported by a stimulus from monetary and fiscal policy.

The European Central Bank understands this, and even the German government’s resistance to economic stimulus is eroding. So if a stable and democratically credible Italian government showed willingness to seriously implement supply side programs, the ECB would surely respond with strong measures to expand credit, especially small business loans. And given the importance of small businesses to Italy, an aggressive program of officially-backed SME lending could have a similar electrifying effect on the Italian economy as it did last year in Britain, with government-guaranteed mortgage loans. In turn, a rebound of economic activity in Italy would have big effects on business and financial confidence in Spain, Greece, Portugal and France, as well as quite possibly transforming the German economic policy debate.

In short, a modest change in Italy’s electoral arithmetic could produce enormous benefits, perhaps even saving Europe from what looks like inevitable stagnation and terminal decline. Why this disproportion between modest political changes and big economic effects? Because European stagnation and decline are not inevitable at all. Europe’s businesses are globally competitive, as evidenced by trade surpluses bigger than Japan’s or China’s. Europe has caught up with the U.S. in technology, and its infrastructure is generally better. But what Europe needs to restore decent growth and employment is pragmatic political decisions, above all to coordinate macroeconomic stimulus with structural reforms.

At present, such coordination seems politically impossible because Germany vetoes any possibility of stimulus. But when desirable objectives are defined properly and articulated clearly to voters, political prejudices can eventually be overcome — a point which brings me back to Venice.

Let the great economy spin

Anatole Kaletsky
Aug 22, 2013 21:43 UTC

On the way to my holiday in Italy this year, I had an epiphany about the state of the world economy. I stopped for lunch in the truly miraculous Piazza dei Miracoli in Pisa, where Galileo Galilei is said to have dropped cannon-balls from the Leaning Tower to test his theories of motion. A few years later, Galileo invented the telescope to amass the detailed astronomical observations that were needed to prove beyond reasonable doubt the heliocentric theory of the universe — the idea that the earth revolves around the sun and not the other way round, as the Bible implied. Galileo was famously tried by the Inquisition for this heresy and decided to recant, presumably inspired by what happened to his fellow-mathematician Giordano Bruno, who was burnt at the stake for similar ideas. But after mechanically recanting, Galileo muttered under his breath the rebellious phrase for which he is still renowned: eppur si muove — “and yet it moves.”

As I enjoyed my lunch in Pisa, Galileo’s defiantly optimistic words echoed through my mind. “And yet it moves” seemed perfectly to describe what I had felt about the world economy and financial markets since the crisis of 2008.

For the past five years, the media and financial markets have resounded with prophecies of doom. Economists have strained to prove why life would never be the same again; why bankruptcy was inevitable for great nations such as Italy, France, Britain and even the United States, Japan and China, and why the pre-crisis decades of prosperity would have to be followed by an era of repentance — or else a Biblical Day of Reckoning would be upon us.

Market euphoria misreads the signals from Brussels and Rome

Anatole Kaletsky
Apr 25, 2013 15:31 UTC

Financial markets, which balance judgments from some of the world’s most highly paid and best-informed analysts, are often uncannily right in anticipating unpredictable events, ranging from economic booms and busts to elections and terrorist attacks. But markets can sometimes can be spectacularly wrong, especially when it comes to politics. A classic case was the slump on Wall Street after last November’s election in the United States. This week’s market action in Europe may offer an even clearer example of market confusion about two fascinating but Byzantine political entities – the Italian government and the European Central Bank.

European stock markets have rebounded strongly this week in the face of deteriorating economic and financial fundamentals from across Europe on the basis of two political events: the reluctant agreement by Italy’s 87-yearold president. Giorgio Napolitano, to serve another seven-year term because nobody else could be found to do the job; and hints from ECB council members that they might vote to cut interest rates from 0.75 percent to 0.5 percent next Thursday.

Neither of these events remotely justified investors’ euphoria. The ECB case is straightforward. First, the ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Second, even if the ECB does act, a quarter-point cut will do nothing for growth. Third and most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

The age of austerity is ending

Anatole Kaletsky
Feb 28, 2013 15:35 UTC

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

The losers in Italy’s election are already clear

Anatole Kaletsky
Feb 21, 2013 18:00 UTC

We don’t yet know the winner of Sunday’s election in Italy, but the losers are already clear. And in this election, who loses may be much more important than who wins.

The obvious loser is Mario Monti, the charming and eloquent economics professor who is widely credited with saving Italy from a Greek-style debt crisis during his one-year term as Italy’s unelected prime minister. Monti could have gone down in history as the most effective and intelligent Italian leader of his generation, had he decided to opt out of this weekend’s election and instead sought appointment as Italy’s president. That is a mainly ceremonial role that can become very important in times of constitutional crisis (which in Italy occur all too often), and Monti could almost certainly have won strong endorsements  from Italian politicians on the left and right.

Instead, Monti surprised everyone by founding a political party and running for Parliament at the head of a center-right grouping. This now looks like a big mistake. According to the last pre-election polls, Monti’s group is running a humiliating fourth, after the Italian Socialist Party, Silvio Berlusconi’s resurrected personal party and stand-up comedian Beppe Grillo’s anarchic Five Star Movement. Worse still for Monti, he seems to have helped his archenemy Berlusconi by splitting the opposition to the scandal-ridden former prime minister. If Monti’s party performs as badly as expected, it will be all too easy for his opponents to present the election as a clear rejection of the painful economic reforms he imposed on his long-suffering countrymen at the behest of the German government and the European Central Bank.

Europe needs Mario Monti more than ever

Anatole Kaletsky
Dec 13, 2012 00:59 UTC

Remember the euro crisis? For most of 2012, politicians, investors and business leaders were almost unanimous in their belief that the possible breakup of the euro would be a massive risk to the world economy. But today the euro is 5 percent higher against the dollar than it was six months ago, European stock markets have outperformed Wall Street by 11 percent in the same period, and Italian government bonds have been among the best investments of 2012.

The Nobel Peace Prize conferred this week to the European Union included three men who, under the EU’s byzantine institutional structure, are all entitled to be called “President of Europe.” With the award, it seemed as if the euro crisis might be almost over.

Silvio Berlusconi burst back onto the EU stage this month with his trademark chutzpah and slapstick timing, disparaging the technocratic government that has been given credit for putting Italy back on the road to financial prudence and thereby saving the euro.

Italy refutes the idea it’s on Europe’s “periphery”

Anatole Kaletsky
Aug 22, 2012 14:50 UTC

The words “core” and “periphery” have become standard terms to describe the winners and losers in the euro crisis. But how could anyone with the slightest sense of history, or knowledge of art and culture, call Italy or Spain peripheral to Europe, while placing Finland and Slovakia, or even Germany and Holland, at Europe’s core?

As a part-time resident of Italy, with a home 100 km from Rome, the center of two millennia of European civilization, I could not be satisfied with this trite answer. Speaking to friends and neighbors in Italy this summer and observing the behavior of Europe’s leaders, I have been struck by a more interesting, and disturbing, explanation of the core-periphery split. These terms do not refer to the past or the present, but to plans for the future. Core and periphery are not geographic or historical descriptions, but euphemisms designed to legitimize permanent economic and political inequalities among the nations of Europe.

With every step toward a resolution of the crisis, the peripheral countries have lost political autonomy, economic opportunity and national self-esteem, while the core countries, especially Germany, have been enriched and empowered. By creating conditions in which the interest rates paid in Italy, Spain and the other Mediterranean countries are much higher than they are in Germany and its northern allies, Europe has imposed a large and permanent economic handicap not only on the governments of southern Europe but also on their private businesses and households.

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