The abyss and our last chance
By Carlo De Benedetti The opinions expressed are his own.
In a magnificent book published a few years ago Cormac McCarthy imagines a man and a child, father and son, pushing a shopping cart containing what little they have left, along a back road somewhere in America. Ten years earlier the world was destroyed by a nameless catastrophe that turned it into a dark, cold place without life.
There is no history and there is no future. But there is an objective: to head south toward the sea. Mythical places, only vaguely perceived, where there might be salvation. The father is getting older and is ever more weary. But he has the child with him. And he has his objective. He wants to take him southward to the sea. Toward a future that may still be possible.
Today, is the western economy, in particular the Italian economy, that world destroyed by an Apocalypse? Are we pushing that cart, containing the few things we have left, toward a mythical sea of which we know nothing, or even what it is like or where it is?
Re-reading the book I was tempted to think this. To think that those pages, written in 2006, were in some way a prophesy of what we are living through today. Never before has an entire productive system, our own, been so fundamentally questioned.
I have been convinced for some time now that the huge financial crisis of the last few years is the litmus test of a deeper crisis to do with the universal economic order that has lasted through the centuries, with a shift of the balance of world wealth toward new countries.
from Ian Bremmer:
Europe’s necessary creative destruction
By Ian Bremmer The opinions expressed are his own.
What we’re seeing in Europe -- in rising Italian borrowing costs and the felling of two prime ministers -- is the growing impatience of the markets for a resolution to the euro zone crisis. To put a finer point on it, the hive mind of the markets has decided it is not going to give Europe enough time to get its act together. The big institutions that drive the world’s economies are sitting on huge amounts of cash -- enough to solve many of these problems overnight. But they have lost confidence in the ability of the European political system to deliver solutions that will work.
In a G-Zero world, where there is no strong global leader to direct the course of events, no one is interested in taking a flier on helping the Europeans get out of their mess. As the abortive G-20 conference showed last week, there is no backstop for any country or institution that makes an error in today’s environment, whether it’s tiny MF Global or the Chinese sovereign debt fund. In the postwar era, the Marshall Plan was the very definition of global security -- it was a huge commitment by the U.S. to rebuild Europe into the economic force (and not incidentally, trading partner) that the world needed. Today, there is no Marshall plan for Europe, from within or without.
That’s the high-level view of the Europe situation. The question everyone wants answered is this: what happens next? Start with Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister of an emergency government. Papademos is committed to remaining in the euro and accepting the terms of the Greek bailout package. Despite the roller coaster ride Papandreou took his country and the euro zone on, Greece has now moved closer to the Spanish and Portuguese models for avoiding the debt crisis drama. In Greece, a resolution is starting to be reached. It’s not the beginning of the end, but maybe this is the end of the beginning.
The same can’t be said for Italy as the situation changes by the day. The decisive Senate approval of a package of austerity measures (by a margin of 156 to 12) was one small step for Italy in the eyes of the markets— and a big step toward Silvio Berlusconi resigning his mandate. It’s a wonder that Berlusconi held on to power for so long; he burned up his political capital years ago with scandals of all stripes. His stepping down is good news for Italy in the long run, but the handover of power to likely frontrunner Mario Monti is a delicate process that will have to be handled with tremendous care. Unfortunately for Italy, political drama has insured it will face a higher and longer level of scrutiny.
Markets will continue to demand extensive and enforceable changes in spending levels throughout the peripheral states. When Italy and Greece look more like Spain and Portugal, the bond markets will treat them more like Spain and Portugal. But that alone won’t solve the problem: investors are going to demand to know what happens next time any euro zone periphery country is on the brink of collapse. Euro zone institutions and politics have to be reshaped to prevent this type of crisis from ever happening again. Until this risk is mitigated, lending costs will stay high for a long time to come.
Case in point: I talked with about 200 international financial executives at a conference two weeks ago. 92 percent thought a “Lehman event” could easily happen once again somewhere in the world. Because we all thought the economy had been getting better over the last few years, we took our eye off the ball when it came to shoring up the global financial system and making the necessary structural fixes. In the U.S., President Obama took up health care. A weak Dodd-Frank bill passed. In the global financial system, Basel III has gone nowhere. And so every time the markets are rattled, we stare down the financial abyss, again and again.
“Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister”
How is more neo-liberalism and more debt a “solution” to anything.
Just like underwater mortgages in the US with no prospect or ever being payable, the time has come for massive write-offs and restructuring the banking system from TBTF to a regulated public utility model.
Enough neoliberal baloney.
Italy’s fundamentals aren’t worse than usual
By James Macdonald The views expressed are his own.
The markets have come to the conclusion that Italy’s debts are unsustainable in the long term. They are therefore demanding a higher risk premium to compensate for the risk that they might not be repaid in full. So runs the conventional wisdom. However, the situation is not that simple.
In the first place it is not at all clear that Italy’s situation is especially worse than it was ten or fifteen years ago. The country’s debt first hit 120% of GDP in 1993, after the spending spree of the 1980s when budget deficits were regularly higher than 10% of GDP. In 1992 the deficit was 9.5% of GDP; and with interest rates on the debt of 10% or more, the country’s interest bill represented 12% of GDP. Throw in a discredited and dysfunctional political system, and the situation looked bleaker than it is today. Yet the country did not default. The old political parties were blown away, and a series of governments, both technocratic under Ciampi and Dini, and party-based under Berlusconi and Prodi, oversaw a period of fiscal retrenchment which brought the deficit to under 3% of GDP by 1997. Part of the improvement came through a fiscal squeeze which brought the primary balance from a deficit of 2% of GDP in 1990 to a 5% surplus by 2000. The rest was the result of lower interest rates. By the late 1990s Italy was able to borrow at around 6% — a rate that no one then considered unaffordable.
Over the past fifteen years Italy’s budget deficit has averaged 3.5% of GDP. It is currently 4.5%. Before the financial crisis erupted, its public debt had fallen to 105% of GDP. It has now risen to 120% of GDP again. Under normal circumstances a reduction of its budget deficit to 3% of GDP would be sufficient to stabilize the situation – a far smaller adjustment than was necessary in the 1990s.
So why has the market suddenly decided that the country’s position is untenable? It cannot be simply that Italy lacks a stable and convincing government. That has been the case for the majority of the postwar decades, and was certainly so in the early 1990s. Yet the country has shown that it can jettison discredited politicians when necessary, as it did in 1992, and as it is doing now.
A more compelling reason may be that the international climate is less benign than before. Italy’s growth rate has been sclerotic for years. But until recently the world economy was growing at a decent clip so that it could be hoped that “a rising tide lifts all boats.” Now, the future of uncompetitive economies looks bleaker.
However, the current climate is as much as anything else a case of self-fulfilling prophecy. One of the reasons that Italy’s position is looking worse than before is the rise in its borrowing costs. With public debt at 120% of GDP, a 4% rise in interest rates, which is what Italy has faced over the past year, will more than double its prospective budget deficit. A further negative feedback loop is provided by increasing margin requirements on its bonds as their prices drop and as trading volatility increases, thus making them less attractive to hold.
The sun sets on sultan Berlusconi
By John Lloyd The opinions expressed are his own.
The sultans, as shapers of history, have gone from the world: but they leave behind the memory of a style of rule in which the division between the private life and the public one, between sexual arrangements and high politics, between the settlement of personal debts, whether of money or honor, and the state treasury barely existed. That was true of kings and princes, Russian tsars and Chinese emperors too: but because the west began (with mixed success) to separate the private from the public some centuries ago, the Sultans of Turkey – who came to the gates of Vienna at the height of their imperial reach and who fascinated and terrified Europe for centuries – are still seen here as the epitome of luxury and power combined.
In Silvio Berlusconi, the Italian Prime Minister, the West finds the nearest thing it has to a Sultan: luxury and power combined. The idea is that of Giovanni Sartori, the Italian social scientist and commentator, who has taught for many years at Columbia University in New York and who, like all writers on the contemporary Italian scene, has had to put Berlusconi at the center of his commentary. His idea expresses the unique quality the media mogul has brought to democratic government in the modern age: a rule for, by and with himself first.
In this, he betrays the legacy of a much greater Italian, Niccolo Machiavelli, who anticipated the modern age of states by his advice to the Prince to separate his private life and family from his public duties. Berlusconi has vaulted back more than half a millennium to the period of the Medicis and the Borgias. The public is private: the state absolves his alleged crimes or future transgressions through laws passed by his governments. His main business, media, especially TV but also his newspapers and magazines, spread the balm of the good life which his governing style proclaims. His private life cannot be other than public: his latest supposed affairs are proclaimed by his estranged wife to be with minors, and are surrounded by wildly improbable stories on his part, together with the use or abuse of the law and police protocol. He seems genuinely surprised when taxed with this: for the Sultan, there is no problem: private, business and state life are all one seamless web. And if a harem is included, well, “I’m no saint!” is one of his best known remarks. Unfortunately (for him) Italy remains a democracy and the Sultan, especially when his powers fade, is harried from all sides.
And now the power is fading. The Sultan still dresses in dark silk shirts and puts on his built-up shoes and does walk-abouts among the summer crowds in Porto Rotondo, near his Sardinian villa-palace. He still has the knack for the phrase which holds attention: this past week, it was that he was recommending a package of cuts and reforms and tax rises while his heart wept blood and tears. He still has his court, marshalled by his faithful, indispensable, Grand Vizier, Gianni Letta.
But the core promise of his three premierships – no more taxes – has been blown away. Italy, fourth biggest economy in Europe, founding member of what became the European Union, member of the Group of Eight and of NATO, is now under huge pressure: if, after the August holiday, hedge funds try to test the patches put upon the EU’s finances by Germany and France, Italy could be in the front line of the attack and could be reduced to the status of its Mediterranean neighbor, Greece.
None of the news, under the azure skies and the broiling sun, is cheering. Fiat, which had hugely improved under its Italian-Canadian CEO Sergio Marchionne, has been hit badly by the slowdown in the Brazilian economy – one of its biggest markets, and site of some of its biggest plants. Its most successful models are the stylish little Pandas and Cinquecentos: but it’s a law in the car business that small cars mean small profits, and its bigger cars, the Alfas and the Lancias, for all their beauty, can’t beat the Mercedes, the BMWs and the Audis. One of its most successful companies is the engineering defense group Finmeccanica: but the defense market doesn’t look good, at a time of budget cuts. Its wine is more popular, and its fashion as desirable as ever: but consumption of both is bound to suffer. That which has underpinned the Italian economy is weakening now.
Italy pays its people to go on vacation
The following article by Silvia Marchetti first appeared in GlobalPost.
ROME, Italy — “Exploit your holidays to discover your unique, magical Italy,” intones Italian Prime Minister Silvio Berlusconi in a new TV ad encouraging Italians to vacation at home this year.
For those Italians still unsure of exactly why they should “discover” Italy — according to Berlusconi, a land not just of “sky, sun and sea but also of history, culture and art — the state has thrown in a sweetener: it will help pay for citizens’ summer or winter breaks by granting “holiday vouchers.”
Berlusconi’s government believes that tourism can be a strategic tool in Italy’s economic recovery, but only if Italians spend money for vacations at home instead of abroad.
The coupons are available to all low-income families, especially those with many children, who wish to go to the seaside or mountains but can’t normally afford it. If the state has its way, visits to sunny beaches or historical cities will no longer be a privilege for the few, but a right of the many.
This sounds like socialism! How many ways will we find to reward failure? Greg Urroz, CRS Phoenix, AZ Realtor
Italy: land of the rich Russian
The following article by Silvia Marchetti first appeared in GlobalPost.
ROME, Italy — Ischia and Capri, two tiny islands in the Gulf of Naples, are fighting over big money. That is, Russian money.
Ischia, a thermal baths and spa destination, complains that its Russian clients prefer shopping on the neighboring isle because it has a wider choice of luxury boutiques. On both islands, nearly all hotels and restaurants have menus written in Cyrillic and employ waiters whose mother tongue is Russian, while shops display price-tags in both euros and dollars.
It’s indeed worth the trouble. Luring tourists from Russia is a lucrative pursuit in Italy. Many of the most breathtaking and expensive locations have been virtually colonized by them.
They’re the former Soviet Union’s new nobility — billionaire businessmen, bankers and investors who travel across the peninsula in limousines, yachts and helicopters (for 2,000 euros an hour), picking the most romantic scenery for the purchase of dreamlike castles and sea manors.
from MacroScope:
Political economy and the euro
The reality of 'political economy' is something that irritates many economists -- the "purists", if you like. The political element is impossible to model; it often flies in the face of textbook economics; and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow. And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.
But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.
For many, the euro simply should never have happened -- it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the currency was born and has thrived for 11 years.
Now the budgetary and bond market upheaval currently afflicting euro member Greece and stalking Portugal, Ireland, Spain and Italy has reawakened the whole debate. "Will the euro survive?" seems a legitimate question once again.
Apart from financial analysts, Paul Krugman seems to have made his peace with the euro's existence but he still reckons it was a bad idea. Eric Maskin thinks financial markets are right to question the future of the single currency. And much is being made once again of Milton Friedman -- high priest of 20th century monetarism -- having reportedly said in 1998 that the euro would not survive the zone's first serious economic downturn.
But having an opinion about the euro is not the same as knowing whether it is going to survive. And this is what most annoys those who have money at stake. Plugging in a new set of variables into complex econometric equations is probably not going to get any of these experts closer what happens next. Hanging around the corridors of power in Brussels, Frankfurt, Berlin or Paris is likely to prove more fruitful.
In the 1990s, many financial strategists in London, Manhattan and elsewhere often confused what they thought should happen with what was likely to happen and got the call wrong on one of the most far-reaching monetary events of the century.
from The Great Debate UK:
Newspapers and Democracy in the Internet era: ‘The Italian Case’
Carlo de Benedetti, Chairman, Gruppo Editoriale L'Espresso/La Repubblica, will deliver the 2009 Reuters Memorial Lecture on ‘Newspapers and Democracy in the Internet era: The Italian Case'.
The Reuters Memorial Lecture commemorates journalists who have lost their lives in pursuit of their profession.
The lecture will be followed by a panel discussion chaired by John Lloyd, with Timothy Garton Ash and Paolo Mancini. Reuters correspondents will be live blogging throughout.
To join the discussion click on the 'make a comment' link at the top of the liveblog panel.
I think the way out of the crisis and out of the debt is easy.
LET´S STOP FINANCING F.E.:
- agricultural grants – let´s cut them to the half – or I see, there is France not willing to do that and start working properly,
- environmental issues – billions of euros so far and the result? China, India etc. producing even more, not caring about pollution – and we take there goods as it is of course cheaper then ours.
- minority issues – why do we spend so much money for minorities integration while these minorities are not even greatful to us for improving their lives? Let´s set the same rules for everyone and if someone doesnt want to respect them, let him-her deport immediately.
Let´s just be more selfish Europeans and give a stop pretending that we can save the world. If the rest of the world will not join us, our attempts will go in vain and our civilization will be killed – by ourselves.