Opinion

The Great Debate

from Breakingviews:

Does Italian capitalism prove that Darwin was right?

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A procession of Italian industrialists and financiers slipped through the alleyways behind La Scala opera house two weeks ago to discuss the legacy of the man whose name adorns the piazza outside the building where they met: Enrico Cuccia. The group, ranging from a former Treasury minister to an iconoclastic fashion mogul, shared stories of the founder of Mediobanca, who’d passed away 14 years to the day. Yet for all the nostalgia that afternoon, absent was any obvious desire to turn back the clock to the days when Mediobanca was the unchallenged puppet-master of Italian business.

That’s surprising given the parlous state of corporate Italy. The uno-due punch of the financial and sovereign debt calamities has thrust the establishment into a profound crisis, one even more sweeping than the Tangentopoli corruption scandal that two decades ago sent dozens of Italy’s top businessmen and politicians into Milan’s San Vittore prison. The uniquely Italian form of capitalism conceived by Cuccia after World War Two is at last being consigned to history.

Though the revolution reshaping the nation’s economy is painful and prolonged, those with the most at stake know that Italy needs dramatic change. Deprived of the protections of the past – whether from the cash-strapped government in Rome or Mediobanca in Milan – Italian companies are at last being forced to play by the rules of global finance. Some 95 percent of the institutional investors who account for the bulk of trading on the Italian Stock Exchange are foreign. The survivors of this Darwinian selection will be the better for it.

Unlike the cyclical spikes in bankruptcy filings that typically accompany wrenching economic change in the United States, the evidence of Italy’s transformation is subtler, if wider-reaching. As companies pass the hat to investors beyond the Alps, they must transform their governance in ways that would have Cuccia turning in his grave on the banks of Lago Maggiore (assuming his body, stolen shortly after its 2000 burial, was ever in fact returned to its resting place).

The year ahead in the euro zone: Lower risks, same problems

Financial conditions in the euro zone have significantly improved since the summer, when euro zone risks peaked because of German policymakers’ open consideration of a Greek exit, and the sovereign spreads of Italy and Spain reached new heights. The day before European Central Bank President Mario Draghi’s famous speech in London in which he announced that the ECB would do “whatever it takes” to save the euro, bond yields in Spain and Italy were at 7.75 percent and 6.75 percent, respectively, and rising. When the ECB announced its outright monetary transactions (OMT) bond-buying program, the euro zone was at risk of a collapse.

Since then, risks have abated significantly, thanks to a number of factors:

    The ECB’s OMT has been incredibly successful in reducing the risks of breakup, redenomination and a liquidity/rollover crisis in the public debt markets of Spain and Italy. Although the ECB has yet to spend a single additional euro to buy the bonds of Spain and Italy, both short-term and longer-term sovereign spreads against German bonds have fallen substantially. Following a number of political and legal hurdles, the successful operational start of the European Stability Mechanism (ESM) rescue fund provides the euro zone with another €500 billion of official resources to backstop banks and sovereigns in the euro zone periphery, on top of the leftover funds of its predecessor, the European Financial Stability Facility (EFSF). Realizing that a monetary union is not viable without deeper integration, euro zone leaders have proposed a banking union, a fiscal union, an economic union and, eventually, a political union. The last is necessary to resolve any issue of democratic legitimacy that might result from national states transferring power from national governments to EU- or euro zone-wide institutions. This transfer of power also would have to involve the creation of such institutions to ensure solidarity and risk-sharing are developed in the banking, fiscal and economic unions. The open talk in the summer by some German authorities about an exit option for Greece has turned into a tentative willingness to prevent and postpone such an exit. There are several reasons for this. First, Greece has done some austerity and reforms in spite of a deepening recession, and the current coalition is holding up. Second, an orderly exit of Greece is impossible until Spain and Italy are successfully isolated. Such an exit would lead to massive contagion, which would hurt not only the euro zone periphery but also the core, given extensive trade and financial links. Third, an economic disaster in Greece would be damaging to the CDU Party’s chances of winning the German elections. Thus, even when Greece inevitably underperforms on its policy commitments, Germany and the troika (the IMF, EU and ECB) will hold their noses and keep the funds flowing as long as the current coalition holds up.

Given these developments, the risk of a Greek exit in 2013 has been significantly reduced, even if the risk of an eventual Greek exit from the euro zone is still high, close to 50 percent by my estimation. Meanwhile, the narrowing of Spanish and Italian sovereign spreads has significantly diminished the risk that either country will fully lose market access and be forced to undergo a full troika bailout like Greece, Portugal and Ireland. Both Spain and Italy may in 2013 opt for a memorandum of understanding (MoU) that opens the taps of ESM and OMT support, but such official financing would inspire confidence as it would not be associated with rising, unsustainable spreads and a loss of market access.

While there is a much lower likelihood of disorderly events in the euro zone, there are still significant obstacles to deeper integration, as well as country-specific economic and political vulnerabilities. The biggest obstacle to the formation of a banking, fiscal, economic and political union is that Germany is pushing back against the time line for action, with the initial skirmish on ECB supervision of euro zone banks. This backpedaling reflects deep German skepticism on whether the resolution of the euro zone crisis requires a move toward greater union. Without a more credible commitment to austerity and reforms from euro zone periphery countries, lurching forward would imply that risk-sharing will turn into a large, long-term transfer union, which is unacceptable to Germany and the core. Thus, Germany will do whatever is necessary to delay the integration process, at least until after elections in fall 2013.

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?

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.

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.

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.

Italy pays its people to go on vacation

ITALY/

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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.

Italy: land of the rich Russian

LEISURE ITALY ISLANDS

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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.

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.

from The Great Debate UK:

Newspapers and Democracy in the Internet era: ‘The Italian Case’

repubblicaCarlo 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.

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