November 11, 2011 · 0 Comments
NYT eXaminer asked Antonio Tricarico to comment on claims made in the New York Times article “Italy Pushed Closer to Financial Brink” by Graham Bowley, Nelson D. Schwartz and Louise Story, and which was published on November 9th. Antonio is coordinator of the Italian NGO CRBM (Campaign for World Bank Reform) based in Rome and has been the economic correspondent of Il Manifesto at several international summits. He was recently at the G20 Summit in Cannes. For more, see part 1 where we asked Salvatore Engel-Di Mauro to respond to the same claims.
Times Claim# 1: “…European leaders could more clearly formulate the terms of a proposed, much-vaunted bailout fund and put it to work, or the E.C.B. [European Central Bank] could step in more vigorously to buy Italian debt.”
Yes, this is true, but has to be contextualised politically. The E.C.B is led by Germany and its monitarist orthodoxy – basically contrary to what happens in the US, with the FED, the E.C.B cannot buy treasury bonds indefinitely acting de facto as a co-treasury and directly intervening in the economy. Whether this approach works in the US then should be eventually discussed as well.
The E.C.B could buy or guarantee all Italian Treasury bonds to pull down the spread, but there is a political veto from Germany. At the same time, the German government is not willing to put German taxpayers resources into a common European bailout fund. So through their previous commitments (440 billion Euro) they dream of leveraging 2 trillion Euro on private market, something impossible today with the recession stepping in Europe.
Times Claim# 2: “Italy is not nearly in as bad of a situation as some observers may suspect,” said Marc Chandler, an economist at Brown Brothers Harriman
Well, this is questionable. In order to keep paying interests on its 1.9 trillion Euro debt Italy needs to have a primary suplus of at least 4%. This is a dream with the prospect of recession getting real for sure in 2012. Even though you dramatically cut expenses, with a recession you will raise less money through taxes and a lot of capital will fly away from Italy (in particular if they try to tax more high-wealth individuals and companies).
At the same time the banking system in Italy, despite less exposure to toxic assets etc., has lost a lot of value. All five major Italian banks have a capitalization of just 40 billion Euro today. They have an exposure to Italian Treasury bonds of 170 billion Euro–more than four-times more. They are also exposed to other Treasury bonds from European countries.
If the economic outlook gets worse and spreads, the prospect for Italian banks will get worse and there will soon be a liquidity issue for them. The E.C.B should heavily intervene then again just for the Italian banks, but this would be temporary. At that point, why not nationalize banks by pulling them out of the market? (Not as they did in the US with AIG and others, which is just a nationalization of losses.)
Times Claim# 3: “The only way to save Italy and stop the contagion, many economists believe, is for the E.C.B. to buy Italian bonds on a much more aggressive scale than it has so far been prepared to do.”
This is just a short term option. However they tried to do some of this recently, even against the will of the previous E.C.B head, Trichet, but it worked only partially on the market. The reality is that an E.C.B flooding of paper money into Italian banks–not the Italian government, see my first point–would not fix the root causes of this crisis.
In short, in my view, these are two options and are strictly related to the Euro project:
- in this era of finance capitalism–when trading money, risk and related products is much more profitable than trading goods or services–the European banking system has gotten heavily financialized and globalized, and it entered into a crisis in 2008 (contagion from US). That crisis is far from being over and now translated through the banks into a sovereign debt crisis, but this is still a bank crisis! Germany needs to save the Euro for the sake of their own banks, who would otherwise collapse or get heavily downsized.
- the Euro dramatically increased the regional imbalances within the Eurozone, thus generating a divergence between the German center and the Southern European periphery (Eastern Europe has always been a periphery in most of the cases). After its own adjustment in the ’90s with austerity measures to support German reunification, Germany invested into the project of global competition by becoming a global exporter. However, for making this sustainable, still today, half of German exports stay within the EU and goes to periphery countries primarily. Furthermore, the surplus of money accumulated through global trade in Germany is discharged into the periphery through investments into banks and some sectors. So the periphery, which had already developed a competitiveness gap with the center for historical reasons–including public mismanagement, but not solely–has lived increased de-industrialization and has become more and more dependent from the center. But now we have arrived at a point–with the incoming recession–that the situation is unsustainable. Both a E.C.B orthodox intervention and the establishment of so-called Eurozone bonds guaranteed by Germany and other countries to refinance the periphery’s debt would be a temporary solution, but would not fix the problem.
Times Claim#4: “But while the E.C.B. will not let the euro fail, analysts said it would avoid bailing out Italy as long as possible, to keep the pressure on Mr. Berlusconi and other Italian leaders to make reforms by cutting spending and removing impediments to growth.”
Yes, that’s the “German” orthodoxy approach, which won’t work in economic terms. We are running toward a wall at full speed and they do not want to turn away, for the sake of sticking to their original project.
The default of Greece is already inevitable, the question is how to make it happen. A debtor led default would be better, through an inevitable nationalization of banks to sustain domestic money flow through the crisis for some time. Of course strict capital controls should be reintroduced to avoid a dramatic capital flight away from Greece, something however already happening. A default of Greece and possible exit from the Eurozone would be dramatic, but would not jeopardize the whole Euro, and maybe in the long run would even be better for the Greeks in order to devalue their currency and gain new competitiveness vis-a-vis the European center.
The case of Italy is much more complicated. Italy is too be to fail and too big to save–see political reasons above. If the situation deteriorates with a recession, which is likely in my view, with social unrest after draconian austerity measures are implemented without fixing the problem either, then a rescheduling of Italy’s debt (call it “light default”) would be necessary and this would raise the key question of reviewing the whole Euro architecture. As people already discuss in some circles in Berlin, maybe we need a two-tier Euro system, with two currencies (Center-strong Euro and Southern European Euro), with different values and somehow related.
An overall compensatory mechanism could also bring in the British pound as a third currency area.
This could be a way for addressing the two root causes, and restructuring the European banking system to serve, again, a productive economy (we might need a series of public investment banks to do the same), as well as re-balancing European regional imbalances, by reducing, inevitably, the powerhouse of Germany as global exporter. This is strongly opposed by Angela Merkel today in Germany (see her open statement from yesterday).
Today there is no political will in the center for that, but financial elites have already started debating the issue because they realized that even their game got out of control.
From a social justice perspective, which is not the one of financial elites of course, the question is to advance–before others do–dramatic proposals for transforming the Euro project and engage in the debt default struggle in the periphery. That’s why having public debt audit in each of the periphery countries is key, in order to expose, not just how this debt was generated, but also who benefited and who lost from this crazy European neoliberal project, and to discuss radical and alternative proposals to get out from the current deadlock.
Technocratic governments headed by people like Monti in Italy–who in 2005 was still at Goldman Sachs–or Papademos in Greece are definitely not the solution, but a continuation of the same status quo and problem.
For more, see part 1 where we asked Salvatore Engel-Di Mauro to respond to the same claims.