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Super Mario?

January 22, 2012

The FT seems to have fallen in love with Mario Monti since being granted an exclusive interview with him last week. The paper’s correspondents have both hailed a package of Monti reform measures, and asserted that Monti is making Italy’s path diverge from that of Greece.

This is premature. Much of the FT coverage has highlighted moves to end legislated rents enjoyed by groups like lawyers, notaries, geometras, and pharmacists. In reality, the biggest of these rents have been abolished already, while long-run economic weakness has forced professionals to give up many of their remaining minimum charges. Notaries could be squeezed further, but their last really juicy rent — the requirement to use a notary every time you buy or sell a car –went years ago. Lawyers and geometras were long since forced by the weight of their numbers and the weakness of the economy to either dispense with official fee schedules altogether or to operate at the bottom end of them. There is such a ridiculous number of lawyers, accountants and geometras in Italy that they have to bid each other down. The nominal level of professional fees in Italy is not the real problem.

What has destroyed the Italian economy is transaction costs — the nominal fee plus the time-and-aggravation cost of getting anything done. The Euro7,000 charge for our leaking roof case would have been unreasonable but for the fact the case took seven years for the magistrate NOT to reach a decision. Italy requires systemic change to create institutions that allow the economy to be more efficient.

The biggest necessary change is a functioning legal system. Monti has offered nothing on this front, save plans for a special business court to try to encourage foreign direct investment. This is a remarkably third-worldy as a policy proposal. It is reminiscent of when a country like China sets up a ‘one-stop’ investment office for multinational companies or agrees to abide by international arbitration decisions in business cases. That kind of thing works for emerging economies if they have high growth rates, which are what attract investors. Italy has no growth. If any investors are to become active in the Italian market, foreign or domestic, they require a legal system that works. Mario should get on and propose one.

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The Latin American option

December 21, 2011

With the ECB doling out almost half a trillion Euros of 1 percent three-year loans to European banks, I am made to think of Latin America in the 1980s. Remember that the Latin American crisis started in Mexico in the autumn of 1982, but it wasn’t actually sorted out until 1989 with the Brady bonds deal (not very clearly explained here). In between, the Fed and other central banks conspired to keep the banks that had lent way too much to Latin America alive.

Maybe the ECB can do that with Europe. If it lends enough cheap money to European banks, perhaps enough of it will be spent by the ‘private’ financial sector on government debt to keep all countries in the Euro. Then the ECB can wait for the US economy to recover and restructure all the debt in a better economic environment — much as the US did at the end of the 80s rather than in the early 80s recession. Southern Europe, like Latin America, just has to put up with a lost decade of growth and steady capital flight. Which is hardly a new thing.

This scenario doesn’t really feel likely to me. Above all Italy and Spain are way more important to aggregate rich-country demand than 1980s Latin America was. Italy may want to think it is Mexico, but actually it is France behaving like Argentina. If you know what I mean.

Which seems to lead to the conclusion that this baby’s gonna blow. Oh dear. Did I mention the IMF before?

 

IMF, IMF, riding as to war

We all hope you will not be

As clueless as before

Oh! [repeat indefinitely until IMF arrives]

 

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The parcel is passed

December 11, 2011

Giuliano Mignini, the prosecutor in the Sollecito-Knox case, has had his conviction for abuse of office — relating to persecution of journalists and illegal investigations (details here under the 20 April 2010 entry) —  quashed after the Florence appeal court ruled his case should have been heard in Turin.

In theory Mignini can be tried again. But it looks like his case can has been kicked way down the road.

Despite Mario Monti’s promises of ‘Change-Italy’, at ground level things look very much like business as usual.

The Italian press has barely touched on Mignini’s successful appeal. There is a short report here in Italian, and an even shorter one here in English.

 

 

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The wrong menu

December 5, 2011

With the publication of Monti’s ‘nation saving’ budget in Italy (here in Italian) and news that Frau Merkel and Sarko have agreed a ‘fiscal compact’ to save the Euro we can see the shape of a week that may postpone Italy’s exit from the Euro but which will surely make it yet more likely in the long run.

First, Monti’s budget looks like a classic Italian serving of pointless, bureaucratic complexity. There’s another expensive-to-collect tax on yachts, and one one private aircraft, which will doubtless raise a net of about 8 euros. There is the return of property tax on first homes, but at a pretty low level and with various possible exemptions. Note that there is no attempt at simplification of different house-related taxes by, say, merging the new levy with the tax on rubbish disposal (known by the acronym TARSU), and sacking half the people who collect these taxes. Monti, may be a technocrat in theory, but this looks like the standard, tried-and-failed fare of the left-of-centre parties. On that note, the Welfare Minister cried while announcing pension cuts (perhaps troubled by the enormity of her own salary).

Why not do tax like Italy does its food? Simple, digestible and to the point. And then apply the tax. You never get to leave a restaurant without paying.

Meanwhile Frau Merkel and Sarko are coming up with a scheme to sanction countries like Italy that don’t stick to budget targets. This plays to German political opinion, but completely misses the point.

It treats Italy as a debt problem. But it isn’t. Italy is a growth problem that can only be resolved with legal system, bureaucratic and labour market reforms that make growth possible. Italy needs to be made to work institutionally.

All this Merkel-Sarko deal is likely to do is to keep the fiscal squeeze on Italy and provide a temporary respite for the Euro. But if Italy cannot grow it will never be able to pay its debts, even at 5% interest.

What we are likely to get this week will be the worst possible outcome. There won’t be pressure for pro-growth reforms from Merkel. And Mario’s budget performance suggests he can’t produce institutional change either.

The Italian economy will just shrink away faster than cuts can be made and taxes levied.

More:

The FT (sub needed) on Merkel and Sarko’s agreement.

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A bit of Perugia in all of us

December 2, 2011

The trial of police officers involved in a wrongful 1980 conviction of 3 men for murder in Wales has collapsed on a technicality. The case has interesting parallels with the Sollecito and Knox case in Perugia. The three convicted men left no forensic/DNA evidence at the crime scene, despite a murder by 50 stab wounds. The man later convicted of the murder left plenty of forensic evidence, but police were obsessed with the other three suspects. As in Perugia, their theory was more important than the investigation.

It all looks rather Italian, as does the failure to complete a trial of the police officers alleged to have perverted the course of justice. However we must note that there have already been two enquiries into this case, and there will now be a third. That isn’t the same as Perugia, where the expectation is that there will be no enquiry, nothing will change, and police and magistrates will not even get a telling off.

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Improbable ideas

December 1, 2011

Martin Feldstein pens a curious opinion piece (FT sub needed) arguing that Italy is perfectly capable of saving itself from a Euro exit. Did anybody ever suggest otherwise? Italy is capable of anything. The problem is that the country’s political and professional classes are incapable of putting national interest before their own.

Is there a mechanism to make the professional class behave? My thought is that rather than some counter-productive tax raid on bank accounts (as is often suggested in Italy), what would be much more effective would be a mandatory conversion of a share of bank deposits over a certain minimum into government bonds yielding 5 percent interest. No one would have their savings confiscated — indeed they would get more interest than in the bank. Such a move would have the effect of forcing the Italian elite to take responsibility for debt and therefore for economic reforms that would lead to growth.

The cash raised could be used to pay down a chunk of debt, thereby reducing interest demanded on the rest. But the real objective would be to get Italians focused on reform.

It is often pointed out that Italy’s private wealth is three to four times its public debt. The real issue is getting people to take responsibility.

The problem? Can you imagine Monti calling the MPs into a closed-door meeting of parliament and demanding they vote to support such a move? They’d all be trying to make mobile phone calls to their bankers ordering TTs to Switzerland.

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Chicken, with insufficient traffic

November 28, 2011

‘Chicken’ is supposed to be an exciting game, which ends with someone getting splatted on the road by an oncoming vehicle. But this Germany-Italy variant is going on way too long. Frau Merkel and (now) Mario stand in the road, ready to hop out of the way of the next speeding truck, but none passes.

Instead, there’s the odd slow-moving three-wheeler. The interest on Italian debt makes a new peak over 8 percent. So the ECB buys more bonds. The stock markets languish, then find some excuse to rally a bit. European growth goes down a bit, US growth goes up a bit. Frau Merkel does nothing. Mario does nothing.

Frankly, I’m nodding off. Rather than ‘chicken’, this is more like Italian football. It is touted as a great game, but turns out on inspection to be thoroughly dull. Each team tries to win by doing less than the other one.

Perhaps this is how the Great Depression earned its name? The politicians just bored everyone senseless.

 

Update:

Nouriel Roubini has a sensible analysis of why Italian debt will have to be restructured in the FT (sub required). He points out that the idea of a big, one-off Italian wealth tax is unworkable. It will just lead to massive capital flight and falling demand that causes real depression. Sure Italians have cheated their taxes for generations. Sure the professional class is unworthy of the name. But the problem is an institutional one and the only solution is institutional reform. Having another tax would be the equivalent of the standard Italian thing of having another law. What needs to change is systems, mechanisms, beginning with the legal one. So give the more-thoughtful-than-previously-IMF the remit, and send them in.

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The fork in the road

November 17, 2011

It isn’t easy to see amid all the goings on, but there is a fork in the economic road. A third week of improving jobless claims in the US signals the very slow recovery of the world’s biggest economy. Meanwhile the spreading of the stress in European debt markets signals that the worst in that region is yet to come.

The world is suffering two different macro crises. A private debt disaster hit countries running the Anglo-Saxon model. As Hyman Minsky would have expected, the US is beginning to escape from this because its government carried sufficiently low debt that it could step in and bail the problem out with monstrous sums of public money. The US is also assisted by having a diversified economy that contains the planet’s best manufacturing firms in addition to its biggest banks (something not considered in Minsky’s ‘financial instability hypothesis’, but then he never claimed it was a complete theory). The UK, and Ireland, and Spain, are more one-dimensional and hence more stuffed. As this article makes clear in Britain’s case.

The second macro crisis is the public debt one of the Eurozone. Here the state cannot step in because its debts are the problem. Instead the state has to negotiate its way out. Which involves politics. Which is why the problem is more intractable than the private debt disaster where the solution is automatic (deleveraging, falling asset prices, misery for anyone who failed to ‘play the market’).

The major ‘negotiation’ of the public debt crisis in Europe is Italy’s, which is now in its ‘Chin Up, Let’s All Stand Together Phase’, under Mr Monti. The press today is being terribly positive. But I cannot see where a good outcome could come from. Italians are all in favour of Mr Monti because he has not yet set out clear policies. Once he does, the political parties will attack him, and allege that dark, conspiratorial forces are behind him. Without a clear roster of policies that have to be approved by a referendum, there is no practicable way forward. And no party is urging a referendum because it would involve making policy choices clear. The parties were not even willing to offer up ministers for the government. The preference is to let the ‘technocrat’ dig his own grave.

 

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Oooh la la…

November 14, 2011

Should have posted this rather nice graphic from the NYT a few days ago, showing debt relationships in Europe.

It reminds us, as Mario Monti goes to work, that the Italian debt buck stops in France.

For it is the French banking system that has a net exposure to Italy of something over US$350 billion.

When the history of recent world banking is written, US and  British bankers will take the prize for unadulterated, venal greed and selfishness.

But French bankers must surely lift the trophy in the combined greed-with-stupidity category.

The French liability in Italy is about 15 percent of French GDP. Which particular risk model were the French banks running when they decided that was a good idea?

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The gentle breeze of British hypocrisy

November 12, 2011

The Economist has published its sixth, and presumably final, cover story on Silvio Berlusconi. The headline – ‘That’s all folks’ – is supposed to evoke the cartoon quality of his premiership. But coupled with a backdrop of Sil set in a painting of end-of-Empire Roman lassitude, it is too busy. Far more visually effective was the June 2011 cover with a simple photo of Sil and the line ‘The man who screwed an entire country’.

I haven’t been the biggest fan of The Economist’s coverage of Italy because it has focused so overwhelmingly on Sil — rather than on a the malaise of an entire professional class which he symbolises. What sets Italy apart is that, relative to its level of economic development, it has the most backward, self-serving professional class and professional institutions of any state in the world. This includes, but is far from limited to, its political and legal and fiscal institutions.

There is also a very English undercurrent of hypocrisy in the manner in which the British elite discusses the Italian crisis with a told-you-so attitude. The Economist is particularly guilty of this, putting the boot in to the German response to the crisis on a weekly basis.

What is forgotten is how the Germans are left to do the political heavy lifting in Europe almost single-handedly. They have a French ‘assistant’, but he is barely worthy of the name.

If Britain had joined the Euro, things would have been different. There would be two big political grown-ups in the Euro-zone instead of one, and that would have made the job of dealing with Italy so much easier.

You cannot argue with Britain’s decision to stay out of the Euro from a selfish, pragmatic perspective, but anyone who supported that decision should limit themselves when yelling from the sidelines about what to do now. How would you like to be Merkel, put in a team with Sarko, and expected to sort out Greece and Italy?

If Britons are honest, they must concede that post-war Germany has done the bulk of the work in creating a stable, prosperous and progressive Europe while the British — famed as people of action — stood around bitching. And when Britain realised it desperately needed to be inside the Common Market in the early 1970s, it needed German support — against French opposition — to get in.

Germany, not Britain, is the moral leader of Europe in the past half century.

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