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.

Book review: School Wars

December 30, 2011

If you have children, and you have not read a history of the British education system, then this book is already worth reading. It is far from perfectly organised, and it fails to make some — to me — obvious and powerful points about education policy. Indeed the book might have been better as a more closely focused pamphlet of 120 pages rather than the 200 pages that it is. But overall, School Wars contains enough good information to leave you grinding your teeth at the weakness and hypocrisy of British politicians in all three major parties. It has proven, in Britain, easier to have a rational debate about homosexuality than about education.

Why? The proximate reason is that the British establishment is still overwhelmingly educated in elitist schools which refuse to accept poor or more difficult to teach children. The apex of this system is the roughly 7 percent of children who go to private schools and the 5 percent who go to grammars. But if you count in other church and non-church state schools which cherry-pick their intake, there is probably one-fifth or more of families and kids which undertake their education on the unspoken basis that it is reasonable to leave everyone else to fend for themselves.

In a country like Italy, the elite plunders the state directly. In Britain, the approach to making sure the establishment gets more than its share is far more subtle. Indeed one can only admire the refinement of the hypocrisy. Instead of grabbing what you want directly, you give yourselves an unassailable advantage by creating selective schools for those with more money, more accumulated learning and better social networks and then ‘compete’ with people who have had to undertake their education in the real, everyday world of mixed incomes and abilities.

School Wars fails to make the most important point about this system — that those who support it are anti-competitive. The British education system exists to prevent children having equal educational opportunity and therefore from competing on an equal basis. It is a myth that the rich and powerful like competition — it is a threat to their status. What they like is competition according to rules they set, just what the British education system offers.

Another thing School Wars fails to address is the false fear that most people have about a nationalised education system, where each school would educate a fair cross-section of the population. Such an arrangement would create a more genuine free market, but it would never mean that the monied classes could not bring their money to bear on their children’s advancement. Such support would simply have to occur outside school, as is the case in Scandinavian countries, continental European ones, north-east Asian ones, or Canada, which have non-selective school systems and post higher average educational scores than Britain.  Money still counts in those countries. However you cannot move your child to some ‘gated’ educational community free of the poor.

It may seem there is a lot missing from Melissa Benn’s book. In fact, there is a lot in it. She is good at showing how real improvement in Britain’s education system cannot come from piecemeal change. Britain needs a simple, straightforward commitment to education as a public good. Everything else leads back, through any number of byways, to manipulation of the system by more powerful interests against less powerful interests. The loser is the  aggregate quality of education. As constructed today the British school system is really an experiment to prove the existence of middle class selfishness. We knew that existed already.

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]

 

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.

 

 

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.

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.

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.

IMF headlines you thought you’d never see

November 30, 2011

The FT (sub needed) today has an article headlined ‘IMF raises alarm on capital flows’. I kid you not.

It is about a new IMF report highlighting cross-border risks from uncontrolled capital flows. This from the agency which helped global banks rape half the world by campaigning for the premature lifting of capital controls in Latin America and Asia in the 1970s and 80s. (You will remember that the IMF was trying to make the abolition of all capital controls an objective in its Articles of Association in the midst of the Asian financial crisis in 1997.)

The FT is apparently unaware of the ironies inherent in an article of this nature. One era just segues into another.

 

What I meant was more tank engines

November 29, 2011

As I stop for a tuna sandwich, the Fat Controller has left the Treasury and is heading for parliament. Here is what I predicted in January. Let’s see how Osborne’s admissions today measure up.

Next day:

1. Osborne changed his growth forecast for 2012 from 2.5% to 0.8%, so at this point he was out at the start of the year by a fact of just over three.

2. There will be a few more tank engines, but any real impact from the Fat Controller’s plan depends on the private sector coming in to leverage about £5 billion of public money. HM Treasury explication of its ‘clear’ infrastructure plan is here.

3. It is very small beer from Osborne, less than I expected. Outlook has to be that growth will fall even further than he now says and there will be some additional capex stimulus in the first half of 2012. He is going to follow the curve rather than influencing it throughout this crisis.

4. Politically the FC is taking the low road of a blame game. It’s all the fault of the Eurozone and the previous long-lived Labour government. There is a sufficient kernel of truth in this to deflect attention from the fact that Osborne himself has no new ideas about anything.

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.