The cavalry mounts up

September 6, 2012

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It isn’t yet Custer’s last stand, for Euroland is the longest Hollywood movie ever made. But Flexible Mario’s press conference today gave us the predictable shape of the final showdown.

Mario’s ECB holds in one hand the promise of unlimited sovereign bond purchases of up to three years maturity (this may include buying long bonds with less than three years to expiry, his language was unclear on the detail). The seniority of the ECB claim on the bonds will be no greater than that of private investors. In the other hand, Mario holds the great northern European stick of what he repeatedly called ‘strict and effective conditionality’. Indeed Mario promised a stick more flesh-splitting still, holding out the prospect of not only EFSF-ESM supervision, but also IMF involvement as well.

As a former Italian bureaucrat who was closely involved in his country’s successful efforts to avoid structural reforms in the 90s and 00s, Mario knows better than most that you need to point the gun directly at the heads of club-Med types such as himself.

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If conditionality is agreed, and sov’ bond buying in the primary market goes ahead, it will be known as OMT. We must be careful not to confuse this with OMD. OMT means Outright Monetary Transactions. OMD was the 1980s’ band Orchestral Manoeuvres in the Dark. Clearly, the two things are unrelated.

Mr Market, meanwhile, is very happy. He continues to believe that Flexible Mario’s pronouncements mean that Frau Merkel will pick up the tab for Club Med Europe. But it is not so. All that Flexible Mario has done is to prepare the stage on which politicians will play, a point which he repeatedly stressed.

Finally, the other salient point today: Mario claimed there was zero discussion in the ECB council of the possibility of NOT sterilising some of the bond purchases, if they happen. In other words, quantitative easing is not yet under discussion.

Comic interlude of the day:

Some genius from Fox News asked Mario how dangerous it is that the ECB already has bonds to the value of 33% of Euro-area GDP on its balance sheet. The ECB balance sheet actually contains bonds to the value of about 3% of Euro-area GDP. Yo, Murdoch…

Graphic of the day

This BIS graphic shows how French banks, which had the biggest exposure to the mess to begin with, have also been slower than their German counterparts to unwind their exposure to ‘peripheral’ Europe. Put another way, when you are very deep in ‘le poo poo’, it is that much harder to climb out.

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Forgot to mention:

Since the cavalry are mounting up, I should repeat my little ditty of December 2011

IMF, IMF, riding as to war

We all hope you will not be…

As clueless as before

Oh! [repeat indefinitely until IMF arrives]

What is it with the FT and Italians?

The FT’s love affair with Monti spilleth over (sub needed) even unto Draghi… I can only assume it is because the badly-dressed FT journalists suffer well-cut suit envy.

La mamma severa

September 3, 2012

Queuing on the south side of the San Gottardo tunnel in Switzerland surrounded by Dutch and German cars, I wonder whether my fellow travellers have been convinced by their summer sojourns in Italy that their southern neighbour is changing. Myself, I cannot see it. Italy is miserable from the cuts that have been going on for years. But structurally the story is the same. In this respect, Mario Monti appears to be a continuation of Silvio Berlusconi, minus the bunga bunga.

What has Monti done? A labour law that no one in Italy believes is more liberal than the old one. Nothing to simplify legislation, the tax regime, or the bureaucracy. And absolutely nothing to create a functioning, more efficient judicial system. Just budget cuts. In sum: Berlusconi 2.0.

I am sitting in a German petrol station pondering this when I realise I have to get out of my car to fill it up with LPG. Unlike in Italy, there is no law in Germany that mandates that only a petrol station employee can fill a car up with gas. I glance wistfully over my shoulder, recognising that feudalism has its upside.

Mr Market, meanwhile, is feeling quite sanguine, having convinced himself that Frau Merkel is readying her cheque-book to bail Italy out. Or at least being ready to let Flexible Mario at the ECB write the cheque. The ECB is to announce the latest terms of its support for so-called ‘peripheral’ countries later this week.

Mr Market, methinks, underestimates Frau Merkel. Italians have been asking for 20 years for a northern European mamma who will put the kibosh on their bad habits, and I suspect they are to be rudely surprised by getting what they wished for. One way or another, with the failure of Monti, a bunch of Germans and IMF folk are going to end up moving to Rome to oversee the structural reforms that Italy requires. Either that, or it’s out of the Euro.

Related posts:

Why Super Mario is made of paper. As his 2012 budget foretold. My own cunning plan to solve the Italian debt crisis. How the buck stops in Paris.  The global picture of what we are dealing with. Why you should never listen to the Brits about Europe.

Back on the blog

August 20, 2012

It’s been a while.

Back in February I was infuriated when WordPress suffered an IT breakdown and failed to remind me of the need to renew my blog domain. The domain was ‘cyber-squatted’ by some monkeys who stuck up porno pics, links in Chinese for cheap flights, and demanded Euro200 to get the domain back. After a week, I paid up, but kinda lost the urge to blog. WordPress admitted their cock-up, but showed no inclination to cover the expense they created for me.

It is a great, FREE service. But I was pissed.

Meanwhile, I had to do a revision of a new book, which took time and pain. The results, I think, are worth it. The book will be out in March 2013 and, whatever people say, is the most important thing I have written. The title: ‘How Asia Works’. You heard it first.

This blog needs some amending. Since September last year we have been living in Cambridge. But, right now, we are back in Italy, which is still a great holiday destination, even if it doesn’t work as a country.

We drove down through Germany, my new favourite European state, following the spine of western civilisation, aka the Rhine. Starting in the offshore port-financial centre called Holland we progressed to Aachen, imperial seat of Charlemagne — he who made European power shift decisively north after the end of the Roman empire. Fantastic kit in the chapel and museums and a local 35% liquor made with herbs (‘Printen’) that can compete with anything I have tried in Italy. From there to the Mosel valley, just off the Rhine, and very beautful. The youngest counted 23 castles to win the castle-counting prize. Wenches in trad dresses serving, er, German food. Finally Freiburg, university town, with fresh water flowing down shallow gutters around town, a bit like Cambridge. Very nice.

The people seemed not entirely infuriated by the bills they will have to pay on behalf of their southern neighbours. Indeed the polls suggest that Frau Merkel can win a third term. The Germans are truly the grown-ups of Europe. Even if they take the neatness and prissiness thing a little too far.

And so it was that we returned to the Third World. Albeit on holiday this time. But still. You couldn’t make this shit up.

What price incompetence?

February 17, 2012

We now know. US$4m is to be paid for Amanda Knox’s story of torture at the hands of Italy’s ‘professional’ classes. It is a lot of money. But then the publishers have calculated that the appetite for a tale of medieval habits sustained in a modern society is considerable. I reckon they will get their money back. Italy is something truly special.

More:

Here is Douglas Preston, who already wrote a book about Giuliano Mignini.

What’s the Greek, Portuguese, and Italian for ‘escrow’?

February 6, 2012

Naughty children shall not have their pocket money. So says every right thinking parent, and so says Frau Merkel about the insufferable Greek ruling class. Even if Greece does get its new bail-out, it won’t see the money. Instead, funds are to be held in an escrow account and released to little Johnny as and when he applies himself to various jobs in hand.

I really can’t say I disagree. Brave Dave Cameron has been urging Merkel and Sarko to ‘just bloody well hand over the dosh’, but since it’s not his money and he doesn’t even participate in Europe, he and the Fat Controller would say that.

Escrow, I think, will be a model arrangement for forthcoming bail-outs for Portugal and Italy. Europe has been round the block with Italy already in the 90s over Euro accession and not a thing got done in terms of structural reform. Frau Merkel is leading Europe. In another 20 years people will look back and realise how important this was. (And what a dreary footnote the Brits were.)

Meanwhile, Reuters seems to have arrived at my view of the Monti government’s efforts so far, posted a couple of weeks ago here.

This is the FT on escrow (sub needed).

Italians leave, no one arrives

January 27, 2012

The Guardian has put together an interesting graphic on movement between the EU’s leading states. It shows that a million Italians have left their country and that people from other rich states find Italy much the least appetising developed country destination. It doesn’t say much for my judgement.

Preferably ask no questions

January 25, 2012

The annual Reporters Without Borders index of press freedom is out.

The UK is 28. Behind Jamaica, which reminds us that press freedom can’t solve every problem.

Italy is 61. The lowest rank of any major developed country.

China is 174. Out of 179. But still ahead of Iran, Syria, Turkmenistan, North Korea, and Eritrea.

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]