Studying the classics

November 9, 2011

They say you can learn from the classics. So here are my bullet points on the heroic struggles of Europe’s ancients.

 

How Greece did it:

1. Get money from EU in return for reforms.

2. Tell EU/IMF you need to hold referendum in order to get population on board.

3. Abandon referendum when rest of Europe says this is devious and should have been discussed up front.

4. Bicker and look ridiculous.

5. Leave Euro and return to Third World.

(6. Feel really bad when Turkey joins EU and takes commitments seriously.)

 

How Italy could do better.

1. Tell EU you need to hold referendum in order to get population on board.

2. Form government of national unity. Agree comprehensive package of labour market, justice system and fiscal reforms with EU/IMF to be overseen by IMF.

3. Don’t bicker. Hold referendum in January.

4. Implement reforms under IMF oversight.

5. Remain in Euro and begin to be respected member of First World instead of being resident joke member.

(6. Not have to feel bad when Turkey joins EU and takes commitments seriously.)

 

But which option to go for?

Rodin's epic representation of the Italian politician

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The song of a lost nation

November 9, 2011

Here’s a new song to sing to keep up spirits as we wait for Italy to fall into the abyss:

IMF, IMF, IMF

IMF, IMF, IM-E-EFF

IMF, IMF, IMF

AYE EMM FFFF

 

Because even though the country is among the richest in the world, it can’t look after itself.

And take a look at the bio of David Lipton, who the IMF had already scheduled to go to Rome next week (before Italian bond yields hit 7.5% this evening). This guy appears to have the cv from hell. He worked at disaster bank Citi in the run-up to the global financial crisis. He (presumably) filled his boots at hedge fund Moore prior to that. He was part of the Clinton financial deregulation road to hell  team in the 90s. Which came just after he had worked with Jeff ‘did I say that?’ Sachs to provide restructuring ‘advice’ to developmental superstate Russia in the 1989-1991 period. Maybe there really is a God. And he really has lost patience with Italy.

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Seven

November 9, 2011

Time for Giuliano Mignini to investigate. The yield on Italian debt has hit seven percent. Which is the same as the number of deadly sins committed by the Italian prime minister. Every week, which in turn has seven days. And today is only just more than seven days after Halloween, the diabolical festival when Raffaele Sollecito and Amanda Knox, give or take a day, hatched their Satanic ritual murder plot. In Perugia. Whose name has seven letters.

It is soooooooo obvious that everything in the whole world is a conspiracy. How can anyone be expected to take action when confronted by forces beyond our control?

Frankly, they can’t. Which is why Italy’s professional class is doing nothing as the country goes down the tubes.

Let Rome burn!

The images will at least form a good backdrop for a Dolce and Gabbana advertising campaign. Sicilian peasant chic — combining glamour, stoicism and passion — is surely the perfect day-wear for the modern cataclysmic financial crisis. Not to mention a great metaphor for a society living on bullshit.

Prime Minister Nero putting in a bunga-bunga order last night.

Worth a read:

Nouriel Roubini reposts what he said about Italy at Davos in 2006. Roubini’s analysis led to a bizarre racial outburst from finance minister Giulio Tremonti, the former professor of ethics who was recently busted renting a Rome apartment for cash.

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Oh mamma, can this really be the end? (Nth reprise)

November 8, 2011

Only in Italy do markets bounce, the currency strengthen, and gold weaken when the leader of political ‘right’ says he will step down (in order, as the traditional Italian formulation has it, to spend more time with his bunga-bunga girls).

Of course Sil hasn’t said when he will go.

As if to remind us that whatever the Greeks can do badly, the Italians can do at least as badly, this limp political comedy will continue.

Meanwhile, the IMF has been invited to Rome, which will give staffers a pre-change-of-government chance to reflect on what actually needs doing to keep Italy in the Euro. Most economists quoted in the press focus on the need to deflate. But this is impractical — Italians couldn’t take the deflation any more than Greeks could. No society can watch its real incomes shrink by a quarter or a third in order to make economists’ graphs look the way they ought to.

The only real way forward for Italy is very serious structural reforms which unlock fairly quick productivity gains and hence growth.

There is no theoretical reason why this cannot happen.

However, the job that will confront the IMF if it is called in to run a programme — which I continue to believe it will be — would exceed anything it has undertaken before.

Not only the labour market and outsize public sector need to be overhauled, but the entire justice system has to be reworked.

Can a foreign agency do such things outside the settlement terms of a catastrophic war? I suspect not. Which leaves two choices. Either give Italy German money and accept the country will not change and will remain a fiscal burden on the centre. Or kick Italy out of the Euro and refocus the group on a more northerly European caucus of states that can actually deliver political, social and fiscal integration.

In the end, it is all politics.

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We like dull

November 8, 2011

Three recent articles make me think how dull and conservative good industrial policy in developing countries needs to be. And how China is proving the point.

The first piece reveals that only 106 plug-in electric cars were bought in the UK in the third quarter of the year. The second indicates that after biding its time, General Electric is making a move into the solar industry (FT sub needed) — but not into the poly-silicon technology that has dominated thus far, instead into the thin film approach that grew out of the US semiconductor business. The third article concerns GE’s third quarter results (FT sub needed), which were none too bad but which were not helped by falling wind turbine prices, a business where GE is already very active.

China has designs on all these green energy businesses. It also has large domestic firms in each sector which are screaming for subsidies. The government could have thrown its money at the most exciting technology — electric vehicles — or at the one where Chinese scientists lead the world — poly-silicon solar. But instead it chose to place its big bets on wind turbines, where the technological path is most established and the cost of green energy lowest, throwing billions of dollars at the construction of Chinese wind farms. It was the boring choice, but it looks like having been the right one — hands down.

As recent press shows, the market for electric vehicles remains tiny. If China had gotten too far ahead of the demand curve, the country could have wasted vast sums on e-vehicle technologies that fizzle. In the solar business, where private Chinese companies dominate global production of poly-silicon cells, there is a real risk that poly-silicon is not going to be the winning long-run technology.

The shape of the evolving wind turbine market, by contrast, is easier to see. It is largely a matter of making the same turbines bigger. In this context, China has created some of the world’s largest wind turbine producers in the space of a few years and there is little chance going forward that they will be ‘technologically disrupted’. They are competing first on price — hence the pressure mentioned by GE in its third quarter results — capturing market share, over-running the entire production value chain so as to ‘own’ the technology, and they will then start to compete on quality and service later.

Sensible industrial policy in a developing country involves plucking low hanging technological fruit. Then you bring cheap capital — human and financial —  to bear.

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Liberal parenting II: blending seamlessly into Cambridge

October 31, 2011

I have gotten into the habit of taking the kids on a very beautiful walk in Cambridge. We cycle five minutes down to the west gate of Kings, lock up the bikes, and enter the college via its back door. We walk down to the college’s internal bridge over the river Cam, survey passing punts and geese, take a loop around the gardens, and exit the front gate to a tiny cake shop down an alley opposite. This is the pay-off for the children. Caked-up, the three of them gambol merrily around the corner to Clare College — to me the most beautiful — via whose courtyards, bridge and fellows’ garden we return to the other side of the river and our bikes.

It is hard not to feel pleased with yourself in such august surroundings with three attractive children behaving with reasonable decorum. I am normally too nervous of them to enter any of the college buildings. But today, seeing there is a service in Clare chapel I accept the request of the eldest to take a look. Arriving early, we mill around with devout, serious-looking old people in the narthex. After a couple of minutes, I am summoned animatedly by the eldest child, eight, to view a large book displayed in the middle of the room in which people are writing names.

‘What is this?’

[I ponder.] ‘It is an ‘In Memoriam’ — in memory — book where people are invited to write the names of those who have died in the last year so that they can be remembered in prayers.’

‘Grandpa died three years ago. Who can we write in the book?’

[Pause.] ‘I don’t know anyone who died in the past year.’

‘I do — Gaddafi.’

‘You are not writing Gaddafi’s name in that book.’

‘Why not? He died this year and someone should remember him.’

‘Because, because…’

‘He died a few days ago… How do you write his name?’

Luckily, at this point the eight-year-old’s younger male sibling butts in with a very loud ‘I don’t like churches’. Before the four-year-old — who originated this refrain and caused a major scene in St Peter’s in Rome last year — can join in, I herd them out.

 

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De-icer

October 29, 2011

[brightcove vid=1245377657001&exp3=45533486001&surl=http://c.brightcove.com/services&pubid=45228659001&pk=AQ~~,AAAACofWkTk~,d-cWVfCeeBH2u4-MzWQrjKX5_f_MoDWg&lbu=http://www.imf.org/external/mmedia/view.aspx?vid=1245377657001&w=300&h=225]

Here is an interesting panel discussion about the Icelandic financial crisis. It is chaired by Martin Wolf (see blogroll), and includes Paul Krugman (see blogroll), Simon Johnson (see blogroll), a deputy director of the IMF, the current head of the Icelandic central bank, and another knowledgeable Icelander.

To recap: Iceland had by some measures the worst financial crisis in the history of the world (Wiki summary here.). However, because there was zero chance the country could bail out its banks — and it is not a Euro area member — they had to go bust, capital controls were introduced, and foreign wholesale funders of the Icelandic banks took the main financial hit. The obvious comparison is with Ireland, which has a similar-size crisis but is in the Euro and partly as a result was forced to go the bank rescue route. So, while Iceland has written off much of its bad debt and is recovering, Ireland is presently set to honour every European cent it owes and faces a decade of painful adjustment.

The event was filmed this week and runs to 1.5 hours. It is just about worth watching the whole thing, but if you don’t have time, scroll through and check these highlights as a taster menu of the way the world has changed — intellectually — as a result of the global financial crisis.

6 mins: Martin Wolf talks about the previously unthinkable phenomenon of the IMF admitting to mistakes.

30 mins: An IMF deputy director actually says: ‘Capital controls were probably the best thing that could be done at the time’. Remember that when the Asian crisis broke in 1997 the IMF was trying to change its articles of association to make a battle against capital controls a centre-piece of its mandate.

57 mins: Martin Wolf talks about the ‘new, cuddly IMF’.

62 mins: The point is made that the lessons of Latin America 1982 and south-east Asia 1997 have were finally learnt such that they could benefit a country (Iceland) whose population is the size of a mid-western town in the US. Roughly speaking, bad US, IMF and World Bank policies were used on approximately 1 billion people in order to learn positive lessons that have been applied to 300,000 people.

89 mins: Martin Wolf talks about the Vickers plan for UK financial sector reform, which he refers to as ‘modern Glass Steagall’. I think it would be fair to say he hopes that this is what it will turn out to be, since the ring-fencing strategy put forward by the final Vickers report has not in fact been tried before.

 

Final thought: the very moment when the IMF is said to have become ‘cuddly’ may be the one when it needs to not be cuddly. Italy, which I continue to believe will require IMF intervention, cries out for the toughest and most invasive kind of IMF action if it is to remain in the Euro area. This includes intervention in institutional areas like legal system reform where the Fund has never previously (to my knowledge) been active. Just when the IMF decided to be nice and listen to Icelandic policy makers, it needs to be Mr. Bad Cop to have any chance with Italian ones. In saying this, I stand by my own preference for Italy to be pushed out of the EU and forced to confront its problems itself — because only that will really force the country to grow up.

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Shaggy dog

October 27, 2011

It’s another fudge from Europe. The European Financial Stability Fund has been ‘theoretically’ expanded through approved leverage to perhaps Euro1 trillion. Private holders of Greek bonds will ‘theoretically’ take a 50 percent hair-cut, though no details have really been agreed. Silvio Berlusconi has delivered a letter ripe with fulsome promises of structural reform in Italy, to add to lots of other fulsome promises he made before.

It was clear in recent days the markets were ready to accept some more thin European gruel as ‘good news’. Corporate earnings in the US continue to be strong and the latest US GDP figures suggest the American economy is slowly crawling away from the abyss. The very slow improvement in the US macro numbers is the bigger economic story, albeit less trumpeted in the press.

The European train wreck waiting to happen has been moved back down the line. But not far. In the absence of any substantive structural change in Italy, a train wreck there will be. The base case remains remains an Italian fiscal crisis and IMF intervention in the absence of any EU capacity to address the problem.

In the mean time, Italy’s negotiating position can only be strengthened by the ECB’s continued purchases of its debt (EU debt socialisation by the back door) and by the Greek debt hair-cut (What about us, another ‘young’,  ‘peripheral’ European state?). Time to write about something else for a while.

Next day update:

Porco cane! Rome auctions some debt this morning and the market still wants 6 percent (FT sub needed)… In fact the cost of Italian public debt has gone up to a new record. Is it possible that people outside the Italian elite are less stupid than they thought?

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Un-modern family

October 24, 2011

You’ve got a big mummy who hasn’t aged that well but has cash. Your dad is a bit flash but somewhat light-weight and ineffectual. And you are still sponging off your parents despite the fact you are 75 years old.


Sound familiar? That’s right, it’s the Germany-France-Italy relationship.

The sight of Frau Merkel and Sarko-I-can-do-a-serious-face-too chastising Big Baby Silvio Berlusconi is like watching some super-sick sitcom that makes Modern Family seem like straight play.

Sil is going to have an emergency cabinet meeting (FT sub) to talk about really really really doing something to sort out Italy’s structural problems.

I am soooooooo excited.

Betchuartooo.

 

Mum and Dad are questioned about Sil:

Here is the presser where a journalist asks in French if Mummy Merkel and Daddy Sarko find Sil’s promises about what he is going to do convincing. The facial expressions are priceless. There have been a couple of hundred thousand page views already.

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Sunday bloody Wednesday

October 20, 2011

Italian debt yields are back over 6 percent. So France and Germany react by announcing that Sunday’s last-chance saloon summit on European debt and economic restructuring will go ahead, but won’t reach any decisions. Instead there might be another summit on Wednesday. Or Thursday. Or next weekend. Maybe Sarko and Merkel are hoping the markets will really fall apart so they can be seen to be forced to do something. This is the most likely endgame. But of course if they are forced by a market crisis, France and Germany will react with a bail-out package rather than a new political agreement that puts the EU on a sustainable track to being the world’s most desirable economic bloc to live in. That would involve a political and institutional agreement, not a conclave of thieving banker types trying to structure the EFSF in a sufficiently complex way that the world is conned into thinking that all is well.

While pondering this, I check the press at the end of the day and am saddened to discover that Berlusconi is dead. ‘Maverick dictator with little regard for reality’ says the headline of the obit in the FT (sub needed). It is a bit tough to say of a deceased G8 leader that he ‘had a grandiose vision of himself and of his country’s place in history’. None the less, Italians certainly ‘were impoverished and repressed by his policies but nonetheless forced to pay homage to the illusion that he was a political visionary’. However, surely the FT has got it wrong with the claim that Berlusconi was born in a tent near Sirte in 1942? Wasn’t he born in Milan in 1936?

 

 

 

 

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