Saturday, 21 January 2012

Merkozy v Cameronti

 Prime Minister Monti’s visit to the UK was a breath of fresh air. Gone were the winkles to pretty girls and glances to female backsides, in were clear speeches in excellent “international” English, delivered to a selected audience at the London School of Economics as well as investment bankers gathered in the London Stock Exchange. Mr Monti was on a roadshow to explain its economic reforms to the investors that would pay Italy’s bills in the coming years  and affirm his country’s commitment to stick to these plans. He spent time with Prime Minister Cameron discussing not only a backstop to the financial blows that Italy will face after the forthcoming Greek default, but also EU-wide growth measures dear to both UK and Italy, particularly full liberalisation of services. Then, Professore Monti rushed back to Rome where he will play host to both Ms Merkel and Mr Sarkozy. The contrast between the sober ex – EU Commissioner for competition, now a respected although unelected technocratic prime-minister and the vivacious Mr Berlusconi, the longest – serving Head of government in post war Italy, could not be starker.
Clearly, it’s not just appearance. In addition to heavy austerity measures that add up to well over 3% of his country’s GDP, Mr Monti launched a direct attack on tax evasion, labour market inefficiencies and mini-monopolies of various professional categories. His recent measures are aimed at liberalising parts of Italy’s ossified economy, particularly in the services market. Italy also implemented a rare pension reform which, hard to find elsewhere, creates a legal link between the retirement age and life expectancy.
Professore Monti looked very much like that species of Italian aboard that I came to observe in my life as an investment banker and were so different from what one could see in the ruling classes in the country’s recent history. Smart, sophisticated, very, very well educated (with a wonderful blend of classic education, Dante & all, plus excellent economic or technical literacy), professional and very good at their job. Many left Italy because their dream job, with commensurate pay, was in the City, or because they were not “raccomandati”, i.e. did not have an uncle in a senior position in one of Italy’s banks or companies. The “brain drain” from Italy is unique in the Western world and resembles that of an emerging economy. To my knowledge, most investment banks of any significance had at least some senior executives of Italian origin running their London headquarters. The contrast between these “emigranti” and Italy’s ruling class became even more perplexing during the absurd Berlusconi years, a heated topic of conversation at many dinners or cocktail parties in London.
British people generally like Italy and Italians. Although direct military conflict is not absent from the common history, there was never a real or perceived contest for some kind of regional supremacy. Italy was never a threat, as Germany and France were, just this wonderful place where classic education, great artists and wonderful food comes from. You can’t get mad on these guys!
Italy’s long absence from the European game-making machine was baffling. A founding member of the enlarged Europe (think Treaty of Rome), one of the four largest countries and economies of the continent, together with the UK, Germany and France, Italy was always supposed to be at the forefront of decision making. Always conscious of their role and very attentive to what they call a “bella figura” (make a good impression), Italians tried to reaffirm their importance by comparing themselves with the other three. A big deal was made over 25 years ago with the “sorpasso”¸ when a growing industrialised economy and favourable exchange rates powered the Italian GDP above UK’s. This was long forgotten post the 90s when, tributary to a poisoned political system and deep social and economic maladies, Italy practically became Europe’s problem child.  Over the last 15 years Italy had the fourth lowest average annual GDP growth in the world; in five of the last ten years, the economy was in recession. Had this been happening in a poor country with a weaker social fabric there would have been no other outcome than massive social unrest, violence, crisis.
However, Italy is a wealthy country with estimated per capita wealth of over €450,000, although not uniformly spread. Moreover, the combination of exceptional family ties and cohesion (“ la famiglia” is still the bedrock of Italian society) and a high informal economy helped cushion the economic hardship. The effect was, unpredictably maybe, some kind of general anaesthetic at the level of common people, who were not as dissatisfied with the country’s leadership and economy as one might have expected, did not think anything was wrong and were convinced, well into the largest economic crisis in recent history that “la crisi” won’t make it to the country’s shores.
The country’s economic decline was mirrored in its diminished political stance within EU. The Franco – German engine, rather informal at the beginning, took over and became indeed the driving force in the EU. UK was always a bit of an outsider, the eccentric crazy aunt that steps on everybody’s feet and tells things as they are, but Italy became increasingly irrelevant. Mr Berlusconi’s antics only accelerated this process, nobody really wanted him around. So we, Europeans or not, all grew accustomed to this Franco – German engine, so much so that we’ve invented a new word for it, Merkozy.
Could things be changing now? France and Germany are likely to remain the driving force within EU in the near term. However, Ms Merkel does not seem to be able to understand what Germany can do to help Europe beyond austerity and more austerity, in spite of appeals to understand that it is in her “enlightened interest” to put German and ECB balance sheet to work. Mr Sarkozy’s increasingly erratic drive and economic problems (see the diminishing credit rating) make him look more and more vulnerable in an election year. It is not at all impossible that he will be kicked out of the race in the first round and France’s next president would be the non – Le Pen candidate that makes it in the second round, probably Mr Hollande.
The EU fiscal summit at the end of last year where the UK showed some English bulldog spirit, according to an exuberating Tory backbencher, and played a different tune to the rest of EU has less real impact than many commentators make it to be. A fiscal union cum Schuldenbremse (debt break – see my posting earlier this month) is by no means agreed, the plan is exceptionally complex and needs ratification from 26 multicoloured Parliaments. It is under heavy criticism from many individual countries for going too far and from the ECB (the plan’s real supervisor) for not being aggressive enough. While the current draft plan, drawn after heavy criticism from ECB on the negotiators’ first attempt, seem to include “a centralised correction mechanism that can be triggered automatically in case of significant deviation from the agreed 0.5% of GDP agreed structural budget deficit” (according to Bloomberg) it won’t be easy to enact all those heavy, detailed provisions in national law of so many countries. Ms Merkel and Mr Sarkozy seem also to be at odds on what can really be achieved with such a plan, which is anyway a long term structure that does nothing to fight the financial crisis in the short term.
In this context, one can only rejoice at the common elements of Italy and UK’s stances. UK’s major interest in the EU is full liberalisation of services, and they are pushing this relentlessly. Mr Monti’s interests and instincts are aligned, at least on these issues. If there is ever to be a major counterbalance to the Franco – German alliance, the UK – Italy duo is the real heavyweight.
Clearly, EU’s short term priorities (including UK’s and Italy’s) are survival and a coherent response to the financial crisis. After the very likely Greek default, Italy will be the next in the line of fire, so defensive mechanisms via the IMF (to which UK would need to contribute to), ECB or German – backed Eurobonds, are now essential. Mr Monti’s political career may be very short, particularly if he is exceedingly successful at delivering the economic performance all Italians hope for, hence incentivising his political class to get rid of him and reap the benefits. Italy has never been at the forefront of economic liberalism and the current stance owes much more to Il Professore’s instincts than to the mood of the left-leaning Italian public. Long – term redistribution of power in the EU is not a priority now, but it should be on the drawing boards. There is a long, long way to a meaningful UK – Italy alternative European engine, but this would indeed be something that would change history and may bring a new political term, Cameronti.


  1. Very nice idea however I'm still not in the market for any Italian bonds. My guess is that Mr Monti appeals to an italian audience of a similar size and profile to the one he presented to in London and that once his policies start to bite a broader audience he will find himself on very shaky ground.

    1. Well, maybe you should be in the market, at least short term, given the +100bps swing over the last days :). On the Italians, my guess is that there is a widespread disappointment with the political class comparable to the early 90s (remember mani pulite?) and a serious, credible figure as Monti is much more credible than the other big mouths. Policies do bite, but at least he gives the impression it's for a good, achievable cause. Italians seem to have awaken from their letargy and be frightened by the virulence of the crisis (they are all followers of "lo spread", between BTP, Italian bonds and German bunds) and conscious it's bad.