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.
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.
ReplyDeleteWell, 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.
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