Tuesday, July 19, 2011

The Economic Pain Grows in Italy

For those of us not versed in the dark arts of accounting or international finance, there is little more solid than money; I have it or I don’t, I can borrow it or lend it and measure it down to the last penny. But confidence is an altogether different commodity, far more abstract and difficult to gauge. This week, Italy is having to persuade us that the world should have confidence in the country.
This week Italy is trying to persuade us that the world should have confidence in both its political and financial stability. It will not be easy.
One index are the ratings agencies evaluation of a country’s creditworthiness and another is the divide beween Germany’s interest rates and the other eurozone rates. On both scores, confidence in Italy is declining day by day.
Until recently, Italy had avoided the worst of the world and European crises. There was no housing bubble as Italian banks demand copperbottomed collateral before they will lend the ordinary housebuyer a cent. There were almost no toxic assets as Italian banks are amazingly conservative in their investment policies. Once upon a time few Italian bankers spoke a word of English; today most of them speak the words and grammar but to their credit they don’t speak the language of the City or Wall Street or the innovative financial operators who filled the market with dubious products over the last decade.
Despite a declining economy, Italians still save and private saving is among the highest in Europe. It’s debt is the second highest in Europe at 120% but its budget deficit is not outrageous and is close to balanced when interest payments are taken out. Italy seemed condemned to a slow and fairly dignified relative decline, a bit like Venice in the 19th century.
But the workings of the financial markets are not slow and Berlusconi and his government are anything but dignified so Italy’s fate is rather different.
The problem is leadership. Silvio Berlusconi won elections not just because he owns half the country’s television stations (though that helps) but because he projects optimism. He has always been very careful not to deliver bad news himself and is highly critical of anyone in the opposition who suggests that all is not well economically. But for the last year, it has been a hard act to keep up; it is not because he is accused of having sex with under age prostitutes nor even that he is on trial for having set up slush funds or for paying English lawyer David Mills to perjure himself or for paying a judge to award him Italy’s biggest publisher in a takeover case. In any case his supporters either don’t believe the accusations or they don’t care even if they’re true.
His optimism falls flat because there are too many Italians underpaid, unemployed of underemployed; too many companies are either struggling or have already given up the ghost. In Italy, he is no longer credible and abroad, the EU, the ECB and the ratings agencies look at Italy’s debt and wonder where it will end.
Enter Giulio Tremonti. The economics minister has rarely been off centre stage, actually, but now he spends more time there than Berlusconi. He arrived, like a good portion of Berlusconi’s ministers and parliamentarians as a business associate, his principal accountant. But unlike the other ex-employees, Tremonti has never been a yes-man and has earned a reputation for solid if not hugely innovative policy. He left the cabinet over policy differences in the last Berlusconi government and for most of this legislature, he has been closer to Berlusconi’s coalition partner Umberto Bossi and has been making thinly veiled moves towards succession.
Over the last year, Tremonti has repeated that Italy needs to reduce its debt and that a major austerity package was inevitable. Berlusconi in contrast has been trying to deal with decling approval ratings and an increasingly divided coalition, quite apart from his court cases. Obviously he is less than enthusiastic about an austerity budget. He has to manoevre between the EU rock and the Tremonti hard place. He knows that if he fired Tremonti, internationl wrath would follow. Last month, Berlusconi said pointedly that cabinet decisions were collective and Tremonti could not dictate a budget and last week he accused Tremonti of “not being a team player”.
Tremonti himself does his best to make himself unpopular, calling a cabinet colleague “a cretin” in a stage whisper in front of an open mike during a press conference. He is alone in the government but has some support from business and the Church. If he was forced to resign, then he would be in a good position to put himself forward as an economically safe alternative to Berlusconi. His only problem at the moment, is the criminal investigation into one of his close staff at the ministry who was also hosting his boss in an €8,500 per month flat.
Beyond the personal and policy differences between the two men, there are big divisions between Berlusconi’s People of Freedom and Umberto Bossi’s Northern League. Berlusconi knows that he must reduce the deficit, Bossi is just concerned about how to stop the hæmorrage of votes and knows that austerity does not win elections.
This week parliament starts debating Tremonti’s €47 bn budget. It should have calmed markets but in the discussions, the main issues were lost. It is a fudged budget – first of all, most of the cuts will affect the next government: €2 bn this year, €5 bn in 2012, and €20 bn each in 2013 and 2014 – with elections due in April 2013 at the latest. Secondly, most of the cuts are regressive – higher health service charges, fixed, whatever your income; cuts on medium range pensions, and cuts on payments to local and regional authorities who provide much of Italy’s social security and health service.
There is no certainty that even these cuts will be implemented. There is the likelihood of government amendments “to improve the bill” said one spokesman, reducing the pain – Tremonti has said that anything is possible but overall savings must stay the same. There is even the possibility of re-introducing a clause which would save Berlusconi’s Fininvest company €570m. The figure was awarded to Carlo De Benedetti as civil damages. In 1991 Berlusconi’s lawyers had bribed a judge to give him rather than De Benedetti the country’s biggest publisher, Mondadori. The criminal case against Berlusconi was dropped because of the statute of limitations but others were convicted. The civil case recognises Berlusconi as responsible.
The original draft budget had a clause which would have delayed payment until the third and final level of judgement. It was yet another blatant example of Berlusconi’s conflict of interests and was removed after an outcry and the preventive interventation of the President of the Republic. Now there are suggestions that it might be re-introduced. Neither Moody’s nor the ECB, nor, one presumes Chancellor Merkel who called Berlusconi on Monday 11th July had this in mind when they pressed for an austerity budget.
So there are many obstacles before even this budget passes and if it is not implemented, then the confidence problem remains.
If the budget passes more or less in its present form, on the other hand, then confidence will remain fragile but intact. If Tremonti is forced to go, if the Northern League decides they are better off in opposition, if parliamentarians worried about having to face an electorate, reduce the cuts, then that confidence will break and the future would be very bleak for Italy and for Europe too.
However bad the Greek crisis is, the Greek economy is tiny. Italy is the third biggest economy in the eurozone with a massive debt that it has difficulty servicing. The only answer would be radical changes in the economy and in order to do that, there would have to be radical changes in politics, not just in the present leadership, that goes without saying, but in most of the discredited political class.
Every generation since the beginning of the 20th century, Italy has reinvented its politics, usually under pressure from outside forces, the world wars, 1968 and the end of the cold war. The time is ripe for change and the financial crisis might just be the stimulus Italy needs.

This was published in The Daily Telegraph on 12 July.
A week later, after the austerity budget has become law - it was rushed through Parliament on Thursday and Friday and President Napolitano signed it into law on Friday evening; already Italians are paying more for their health service - things look even worse. The markets have so far not shown confidence in Italy and the discontent at the perks and privileges of the political class are growing

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