Bill Emmott - International Author & Adviser


The entrepreneur who does not understand Italy the company
La Stampa - August 5th 2011

The turmoil in financial markets is almost enough to make you agree with the President of the Council: Italy looks like the victim of this crisis, not its cause. For it is partly true: economic growth is weakening everywhere in the rich world, America has avoided debt default but only through a feeble compromise, and the eurozone governments have failed to produce a full solution to the problem of Greece being unable to repay its debts. But don’t be too sympathetic to Silvio Berlusconi. Italy, or rather its government, is also to blame.

            The President of the Council reminded Parliament that he is a businessman. But then he showed that he has forgotten what a successful business requires: an understanding of the company’s revenues, control of its costs, and a management that has a credible strategic plan. In the business he is now running, which is called the Government of Italy, he has none of those three things. That is why Italy is now in the centre of the market storm.

            The President showed he does not understand the Government of Italy’s revenues when he argued that Italy is solid because Italian households have high savings and low debts. This is true but irrelevant from the point of view of the Government’s finances, for those savings do nothing to help its revenues, and little to make it easier to borrow, for most bonds are bought by banks and by foreigners.

Citing household savings as a strength for government finances would be like a businessman citing the wealth of his customers or employees as proof that his company is solvent. The only way these household savings could help would be if the Government were to increase taxes sharply to raise revenues, or force households to buy government debt. Surely only Communists would consider such a thing?

            He is not in control of the Government’s costs because the fiscal manoeuvre recently presented by his economy minister remained vague about how spending is to be reduced, and deferred the main cuts until after 2013. Most important, however, he cannot be in full control because the Italian government is such a big debtor that even at recently low borrowing costs it has been paying 4% of GDP every year to service debts that total 120% of GDP, the second highest in the eurozone after Greece. If bond markets demand higher interest rates to compensate for the risks they perceive in holding Italian debt, then those interest costs will rise, and there is nothing the Government can do about it.

            Like most political leaders caught in this situation, the President of the Council blamed speculators. But as a businessman he must know the difference between speculators and investors or lenders. It is investors and lenders who are causing problems for Italy, because they consider it risky or under-performing. A good businessman would respond by presenting those investors with a credible strategic plan for how he intended to raise revenues and control costs—in other words, boost economic growth and cut costs. No such plan exists, and this Government has lost all credibility that it will ever produce one that works.

            Where the President of the Council is correct is in wondering: why now? My Government has never been credible, he might be forgiven for saying, so why are the financial markets making such a fuss about it now?

            The answer is, in part, that markets do act like herds of animals, all running together in the same direction at once, gaining confidence from each other in doing so. The Western trend, in this July and August, is clearly bad—slower growth, bigger debt problems, dysfunctional politics, in many countries all at once—and the herd is running away from that fact.

            The other answer is the euro. It is ironic, in a way. When the single currency was launched in 1999, its supporters argued that it would have two big effects: it would put pressure on member countries to liberalise their economies, to make up for the loss of currency devaluation as a policy tool; and bond markets would provide a discipline by demanding higher interest rates from riskier countries. Neither of those effects happened during the currency’s first ten years, but they are both happening now. It is just that they are happening more suddenly and violently than anyone would like.

            Moreover, the pressure for liberalisation and the discipline of bond markets is being reinforced by the exact nature of the rescue efforts that Germany is leading for Greece. The emergency summit on July 21st agreed that there should be a new bail-out, but that also Greece’s debt should be reduced by making private creditors extend their bonds and accept lower interest rates.

Seeing that proposal, which is not yet fully implemented, investors were naturally going to ask: if we have to bear these burdens for Greece, who else might we have to do this for in future? The answer, naturally, is anyone whose government debts are so high that they might become unaffordable in the next few years. In other words, Italy. For the one thing that has been truly solid has been the high level of the government’s debt.


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