Italy doesn’t have an economic problem as much as a political one. While the country has underperformed economically over the past decade both relative to its eurozone peers and relative to its earlier self, as Daniel Gros, director of the Centre for European Policy Studies in Brussels, points out,
[Italy’s] three most important measurable growth factors actually improved in both absolute and relative terms:
- Investment in physical and human capital; the former is high and the latter is improving rapidly.
- Structural indicators in terms of product and labour market regulation (all improving absolutely and relative to Germany according to OECD indicators).
- Investment in R&D (improving).
The only factors that have deteriorated absolutely and relative to the core of the Eurozone are indicators of governance – such as corruption and rule of law.
Italy’s performance has deteriorated dramatically over the last decade – the years of Berlusconi governments – on the three governance indicators the World Bank considers most important for an economy: the rule of law; government effectiveness in general; and control of corruption. Italy now ranks lower than any other eurozone country, including Greece, on all three.
Changing a country’s political culture to support good governance of the body politic is the hardest thing to achieve, yet “progress on these fronts might in the end be more important for growth than the reforms now being imposed by the EU,” Gros says.
It’s not the bunga-bunga that gets them. It’s the bonds. Looks like Italy’s beleaguered prime minister, Silvio Berlusconi, is the latest to learn that. He squeezed his quickly cobbled together austerity package through parliament, but at the cost of his governing coalition holding together. What months, or is it years, of partying in questionable taste and the after scandals couldn’t do to him, the yield on his country’s sovereign debt could. Berlusconi has offered to resign, albeit at a time uncertain. Investors have spoken. Electors, it seems, weren’t consulted.
Mario Draghi’s reputation as an inflation hawk took a back seat to his other reputation for being his own man when at his first meeting as head of the European Central Bank he surprised markets by cutting the central bank’s benchmark interest rate by a quarter of a percentage point to 1.25%. It would be too harsh to represent this as a slap in the face of his predecessor, Jean-Claude Trichet, who was criticized for raising rates, in the German interest, as it was taken to be, during a time of credit crisis, but Draghi’s reversal is a welcome sign of what will be a continuing need for independence especially in the face of the euro-zone leadership’s continuing inability to get a grip on its debt crisis. His diplomatic skills can mask the extent to which he is self-confident about following his chosen course, but as Europe politicians may find, being Jesuit-educated, Draghi will know how to make their minds follow.
Greece’s unexpected decision to hold a referendum on the euro-zone’s proposed bail-out has been a gift horse for China as it gives Beijing even more time to get the rest of the world used to the fact that it will be chipping in no more than a widow’s mite at best. China’s contribution to the euro-zone’s would-be 1 trillion euro bail-out fund, the European Financial Stability Facility (EFSF), has always been more likely to be more token than substantive, regardless of any wishful thinking on the part of China’s largest trading partner. Now, says deputy finance minister Zhu Guangyao, speaking ahead of the G-20 meeting in Cannes, “the fund has not established details of its investment options so we still can’t talk about the issue of investing”. The head of the fund, Klaus Regling, was in Beijing last weekend with his collection tin, but went away empty handed for reasons outlined here. Beijing is no more willing than Berlin, Brussels or Paris to take on the risks of loss. Why should anyone be surprised otherwise?
The markets’ giddy response to the eurozone debt-crisis solution agreed by European leaders this week is a case of investors willing themselves to see the glass half full. The combination of the eurozone’s bailout fund, the European Financial Stability Facility (EFSF), being bulked up to €1 trillion, a €100 billion recapitalization of Europe’s banks by June next year and private bondholders being asked to take a 50% haircut on Greek debt is at least more palatable than any of the doomsday alternatives–an unruly Greek default, an unraveling of the euro and a collapse of the banking system.
Yet the euroleaders’ plan, belatedly pulled together with all the one minute to midnight brinkmanship that Congressional leaders in the U.S. showed in July over America’s debt-ceiling debate, similarly depends on the details being fleshed out after the event. These include whence to raise the money for the EFSB and on what conditions to ensure the participation of the likes of China and the IMF. They also include the sleight of legal hand that will be needed to ensure that an orderly part Greek debt fault–for that is what the bondholders haircut is–does not trigger a credit default swaps crisis.
Getting those and all the other many, many other implementation details right will determine how much risk this solution has really taken out of the euro crisis, or whether it has just papered over the cracks.
This Bystander noted last year that moves were afoot to develop a municipal bond market as a way to put the financing of provincial and local governments on a more transparent footing, and to wean it from the off-balance sheet financing via captive investment vehicles that local authorities have resorted to get round restrictions on official borrowings. As of June, 2010, these captive investment vehicles accounted for 7.7 trillion yuan of local government borrowings (more than three-quarters of the total), and had become some of the most riskiest parts of local government finances in the eyes of the finance ministry.
Now, Zhejiang and Guangdong provinces and the municipalities of Shanghai and Shenzen have been given permission by the ministry to issue three- and five-year bonds on a trial basis. It is the first such direct muni-bond issuance sanctioned in 17 years. Collectively the quartet are expected to be capped at…
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China will play its usual defense against the moves in the U.S. Senate to twist Beijing’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating trade wars while patiently waiting out the start of any actual hostilities, calculating that they will eventually recede.
The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Similar sentiments have been expressed by the central bank and the commerce ministry.
While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.
At the very worst, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure that is anyway likely to abate after next year’s U.S. elections, while buying more time for the economy, particularly the export-manufacturing sector, to adapt.
China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. But they want do it to their timetable, not Washington’s — and they have the playbook to do that.