Wednesday, October 26, 2011

Save the euro, bomb Rome, Paris and London...

Save the euro, bomb Rome, Paris and London...
By Francesco Sisci

ROME - It is possible that the ongoing European Union summit on the European debt crisis, which is threatening to kindle a global economic meltdown, will manage to patch together a reasonable solution regarding Greece, the country that started the problem.

However, it is unlikely that much will be accomplished regarding Europe's greatest issue, Italy, the country whose debt is too large to be bailed out by any individual EU member.

Observers and markets are skeptical that the shaky Italian government, which took long and precious weeks to decide on the appointment of a new central banker, will be able in just a few hours to present a convincing plan that will cut debts and jump-start growth.

Nor did the European governments seem able to force Italy to change its old inward-looking government practices and accept the reforms necessary to save the country and the continent.

In fact, the ongoing crisis appears to be a failure for the fathers of the Maastricht treaty, the one that paved the road for the monetary union.

Those politicians - Germany's Helmut Kohl, France's Francois Mitterand and Giulio Andreotti of Italy - explicitly refused to conceive a way out of the euro for individual members, and in so doing, they believed that in any crisis there could be only one solution: moving forward with more political unity.

The idea then was to construe an economic deterministic mechanism that would effectively push for a real union that would be very hard to achieve otherwise. Therefore, they believed crises would actually be helpful to achievement of the ultimate European goal of political integration. But no road forward was clearly indicated, just as it is not clear how to get out of the euro.

In fact, in this crisis, it has been hard to think of expelling single delinquent EU members like Greece, for instance. But is also proving very hard to find a way forward for the union, and it has been even harder to impose the will of the majority members on the delinquent minority.

Certainly, there are also broad economic considerations that discourage expulsion from the union. Germany would lose the long-term benefits of the union if it were to expel Italy, its largest potential industrial competitor in Europe. Italian manufacturers could be boosted by a return to the lira, undercutting German exports. But these broad interests lose importance if Italy is unable to reform itself, and Germany is expected to shoulder most of the humongous 2 trillion euro (US$2.78 trillion) Italian debt.

Italian ruling politicians, who have been in power for years, in fact have no short-term interest in drastic measures to solve the Italian debt problems. Necessary measures, from cuts in expenditures to liberalization to kick-starting growth, would harm many interest groups and prove to the people that the politicians now in power did not act for years, even though they knew fully well the problems.

Benefits would conversely take years to reap.

There is therefore a fundamental contradiction between long-term national and international benefits of European integration and the short-term interests of those in the Italian ruling class who owe their power to the present status quo. Their short-term interest is in encouraging a different, growing popular sentiment: that Italy would be better off without the euro and with a return to the lira.

The lira, which could be devalued, would offer an easy way out of the problem that would not touch the powerful interest groups but would throw all problems on the lower classes who would have to live through a period of high inflation, as happened many years ago. The lower classes would be nominally compensated for their sufferings with symbolic pay increases.

This idea in Italy is almost heresy officially, but it is resurfacing after years of lethargy, and the contradiction between the long and short-term is at the root of the present problem.

The Italian situation is in fact not worse than it was a few years ago, and its debt ratio has not dramatically deteriorated. However, Italy's failure to give markets prompt answers as the Greek crisis was ravaging the continent led to the belief that Italian rulers would be unable to act if the contagion struck their country.

The events that followed proved the markets right, as for months markets have shot warning salvos about the Italian debt while the Italian government has failed to respond effectively.

On the other hand, the other European governments failed to impose the concerted European will on the recalcitrant Italians and also stopped short of any real political mechanism forcing Rome to obey Brussels. Here, there is another contradiction: between the interests of the majority and the minority in the union.

There is a lack of political tools in Brussels to impose the majority's will on the minority, even if that minority can sink the whole European boat.

Maastricht's Europe could have worked if economic distances between states had shortened, as Kohl or Mitterand had believed would happen. They didn't - and they possibly grew larger. This broke another Maastricht assumption: that all union members' interests would be aligned and thus member states would have an interest in avoiding difficult confrontations and finding compromise.

Here, we are at the core of the problem. Economics can help politics but can't provide political and systemic solutions, especially since different states pursued different economic policies over the years and each state looked only after its own domestic affairs.

National leaderships were in fact elected only by their own local constituencies. Local issues, or at the most national concerns, dominated political agendas, which proceeded separately over the years. Overall European policies conversely did not make a candidate win or lose an election.

Political decisions and strategies differed greatly in the various European countries over the past 20 years and did not bring national economies closer together. This was because one of the Maastricht assumptions was wrong: economics alone cannot shape political union, as the European founding fathers seemed to believe.

Political decisions brought economies further apart, and different national economies - without the necessary politics but constrained by a single currency for many different states - make the situation explosive, as it is presently, without providing any ready, viable solution.

However, in the present situation, things have gone too far to let any country out of the euro, and so there needs to be a political solution for Europe first and for Italy second.

Italy has proved unable to extricate herself from the present bonds. In other times, Italy could be left to its destiny, ie the return of the lira. But given the present difficult global environment, letting Italy out of the euro could trigger a second economic crisis. Here the present economic difficulties are, in the classic pattern, bringing about social turmoil and political shifts.

This is already happening and the violent protests in Rome on October 15 could be just a sweet aperitif to the much more bitter meal that will be dished out to Europe in the coming months if a comprehensive political solution is not found.

Then Italy must be saved despite herself. It must be "invaded", and there is little time for anything else.

How? It will require concerted efforts from the European capitals and from Washington. Libya, which did not pose a major risk to anybody, was subverted and bombed. Nobody wishes for bombs to fall on Rome, Paris, London or Berlin... but major political changes must be imposed on Rome and Paris - within the government and to the whole Italian/French ruling elites who led Italy and France to the present disaster.....

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