PETER MARTINO: THE END OF THE EUROZONE
The End of the Eurozone The Welfare State Has Cannibalized the West’s Potential for Growth
http://www.hudson-ny.org/2583/end-of-eurozone
During a joint Franco-German press conference two weeks ago, French President Nicolas Sarkozy and German Chancellor Angela Merkel openly ridiculed the competence of Italian Prime Minister Silvio Berlusconi, and with that sealed his fate.
Italy’s main problem, however, is its lack of economic growth. This, too, can hardly be blamed on Berlusconi. Italy’s crisis is part of a European and global crisis. The money needed to maintain the West’s self-defeating welfare systems has run out; the welfare state has cannibalized the West’s potential for economic growth.
As far as Italy’s €1.9 trillion debt load is concerned, it is nominally one of the world’s largest, but half of it is held domestically. Italy’s problem is that the mismanagement of the eurocrisis – for which Merkel and Sarkozy are much more to blame than Berlusconi – has affected public confidence, resulting in Italians moving their money to Swiss banks rather than reinvesting it in Italian bonds. Next year more than €300 billion of Italian debt comes due. If Italy’s private investors are unwilling to finance it, the eurozone’s emergency bailout fund, EFSF, will have to do so. But the EFSF simply does not have enough funds to help Italy, which is Europe’s fourth largest economy and bigger than the combined economies of Greece, Ireland and Portugal – three countries the EFSF is already supporting.
Far more significant than Berlusconi’s defenestration last week, was the announcement that French and German officials are exploring the idea of a rump euro. Countries such as Portugal, Ireland, Italy, Greece and Spain (the so-called PIIGS), which have for decades been encouraged by Brussels to expand their welfare states with borrowed money, will simply be pushed out of the eurozone boat, which would be restricted to France, Germany and the other creditworthy countries in Northern Europe. In this scenario, France would be the only country facing major difficulties, but the other eurozone countries with their triple-A credit ratings would be able to devote the funds of the EFSF exclusively to a rescue operation on behalf of France.
The EFSF currently has only €440 billion at its disposal. Half of this sum has already been assigned to Greece, Ireland and Portugal, while supporting Italy is already expected to cost at least €1 trillion. Abandoning Southern Europe for the sake of France – and Sarkozy’s political future – now seems to be the policy. While last week Merkel still stuck to the official line that the entire eurozone must be saved, Sarkozy publicly said that a “two-speed Europe” would need to be considered, with an inner core around Germany and France, and an outer core of countries that are “as yet unable” to join the inner-core.
Sarkozy and Merkel publicly venting their doubts about Berlusconi’s ability to push through an austerity program imposed by the European Union (EU) caused the markets to lose confidence in Berlusconi. The Italian 10-year government bond yield rose beyond the 7% barrier, and a number of the Prime Minister’s supporters in the Italian Parliament defected. Berlusconi felt compelled to resign. Less than a week after his Greek colleague, George Papandreou, he became the second European leader to be ousted after a process initiated by Sarkozy and Merkel.
Papandreou, who had angered the Franco-German leaders with his proposal to hold a referendum over the austerity package imposed by the EU, has now been replaced by a government of technocrats led by Lucas Papademos, the former vice-president of the European Central Bank. Berlusconi is likely to be replaced by a government of technocrats led by former EU Commissioner Mario Monti. Athens and Rome, therefore, are now being governed, not by their elected leaders, but by confidants of the European Commission in Brussels.
It remains to be seen, however, whether Monti will be able to do a better job than Berlusconi at keeping Italy’s sovereign debt under control.
When Berlusconi became Prime Minister in 1994, he inherited from his predecessors a government debt hovering around 120% of GDP. It is true that Berlusconi was unable to bring Italy’s sovereign debt down. Nevertheless, during his three terms in office, he managed to keep it at its level – a feat which most of his colleagues in the eurozone, the group of EU countries that use the euro as their common currency, failed to achieve.
Although Berlusconi had managed to bring the debt level down slightly, as a result of the 2008 Lehman crisis it rose again to the 1994 level. Even though one may argue that the Berlusconi years were lost years for Italy, those years certainly did not exacerbate Italy’s situation. It is ironic that the liberals, who were booing and jeering when he resigned last Saturday, are the ones who saddled Berlusconi with the enormous debt which he encountered when he took office 17 years ago.
If one does not consider the interest payments on existing debt, Berlusconi’s Italy runs a budget surplus. Its 2011 budget deficit of 4% of GDP is lower than France’s 6%. Its unemployment rate is 8%, compared to 20% in Spain, although not a single eurocrat in Brussels is ridiculing Spain’s Socialist government over its economic results.
Last month, the eurozone leaders tried to enlarge the financial capacities of the EFSF, but their attempts ended in a fiasco that seriously undermined the euro’s credibility and left Italy defenseless. Berlusconi was made the scapegoat. He had made it easy for his enemies: The excesses in his private life – his so-called bunga bunga parties, often involving young starlets – seriously undermined his personal credibility.
It is far from certain that without Berlusconi Italy would be in a better state today. On the contrary. By Italian standards, Berlusconi’s political track record is impressive. The now 75-year old Berlusconi, a successful businessman, managed to become Italy’s longest serving postwar Prime Minister. He served as government leader during three terms and is the only postwar Prime Minister to have completed a full term in office.
Berlusconi resigned on Saturday, after getting the EU-imposed austerity package of economic reforms approved. His likely successor, Mario Monti, will need Berlusconi’s talents if he wants to survive in the notoriously unstable and chaotic Italian field of politics. Unfortunately, Monti is not a seasoned politician. The chances that he can push through the unpopular reforms demanded by the EU and the IMF are slim. And the chances that these reforms will be able to stop debt cost from spiraling out of control, and Italy from gliding further towards the abyss, are equally slim. With a debt ratio that is too high, Italy needs either a bigger primary surplus, a lower interest rate, or a higher growth rate. None of these things is likely to happen.
What this means for Italy, Greece and the others who are being left out in the cold, is clear. They will have to save themselves. If they cannot do so, they will have to leave the eurozone and return to their former national currencies, devalue and rebuild their economies from scratch. Soon Italy will be in need of another Berlusconi – preferably one without the “colorful” private life and the bunga bunga parties.
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