Mario Monti, the Italian premier, was meant to be the technocrat's technocrat – a former European commissioner and academic economist who would rigidly implement the demands of Brussels and the financial markets.
But it's always been an illusion that you can take the politics out of decisions about where and how to swing the axe. Monti brought that message loud and clear to Berlin on Wednesday, warning Angela Merkel that the Italian people will only put up with so much.
"I am demanding heavy sacrifices from Italians," Monti told Die Welt newspaper. "I can only do this if concrete advantages become visible." If not, he said, "a protest against Europe will develop in Italy, including against Germany, which is seen as the ringleader of EU intolerance, and against the European Central Bank."
In other words, Monti is not just dealing in abstract calculations; his decisions will have a severe impact on the lives of ordinary Italians, and they're entitled to ask what it's all for – particularly when many analysts believe the end result will be a deeper recession and an even worse outlook for the public finances.
That fear is reflected in the fact that Italy's bond yields remain above 7%, close to unsustainable levels, despite the latest austerity measures, which were meant to offer comfort to investors nervous about Italy's fiscal position. Instead, they have deepened concerns about a likely recession.
It's worth remembering just how much pain is being inflicted on the Italians. Dario Perkins of Lombard Street Research points out in a new note that even under Berlusconi, spending cuts and tax rises worth 2% of GDP were already due to take effect in 2012.
Monti has since announced an extra €20bn of additional austerity measures, or another 1.3% of GDP, for this year alone. That will squeeze economic demand severely, just as almost every other continental economy – as well as the US and the UK – launches its own austerity measures.
The OECD estimates that the deflationary impact of fiscal tightening increases by almost a third when other countries are cutting back too. Growing hardship in Italy – and in Spain, where youth unemployment is already above 40%, and the new rightwing government has also joined the austerity bandwagon – is inevitable.
Like the Greek politicians raising the spectre of state bankruptcy, Monti is trying to strengthen his own hand in tough negotiations. But he's quite right to warn of the heavy political risks of the course Europe's leaders have chosen.
By signing up to the new "fiscal compact", they are locking austerity into the very DNA of the eurozone, even as the evidence mounts from Greece and Portugal that it inflicts unbearable social costs without delivering the promised dividend for the public finances.
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11 January 2012 2:39PM
Italy's voters will not tolerate deeper cuts to the nation's budget
ok but then they'll have to pay higher taxes.
11 January 2012 3:54PM
Ah no problem dear Monti, we will just print some money devaluing our savings for you, or well guarantee some billions for you. Sinceresly: Ze Germanz.
11 January 2012 4:08PM
The fiscal compact, as currently drafted has 1) targets 2) a timeline 3) sanctions
1) Targets 0.5% structural deficit, 60% debt:gdp ratio
2) timeline. Those states above the second target are locked into a benchmark of 5% reduction in the ratio per year.
3) sanctions. Still being argued about. Inspection of books, judgements by the ECJ, mandatory sanctions, etc.
As far as I know, the UK has similar targets and timelines too. Certainly the structural deficit is meant to be at 0% by 2016. That's the Brown / Osborne "Golden Rule". If I recall correctly, the target debt:gdp ratio used to be 40%, but I could be wrong about that. It doesn't have sanctions of course, as it has fiscal sovereignty.
20 years for eurozone members, 6 years for the UK.
Certainly austerity brings terrible costs and big social tensions. Ask the UK public sector. Is it incompatible with growht? For the UK's sake, it had better be ...
11 January 2012 4:52PM
You mean those savings which your banking system invested in the excellent, safe, risk-free government bonds of countries like Greece and Italy? Yup. Damn straight you are going to keep printing money and devalue your savings a bit.
11 January 2012 5:10PM
Ah no problem dear Monti, we will just print some money devaluing our savings for you, or well guarantee some billions for you. Sinceresly: Ze Germanz.
You mean those savings which your banking system invested in the excellent, safe, risk-free government bonds of countries like Greece and Italy? Yup. Damn straight you are going to keep printing money and devalue your savings a bit
Also invested in Property bubble, sorry, but If the ECB won't print sooner or later the depression will hit the German economy and than the German bond yields will rise:)
11 January 2012 5:41PM
Dear Italians,
You know that we Germans love you, for your food, culture, way of life and beautiful landscapes and cities...but we can't magically solve the problems you've gotten yourselves into. Italy has been a partially failed state for years if not decades (especially the South), now's the right time to fix things. Yes it will hurt...a lot...but it will pay off in the long run. Just hold tight! Unlike certain other countries you still have a strong manufacturing base and make many things others (including us) want to buy...so there's hope yet!
11 January 2012 6:33PM
"Dear Italians,
You know that we Germans love you, for your food, culture, way of life and beautiful landscapes and cities...but we can't magically solve the problems you've gotten yourselves into. Italy has been a partially failed state for years if not decades (especially the South), now's the right time to fix things. Yes it will hurt...a lot...but it will pay off in the long run. Just hold tight! Unlike certain other countries you still have a strong manufacturing base and make many things others (including us) want to buy...so there's hope yet!"
LancerRed that's OK, but the ECB should act like the FED and whilst the Italian people paying 7% on their debts the banks get a loan via 1% interest is it fair?
11 January 2012 9:48PM
Let's analyze this. European banks made risky loans to finance real estate speculation and excessive consumption. Now the loans have gone bad. A lot of loans were strictly private -- willing lender, willing borrower, both sides taking their risks. The options are:
1. Shifting the banks' losses to taxpayers by socializing private-sector losses.
2. Having Europe's central bank provide enough liquidity to keep the banks from collapsing by purchasing bonds in exchange for cash balances.
3. Letting things go and hoping for the best.
Let's call Door #1 the "Ireland/Spain Option." How nice it was that countries with sound budgets agreed to take the bullet on behalf of Europe's private banks so that consenting adults would not have to bear the full consequences of their own free decisions. Never mind moral hazard.
There are limits to Door #1 since cutting public expenditures and increasing taxes serves to increase (rather than decrease) public indebtedness in economies with high debt loads and mass unemployment. It would nice if this weren't true, but the fact is that pushing for even tougher austerity measures will simply scale up the crisis and reduce the amount that the banks are ultimately repaid.
So -- should the ECB really put a lid on liquidity when there's evidence that mass bank failures may be the only viable alternative? Note that the question here isn't whether one is morally for or against "printing money." Really the question is whether and how to apply economic science in treating a patient in an emergency triage situation. When the patient is bleeding profusely the doctor administers a transfusion to stabilize the patient's vital signs. In macroeconomics, the central bank's #1 job is to prevent a severe financial collapse that send the "real" economy into a grave, system-wide downturn.