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Much ado about nothing

So Spain is expected to ask for a bail-out, and official requests to do so are increasing at the (anonymous) European level.

Sure. And after that, after Spain will have accepted, Italy will be asked to ask too. Indeed, Mr. Monti’s discourse has slowly shifted over the past few months to get the country ready for this: it was “absolutely impossible” first, then “unlikely”, then “with no additional austerity”. Just wait for Spain and the narrative will accelerate in the peninsula too.

What matters to be said here is that it matters little if Italy were or not to join in the bailout plan.


Let’s think about what are the main impacts to be expected from the Italian bail-out. I see four main issues.

a) spreads will go down and so Italian interest expense. What will be done with the savings?

b) how much additional austerity should we expect imposed on Italy?

c) how many additional reforms should we expect imposed on Italy?
d) what impact on credit markets and the real economy will lower yields generate?
Here are my four answers:

a) Lower spreads will generate 5 billion savings in 2013. Peanuts. Even more peanuts if these are used to reimburse more debt, and only slightly expansionary if used to lower taxes or increase public spending.

b) Additional austerity will have to be pushed forward, even if by so little, to quell German anxieties. It is likely to more than compensate any positive effect due to a).

c) Additional reforms imposed from above may target the wrong needs for the competitiveness of the Italian economy. Or turn out to be irrelevant. Even if they were to be appropriate reforms they are likely not to have an impact for the next 4-5 years. They might have additional negative (recessionary) internal demand effects in the short-run (like re-orienting pay-roll taxation away from firms to workers, as Portugal was recently forced to do by the Troika).

d)  If you believe we are right now in an aggregate demand crisis with a liquidity and confidence trap, well it is likely that any lower interest rate will not be able to stimulate that much more  borrowing by consumers or by firms wanting to invest.

Much ado about nothing. If we do not launch a parallel fight on the aggregate demand front through expansive fiscal policy we are likely to watch the usual comedy. Which distracts us for a short time and makes us forget pain. But once the show is over, reality will knock at our door with its harsh truth.


  1. Some entrepreneur, interviewed during Ambrosetti Seminar, said Monti should ask the bail out even if Italy didn’t need that, just to be sure that next government had bound hands and kept following present austerity policy…

  2. “But once the show is over,
    reality will knock at our door with its harsh truth.”

    Grex agit in scaena mimum [...]
    mox ubi ridendas inclusit pagina partes,
    vera redit facies, adsimulata perit.

    From Shakespeare to Petronius.

  3. cut n’ paste

    Martin Wolf FT Why exit is an option for Germany

    [..] Indeed, Charles Dumas of London-based Lombard Street Research argues that euro membership has encouraged Germany into a costly mercantilist strategy at the expense of its people and the productivity of the economy. He notes that Germany’s real personal disposable incomes have risen remarkably little since 1998 (see chart). So, too, has real consumption. Productivity per hour also grew more slowly in Germany than in the UK or US between 1999 and 2011, perhaps because euro membership protected business from a strong currency.

    [..] He argues that going back to an appreciating Deutschmark would squeeze profits, raise productivity and increase real consumer incomes. Instead of lending surplus savings to profligate foreigners, Germans could enjoy higher living standards at home. Moreover, this would generate swift adjustment in competitiveness of eurozone members, which would otherwise occur too slowly, via high inflation in Germany and high unemployment in partner countries.

    • It’s better to say (like Prodi) that euro permitted Germany mercantilist strategy, then they can stop anytime if they want, even with euro.
      Why high unemployment in partner countries? I don’t mind because an appreciating DM have to lead this event, or he simply repute that the profilgate (sic) have anyway to pay through the mother of the structural reforms: austerity>recession>unemployment>lower wages?


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