Make no mistake this time. The Italian vote should make investors rejoice. Here are 4 reasons why and why markets can gain from it:
a) Paul Krugman rightly called the Italian election a test on austerity. Austerity has lost. It is quite a remarkable and unique result. Italian voters have been clearer than Greek, Irish, Spanish, French, Dutch voters so far: we have said clearly and loudly that austerity is not in our best interest. If it is not in the best interest of Italians, it should not be in the best interest of markets, which most of all from Italy and Europe are expecting policies capable of creating growth.
Italy could become the igniter of a new approach to growth-oriented policies in the euro area. I did not say in Italy: I am not talking about policies that are taken unilaterally. I am talking about an alliance of the willing who so far have shown incredible shyness in fighting against austerity at the European Council table. I am talking about letting the euro Northern countries become aware once and for all of the obvious: that the suffering of Southern euro countries would one day become the suffering of the whole area.
In this sense, asking the ECB to step-in and provide support in exchange for austerity would be a disastrous plan with severe unintended consequences that even usually sensitive opinion-makers like FT’s Munchau seem not gauge fully.
If Italy were to submit to such a plan in the face of a spread rising to 400 or 500 basis points the coalition of the Italian voters in favor of an exit from the euro would grow substantially. So much that in a next election (which is likely to be called within the next year or so) a referendum could be called on the euro issue, and at that point it would be one that would have the serious chance of seeing Italy abandon the common currency.
There is instead ample space for sustaining an expansion of European internal demand through public spending and lower taxes that first stops and then reverses the huge growth of the public-debt ratio that austerity has generated in weakly perfoming member States. These expansions can be deficit-based in Northern countries and with a balanced budget approach in Southern countries. Italy for example has raised enough taxes in the past year to have the resources to dedicate to sorely needed public investment programs rather than to improving its primary surplus. By so doing the growth that would follow would make Italian public accounts improve, together with a boost to the competitiveness and capacity utilization of Italian firms. An element financial markets should rejoice upon, since it would make Italian capacity to repy more sustainable;
b) Growth-oriented policies should not be considered those under the uncertain label of “European-wide reforms”, that is those reforms enforced homogeneously across member states under the supervision of the European Commission. These reforms, proposed and sometimes enacted by the Monti Government, have vastly failed. Both in terms of approval (Monti’s party results having been sanctioned by the voters) and in terms of impact, two circumstances that are clearly intertwined. They have failed because they were and were rightly perceived as either irrelevant (cab reform, when nobody wanted to ride on cabs because of the recession) or damaging (labor market reform that, in the midst of a very hard recession raised the cost of hiring and made consumption demand collapse in the face of greater uncertainty about job precariousness; or a spending review that cut spending independently of whether it was good or bad spending) or erroneous (the Italian pension reform left many workers without a job and without a pension because of legislative mistakes).
All these wrong reforms that ousted Monti from political relevance are due to the fact that they were negotiated at the European level, with little knowledge of the true and non recessionary reforms that the country needs. Italy is in bad need of its own, specific, reforms over which Europe has so far helped little in forcing us to adopt them: anti corruption, public investment in critical assets that are non maintained and crumbling, university enrollment, school reorganization, support in terms of internal demand and lower red tape to SMEs. Mr. Grillo’s movement has a keen interest in some of these reforms and will likely push the debate a step forward on these issues that are critical for long-run competitiveness of Italy without generating a suicidal recession. Markets should push for this momentous occasion to ask Italy once and for all to take advantage of these few months before a new election to support those reforms.
c) An ECB-led austerity plan in exchange for support would not only be an economic faux-pas: it would generate a political tsunami of vast proportions that would rock the Italian prospects of remaining in the euro area. The sensitivity of Italian citizens to the (wrong) impositions from Europe and the related perception of an increasing lack of a European democratic process are the 2 factors that, together with austerity, explain the success of Grillo and the defeat of Monti. Were we, in the face of a just-occurred democratic process of voting, surrender our autonomy in economic policy to a foreign-based, independent institution would be equivalent to throw 1000 burning cigarettes in a huge and dry forest: a massive destructive fire would ensue. Grillo’s party, which is not currently made by a majority of anti-euro voters, would see an immediate increase in popularity and an increasing share of its electoral base against the euro. It would be sheer folly for markets not to understand this and ask for ECB support.
d) Finally, one word about politics. Italy’s disastrous economic performance in the past 15 years is no doubt related to the disastrous leadrship performance of many (albeit not all) of its Prime Ministers. The fact that most of these leaders (albeit one is still heavily there!) have been forced out of the Parliament or heavily penalized by the vote is a result that should rejoice markets since it enhances the likelihood of a bright future ahead of us with new leaders in traditional parties (like Mr. Renzi in the left coalition and possibly one day a new conservative leader) more likely. Also, Grillo’s MP will probably prove to be competent, much more than we think: the way they are working with the Center-Left regional government of Sicily is a prima-facie indication of this.
To sum up. Markets should rejoice. Italian voters’ courage and inventiveness give new hope and energy to a sick Europe. Any older version of politics running the sow would have seen much more of the same and that would have simply prolonged a slow death of Europe by exit of the euro of some of its most suffering members. Markets should give a chance to this new experiment, for their own self-interest, that is, just like good Adam Smith always said.
26/02/2013 @ 12:30
26/02/2013 @ 15:38
Good post Gustavo, we need a bust of optimism, these days… Only one question: I fully agree that in the long run we want to implement some program of public investments – I only wonder if in the short run a program of tax cuts (either on IRPEF, IRAP or IMU) wouid be more desirable instead…
26/02/2013 @ 16:16
26/02/2013 @ 20:11
Brancaccio dice che l’euro e’ un morto che cammina. Cosa ne pensa?
27/02/2013 @ 14:12
“… an alliance of the willing who so far have shown incredible shyness in fighting against austerity at the European Council table”.
Vorrebbe dirci, di grazia, chi sono?
“Italy’s disastrous economic performance in the past 15 years is no doubt related to the disastrous leadrship performance of many (albeit not all) of its Prime Ministers”.
No, no! TUTTI, e non solo i primi ministri, TUTTI I POLITICI.
Al 1° posto Prodi e il PD per il tradimento ai valori e agli interessi che dicono di rappresentare (ha meno senso rimproverare la destra di essere di destra). Renzi, un “conservatore” dichiarato o meglio un REAZIONARIO – Bersani e gli altri sono reazionari non dichiarati – alla guida della sinistra? Se nessuno rappresenta gli interessi della “sinistra” il sistema si squilibra, come è successo).
1°ex aequo Napolitano.
Monti, Fornero &C? Li hanno messi lì per far quello che hanno fatto, squallidi esecutori.
Secondo lei “i mercati” sono un “essere” razionale?
@Marco, posso dire cosa ne penso da non-professoressa?
Brancaccio è in ritardo (nonostante lo sapesse fin dal principio perché è un ottimo economista) e la sinistra a cui si rivolge non esiste. Se aspetta loro, campa cavallo….
27/02/2013 @ 17:47
Per sua sfortuna professor Piga oggi sono a casa con l’influenza…
A proposito di mercati (e di ingerenza teutonica): lo spread è un’arma politica e dipende soprattutto dalla Bce (cioè dalla Germania) non da un punto percentuale di questo o quel candidato. Per non parlare delle agenzie di rating… e naturalmente tutta la stampa propagandistica a fare da grancassa fin dai primi altalenanti exit poll.
Siamo stati elettori disubbidienti, per questo ci castigano.
27/02/2013 @ 22:07
Guarisca presto e continui a bloggare.
28/02/2013 @ 00:28
Volevo solo congratularmi del fatto che lei sembra uno dei pochi con voce in capitolo a rendersi conto dell’ opportunità che si è aperta con il risultato di queste elezioni.
28/02/2013 @ 00:36
06/03/2013 @ 21:59
More than one week has gone by and we cannot say that you were wrong, Gustavo. Financial markets have not reacted (yet!?) the way everybody would imagine: Italian interest rates at 7% cent on new debt auctions and difficulty in financing. My opinion is that they are waiting. OMT is protecting us, but I don’t know for how long.
The message from the Italian ballots and from all Southern Europe is very clear, but I don’t know if it is clear enough for German and other Northern countries voters, Would they be more willing to mutualize debts and issue Euro-bills (not even to say Euro-bonds) to allow the end of austerity (as it is possible in the US)? If you were a German worker who went through a rough changes in pension laws and labor-market laws in 2002-2005, how would you think? The French are the next in line for speculation. They are very unlikely to save their great welfare system under the rules of the fiscal compact. But they were waiting for us, for the Italian to be wise like M. Hollande: winning the campaign announcing refusal to austerity, and then apply austerity but waiting for some partners to turn the table against Ms. Merkel. (See some very harsh comments on Le Monde regarding the Italian vote turnouts).
I am very worried that the voice of the Italian voters would not have any representation in the European Council you mentioned. While waiting for a new (hopefully more successful) generation of Italian politician, we may be all dead! It is such a long run!
(struggling to be optimist…)