Il Vecchio Glorioso Comunista

The re-election of Giorgio Napolitano on 20 April for a second seven-year term is an extraordinary event. Unprecedented in the Republic of Italy, not least because of a silent Constitution that neither prohibits nor specifically authorizes re-election (see Part II, Titolo II, art. 83-91). Most uncommon for a man of 88, one year older than the Queen of England and only junior - among Heads of State worldwide - to Robert Mugabe and Shimon Peres, and over six years older than the Italian male life expectancy at birth. Especially after so many previous, consistent and stern denials of such a prospect, labeled  by himself as "ridiculous". And accepting the post on the condition - not to be found in the Constitution, and requested only after re-election - that Parliament grants him effective Carte Blanche in the formation of the next Government. 

Admittedly any President can be better than no President, and financial markets (both the stock exchange and the market for government bonds) rejoiced at the news and the very prospect of a new government rather than none.  Whether initial market optimism was justified or groundless still remains to be seen.  For many Napolitano has been and is a Man of Providence, selfless and generous in the service of the country, an impartial custodian of the Constitution. But many others see him and his re-election at best as a mixed blessing, at worst as an unmitigated disaster.

On the one hand, Napolitano has the merits of being committed both to national unity and to Italy's European integration.  On the other hand, his understanding of such commitments is questionable.  For him, national unity is the avoidance of conflicts at any cost, and in particular the appeasement of Silvio Berlusconi, with the speedy presidential countersigning of ad personam laws favourable to him and his companies though subsequently declared unconstitutional, the postponement of a confidence vote in December 2010 that allowed Berlusconi time to illegally purchase additional parliamentary support, and the President's undue exhortations to magistrates to postpone Berlusconi's appearances in court and his sentencing in four open cases in the run up to the last elections.  While Napolitano's interpretation of Italy's interests in Europe is the total acquiescence to the obligations of EU and EMU, including the so-called Growth and Stability Pact that Romano Prodi at least had the courage to call "stupid", and the associated European austerity measures.

(In passing we might also mention Napolitano's political, outrageous use of pardon in the case of CIA agent Joseph Romano, convicted for Abu Omar's "military rendition" and torture, while pardon had been specifically restricted by the Constitutional Court to cases of compassion; his demand that phone tappings of four conversations of his with former Minister Mancino should be destroyed - as they were on the day of his re-election - regardless of their possible relevance to the investigation of State negotiations with the Mafia; and his continuous strong support for Italian military involvement in "peace-keeping" missions  in Iraq, Afghanistan, Libya and Lebanon).

What is worse, in the name of such questionable interpretations of well-meaning commitments Giorgio Napolitano has been perfectly willing to sacrifice democracy and the very same Constitution which he has sworn to observe and to which he has always vigorously paid lip-service.  An authoritarian streak, typical of a glorious old Communist in the tradition of Togliatti and Amendola, used to sacrifice everything, including his own party, in the name of a cause, has led him to transform Italy into a semi-presidential republic.  (For a lucid assessment of Napolitano's first seven years, see Thomas Mackinson, Il Fatto Quotidiano, 18 aprile 2013.

Back in November 2011, when Berlusconi resigned the Premiership, Giorgio Napolitano could have dissolved Parliament and called new elections: Berlusconi would have been steamrolled and buried forever.  Instead of which Napolitano appointed Mario Monti as life senator and pieced together a so-called "technocratic" government under Monti's leadership, backed by a Grand Coalition of PdL, UDC and PD, that squeezed economic life out of the country and led GDP further down a recessionary path. Napolitano's pretext for a technocratic government (of which as recently as 2010 he had denied the very concept) was the fear that Italian debt might become unsustainable. The fear, that is, that the spread between interest on Italian debt renewal and that on German Bunds - that under Berlusconi had escalated to over 500 points (i.e. 5%) on ten year bonds - might rise further during the electoral campaign and after the election if Parliament had been dissolved. 

Monti's austerity policies, predictably, instead of reducing the Debt/GDP ratio raised it to 127% by the time of the recent elections, poised to rise over 130%; though initially they had a small net favourable effect on the spread due to financial markets taking note of a renewed Italian commitment to repay debt.  But the spread fell significantly only in the summer of 2012, not thanks to Monti but as a result of Mario Draghi's resolve to do "all that it takes" to save the euro, and of his Outright Monetary Purchases approaching an ECB role as Lender of Last Resort.  If Napolitano had called an election in November 2011, it would have been won hands down by the PD, and markets would have rejoiced just as they did immediately after the elections of 24-25 February 2013 when they believed early exit polls wrongly giving victory to the PD. But that was a cruel delusion, the Italian electorate split three ways into three parts defying governability.

The PD coalition, whose campaign ruled out an alliance with PdL, gained by a whisker an artificial majority in the lower Chamber (thanks to the majority premium of an indecent electoral law passed by Berlusconi) but only a useless relative majority in the Senate, and was unable to form a government even with the support of Monti's coalition that had barely cleared the 10% threshold for entering the lower Chamber. The PdL coalition gained almost a third of the vote in both Chambers, was open to an alliance with PD but ruled out a technical government.  Beppe Grillo's 5Star Movement (the largest single party if we exclude Italian voters abroad) obtained almost another third but ruled out participation in any government, not least with Bersani's PD.

Pierluigi Bersani, the un-charismatic leader of the PD, tainted by 15 months complicity with Monti's recessionary policies (like the PdL, which at least had provoked Monti's fall before the end of the legislature), handicapped by a lack-lustre electoral campaign without either a programme or alternative policies, had always excluded most vigorously the continuation of a Grand Coalition that included Berlusconi.  Napolitano gave him an "exploratory" mandate, conditional on his obtaining a clear majority on paper before allowing him to seek a confidence vote in both Chambers, and quickly withdrew it with dubious constitutionality, in spite of the precedents of unconditional mandates.   The M5S followed a deplorable , indeed unforgivable, and self-defeating un-cooperative strategy, refusing to support a government led by Bersani, who in truth had offered only a vague programme of 8 points imitating some M5S policies, without offering them ministerial posts or negotiations about the choice of the Premier. 

Napolitano should have allowed Bersani to seek a confidence vote, which he had a fighting chance to obtain; even if he had lost, at least his government would have taken the place of Monti's government, that Napolitano undemocratically left in charge in spite of Monti's spectacular electoral defeat. Napolitano should then have explored an alternative, or resigned at once long before his tenure's expiry in mid-May, so as to speed up his replacement by a new President who could then proceed to dissolve Parliament and call new elections or seek to construct a new government on the strength of such a threat.

Instead of which Giorgio Napolitano temporised, wasted time and pre-judged the subsequent course of events, by appointing an improvised "Commission of Ten Wise Men", with the ambiguous role as "facilitators", totally outside Constitutional procedures, with the task of producing a draft programme for the new government. The so-called Wise Men were indeed all men in their middle to old age, exclusively from the parties that would be included in the a potential Grand Coalition.  A most peculiar procedure, in the absence of a candidate Premier, however pre-judging the subsequent appointment of a Premier who would then be effectively bound to endorse a Grand Coalition to accompany that particular programme.

What is worse, many of the ten appointees, tipped as potential Ministers in the future government, as it actually happened to four of them  - another extra-constitutional feature - were rather controversial, notable not so much for their wisdom as much as their representation of party kakistocracy (i.e. power of the worst, to coin an expression). See Marco Travaglio at Servizio Pubblico of 4 April. 

 

 - Filippo Bubbico (PD) former President of the Basilicata region, had been indicted four times and was still subject to one indictment for abuse of office, the author of a hare-brained, expensive and failed scheme to promote employment in his region by subsidising silk worms cultivation (sic).  

- Giancarlo Giorgetti, a Lega MP close to Bossi who then switched to Maroni's support, well connected in banking circles (Fioroni and Fazio), notorious for having taken a €100,000 bribe delivered directly by Fioroni at Montecitorio, though he returned it the same day recommending a donation to a sport association instead; his wife indicted for fraud against the state. 

- Enrico Giovannini, President of the Statistical Office, undoubtedly a competent statistician but never speaking on policy issues; he had been asked by Monti to conduct an investigation on the costs of politics and the salary differentials between Italian MPs (the highest paid in Europe) and MPs in the rest of Europe,  but after six months research in the end had declined alleging the difficulties of the task.

- Mario Mauro, a close associate of the unspeakable ex-President of Lombardy Roberto Formigoni, had switched to Monti at the last minute.  

- Enzo Moavero Milanesi, a EU official,  Minister for European Affairs in Monti's government.

 - Valerio  Onida, ex-President of the Constitutional Court, was on record both for backing Napolitano in his quarrel against the Palermo magistrates investigating the negotiations between mafia and the State, about phone tappings involving former Minister Mancino; and as arguing that the 1957 Law named after Sturzo, often invoked to allege Berlusconi's ineligibility to Parliament, did not apply on the Jesuitical argument that Berlusconi was neither the direct holder of a state concession of TV channels nor the manager of the company that was granted the concessions - glossing over the fact that Berlusconi was indeed a major shareholder in that company, in a clear conflict of interest with the State. 

- Giovanni Petruzzelli, an associate of Senate ex-President Schifani, was President of the Anti-Trust Authority without being able to claim a specific competence, consultant and co-author of Totò Cuffaro, former President of Sicily currently serving a 7 year sentence for aiding the Mafia.  

- Gaetano Quagliariello, distinguished for his multiple moves from Radicals to the UDC, to PDL (as deputy head of the group), to Monti's group and back to the PDL, was the author and proposer of many of the initiatives introduced - and endorsed by Napolitano - to favour Berlusconi and his companies.  

- Salvatore Rossi, a Bank of Italy high official close to the centre-left.

- Last but not least, Luciano Violante (PD), a sycophant  ex-magistrate who in 1998 had proposed an amnesty for Berlusconi and in 2003 (immortalised by youtube on the web, http://www.youtube.com/watch?NR=1&v=RHPRel7mpUM&amp) actually reminded an ungrateful Berlusconi in Parliament that the PD had guaranteed in 1994 not to interfere with his TV channels, and had set aside the pursuit of legislation on conflict of interest; he actually boasted that Mediaset turnover had increased 25-fold under their government.

In conclusion, not a bunch of Wise Men but - with a couple of exceptions - a gallery of partisan and biassed villains, at least in the eyes of many respectable observers.

When, after over 50 days of total inaction, parlamentarians and regional electors began the process of electing a new President, Pierluigi Bersani - no doubt under the influence of Napolitano - made a spectacular U-Turn from his "No alliance with Berlusconi in government" that had been the main line of his electoral campaign and his early exploration of forming a government, to opening to the Grand Coalition with Berlusconi through the proposal of a candidate agreeable to the PdL, Franco Marini, a respected Catholic trade unionist and former President of the Senate. Such an abrupt switch, to a diametrically opposite policy, predictably was not acceptable to a sufficient number of PD electors to miss the two third majority (required in the first three ballots) so that the candidate was sunk even with the support of most of the PdL.

At this point Bersani made a third spectacular U-Turn and proposed Romano Prodi, corresponding to what Berlusconi called a "declaration of war".  Bersani behaved as a kingmaker, rather than as a democratic leader, in proposing both Marini and Prodi, for neither was subjected to a vote together with other contestants or on his own; Prodi was approved by a dubious and opaque "acclamation" at a meeting of PD electors, instead of being subjected to a ballot, whether open or secret.  So Prodi, the PD founding father and truly independent candidate, also failed to be elected even by the simple majority required at that stage, missing as many as 101 votes that could have been commanded by the PD. 

All the time the M5S had put forward the candidature of Stefano Rodotà, a distinguished professor of Civil Law, who had served for two legislatures as an MP elected as an independent in the Communist Party, former president of PDS - an earlier incarnation of the PD - an ex-President of the Privacy Authority and a civil rights champion: an offer Bersani could not refuse, but did refuse to his eternal shame. Just like the M5S refused to vote for Prodi, also to Beppe Grillo's eternal shame.

This is when Napolitano was asked - again, after repeated earlier refusals  - to stand for re-election. On Bersani's part this was a third U-Turn, from Prodi's independent candidature to Napolitano's strong advocacy of the stitch-up between PD and PdL - or inciucio, in Neapolitan dialect. This is a derogatory term that Napolitano now asks to be banned in his version of political correctness and newspeak; equally banned are expressions playing down the importance of the new government as a "the President's government" or "limited purpose" or "low intensity", or "service government". The designation of the new Premier,  Enrico Letta, until the previous week Bersani's deputy and equally opposed to a Grand Coalition with PdL, made Berlusconi blissfully happy, laughing all the way to the bank (and to the Tribunal), not least because Enrico Letta is the nephew of Gianni Letta, a major advisor and a Minister of his (which makes the present "governo di servizio" a "governo di servi, zio..." in a cartoon in Il Fatto Quotidiano).

The government sworn in on 27 April could have been worse. Angelino Alfano as a deputy Premier and Minister of the Interior was a big price to pay, but at least the old party caryatids on both sides (including Berlusconi) were out - for the time being.  Ministerial average age of 54 years is 11 years lower than in Monti's government; there are only 21 Ministers of which one third are women, including the first black Minister ever in Italian government. Their vote of confidence - aided by a shooting incident in front of the government palace, Palazzo Chigi, immediately used unjustly to demonize M5S - was taken for granted, but its durability is not: the proof of the new pudding will be in the governing.

A Grand Coalition is being presented as a novelty but is nothing more nor less than the replication of the Monti government, with some involvement of politicians that Monti had sought and failed to obtain. It is hard to imagine that Letta might do much more than Monti, apart for the partial reversal of some of his austerity measures: already the two sides are quarrelling about the suspension versus the reimbursement of IMU, and it is not at all clear what government expenditures will have to be cut to make room for lower taxes. 

The centre left PD-SEL alliance is definitively broken; the PD itself has been cracked by Bersani's repeated U-Turns and the final betrayal of PD electoral commitments. Bersani has been scrapped at last; Matteo Renzi has been side-lined and - having always supported an alliance with Berlusconi - will not be able to re-unite the party. The millions who voted for the PD on the basis of its commitment not to ally with the PdL have been betrayed, yet paradoxically those MPs who would not give their confidence vote to Enrico Letta are the ones who have been threatened with expulsion, instead of the other way round. In the end, only one out of 293 PD members of parliament abstained: a "Bulgarian-style" party discipline that would have deserved a better cause. 

Neither Napolitano nor Letta, but Berlusconi is the only true and absolute winner of Italy's latest elections.  All he needs now is to be appointed as life senator by a benevolent Napolitano, and to walk into the posts of either Premier or President at the next round, especially if a French-style direct election of the President was introduced beforehand. Gaetano Quagliariello's appointment as Minister for Institutional Reform, and Berlusconi's bid to a candidature as President of the Committee for Reforms, if successful, might pave the way to such a formalisation of the extra-constitutional presidentialism ushered by Napolitano.  Nothing much can be done about everything else, as a fait accompli, but at least this final corruption of the Italian Constitution can and should be resisted, in order not to have Berlusconi for ever.

Iron Lady: Rust In Peace

Margaret Hilda Thatcher (1925-2013) once famously said, in an interview to Woman’s Own of 31 October 1987, that "There is no such a thing as society. There are individual men and women, and there are families”. Naturally she was often reviled for such a proposition, including by me as I repeatedly quoted her and criticised her vigorously for it in lectures and seminars.

Taken literally such a proposition is patently false. Clearly the collection of individuals and their families are interconnected in a vast and thick mesh of relationships – through economic, political and social institutions – known as “the fabric of society”. The total is infinitely larger than the sum of its individual parts.

But what Thatcher actually meant is that society is all of us, and is not an external entity distinct from the collection of all individuals and their families, so much so that she went on to say: "And no government can do anything except through people, and people must look after themselves first.” A perfectly simple and innocent call for self-help, and for restraint in the reliance on government transfers from a budget to which in the end we all have to contribute. Sure, she was neglecting the fact that welfare transfers are not necessarily always a disincentive to create income and wealth, that they also represent a stimulation of demand and therefore may generate employment and income, and that a more equal and cohesive society may be worth attaining - at least up to a point - even if re-distribution had a net cost in terms of efficiency. But even these omissions and reservations are legitimate though possibly misguided opinions, for which Thatcher did not deserve to be reviled. Therefore belated but sincere apologies are due and are here unreservedly made.

Nevertheless, there are still many exceedingly serious reasons to revile her. The general principle, that one "not speak ill of the dead", does not apply to influential public figures (as we are reminded by Glenn Greenvald, Guardian 8 April): noblesse oblige. I lived in England throughout most of her political career, from 1962-1982, and intermittently until after her downfall in 1990, and disliked her passionately. Mrs Thatcher - for I could never bring myself to call her a Lady - to me was forever Thatcher-the-milk-snatcher (as in 1971, while Minister for Education in the Heath government, she abolished free milk for school children aged 7-11 years). Never mind the destruction of the British coalmining industry: coalmining is an attractive occupation and culture only in the morbid, romantic literary sickness à la D.H. Lawrence, and miners should have been retired gradually by Labour governments over the previous thirty years, instead of being kept employed artificially as a reserve army of Labour voters. But there was no reason to confront them as Thatcher did and unleash riot police on horseback assaulting them: she could have easily bribed them instead with the proceeds of North Sea Gas.

Nor was there any need to start a class war using a regressive and odious poll tax, or to deny Irish hunger strikers in the Maze prison their political status thus leading to their death. She lowered taxes and cut welfare expenditure and industrial subsidies, promoting de-industrialization and unemployment (that rose to a record of nearly 13 per cent under her watch); she privatized council houses without building new ones, and sold off all kinds of public assets, including public infrastructure (steel, airways, etc.) and utilities such as water, telecoms, gas and electricity, transferring massive public wealth to the private sector. She de-regulated economic activities, especially finance, and shrunk the size of the state. In doing this she somewhat revived competition - which she could have done if she had wanted to even without privatization - but did not promote economic growth in the UK, as she is widely credited to have done.

Thatcher never understood any macroeconomics - or she would not have written (in her Path To Power, 1995): "There is no better course for understanding free-market economics than life in a corner shop." With infinitely greater confidence than that applicable to her assertion about society, we could say that "There is no such a thing as a market system". For in order to substantiate the naïf, oversimplified market vision of her mentors (Milton Friedmann and Friederich von Hayek, Alan Walters and Keith Joseph and the whole of the Mount Pelerin Society) as a system of self regulating equilibria we would need a system of complete markets, i.e. of exclusive, spot and inter-temporal, instantaneous and non-sequential markets, for all dated and contingent goods and services. Instead of which we only have a relatively small number of spot markets, a handful of forward markets except for labour and mostly for homogeneous primary commodities as well as money, all sequential and rarely contingent on the states of the world. In the market system as we know it economic agents act on the basis of expectations as well as prices in a typical, incontrovertibly Keynesian world of inadequate and unstable effective demand and involuntary unemployment.  

Policies based on such hyper-liberal (then labelled monetarist) approach, which she shared with Ronald Reagan who gained power in 1980, had massive adverse consequences over time and space. They contaminated and corrupted the New Labour approach of Tony Blair and Gordon Brown, they deeply affected the transition path of the Soviet Bloc from central planning to market economies and caused its immense unnecessary costs, and they paved the way for the global Great Recession of 2008 which is still causing our misery to date. 

Internationally, she strengthened her failing domestic support by declaring war on Argentina over Britain colonial possession of the Malvinas, instead of conducting political negotiations; her tears over the accompanying loss of lives, revealed by recently published War Cabinet papers, are only evidence of hypocrisy. She played a key role in bringing about the first Gulf War, and advocated the 2003 attack on Iraq. She denounced Nelson Mandela and the ANC as "terrorist", while she befriended dictators like Augusto Pinochet, Saddam Hussein and General Sukharto ("One of our very best and most valuable friends"). She opposed German re-unification and the euro but fortunately she was defeated by Germany and France trading one for the other.

For somebody so opposed to the state taking care of its citizens "from cradle to grave", it is ironical that she should be given a lavish “ceremonial funeral with military honours” yesterday in St. Paul’s Cathedral at an estimated cost of £10-12mn. It is only fair that Ken Loach should have suggested that her funeral should have been "privatized": "Put it out to competitive tender and accept the cheapest bid. It's what she would have wanted".

Grillo's Zombies

"You are a Dead Man talking!" - said Beppe Grillo to Pierluigi Bersani who had asked for M5S support for a legislative platform that included some of Grillo's pet initiatives. Admittedly Bersani is a lugubrious, funereal figure, totally un-charismatic, indeed "de-tumescing", to use a term coined by a former Cambridge colleague to damn Tony Giddens, then a candidate to College high office . After all, Bersani now demands respect, after calling Grillo "a Web fascist", which is worse and unwarranted. The 5 Star Movement is marked for its non-fascist, non racialist, non right-on rightist stance. And Bersani has been utterly inconsistent: he criticised Mario Monti, but aided and abetted his disastrous recessionary policies for fourteen months. A Bersani-led Democratic Party was only stopped from forming a new government with him by Monti's electoral debacle.

The problem is that Beppe Grillo is treating his brand new, clean and youthful 54 Senators and 109 "Onorevoli deputati" (or rather "citizens", as he wants them to be called, rejecting traditional titles), precisely like Zombies. "We will not give a vote of confidence to any government, let alone a PD-PDL government: we will vote on a law by law basis, according to our programme". Which is plainly silly: the M5S 163 parlamentarians will not get an opportunity to vote law by law unless there is a government in power that commands a confidence vote in both houses. The 163 citizen are turned by Grillo into Dead Men Who Do NOT talk.

 

Frozen, hibernated, silenced, ready to be resurrected only to leave their respective Houses when Parliament is soon going to be dissolved. A rather inglorious end to such an extraordinary, auspicious, revolutionary success. And when new elections are called, the protest voters that concentrated on Beppe Grillo on 24-25 February, now frustrated by the complete waste of their votes, will turn back to traditional parties, most probably PDL that will also drain some of Monti's support - unless the magistrates send Berlusconi to jail.  

Grillo's suggestion, of forming a government on his own, with the confidence vote support of PD and PDL, is as much of a non-starter as Bersani's offer to Grillo of a PD government with M5S support on specific policies plucked from their programme. What is needed is effective power sharing, with a precise division of Ministries, not the unaccountable, unspecified support for policies presumed to be jointly desired (how many? to what extent? accompanied by what else?). Grillo seems to favour a PD-PDL "Governissimo" which would not last long and cause the PD to lose half of their electorate (as happened to the Left in Greece and in Spain). D'Alema would pay this high price, for it is the only government which would give him office. Napolitano and Veltroni would, out of concern for Italy's stability and place in Europe, but Bersani and his cronies are unlikely to bite. 

Nevertheless, there are three tenuous prospects for a way out of this unprecedented constitutional crisis.

First, last Friday Dario Fo - Grillo's stated candidate as Napolitano's successor, though unavailable - said that there is a possibility of a deal with the PD under the leadership of someone other than Bersani (Matteo Renzi? Fabrizio Barca? Dario Fo did not say). Earlier on the same day Massimo D'Alema had already said, on television, that if Grillo sets this condition it should be immediately accepted.

 

Second, the 163 parlamentarians treated like Zombies by Grillo are nothing of the kind. Leading personalities are emerging within their group, and they are a diverse and articulate lot. They do not have to revolt, they can simply ignore the attempts to make them do as they are told. Give them a taste of Roman parliamentary life, and they will prefer to stay on rather than to return to the provinces.

Finally, it might actually dawn on Beppe Grillo that rejecting the opportunity to change, at last, some of the fundamental ills of Italian political life might actually jeopardise his current command of the protest vote. He simply will not get a second chance.

Irreversible Euro

“The Euro is Irreversible” - said Mario Draghi at least twice in the last few weeks, both in his 26 July Speech in London, and at the 2 August Press Conference in Frankfurt following the ECB Governing Body meeting. On the second occasion, the ECB President was specifically asked by a journalist: “What is the real meaning of the statement that the euro is irreversible?”

Draghi explained: “There is no going back to the Lira or the Drachma or to any other currency. It is pointless to bet against the euro. It is pointless to go short on the euro. That was the message. It is pointless because the euro will stay and it is irreversible.”

On Thursday 6 September Mario Draghi delivered on his promise. Outright Monetary Transactions (OMTs) are the new instrument being added to ECB powers, without any need for a change in the Treaties, making the ECB all that much closer to the Fed precisely because of its own independence in monetary policy and the requirements of effective mechanisms of monetary transmission.

These transactions involve “unlimited” purchases of government bonds (i.e. without pre-set limits in quantities and time), mostly within the one-to-three-years-residual-maturity range (in place of the earlier programme of bond purchases, now terminated), immediately sterilised, without asserting ECB seniority. And (in cauda venenum) OMTs are conditional on a specific request by a country for EFMS/EMS assistance and the strict monitoring of agreed fiscal policies and structural reforms associated with the programme, under penalty of cessation in case of non compliance.

The spread of Italian and Spanish bonds quickly dropped by over 100 points; the euro strengthened significantly; stock exchanges surged. But by Monday 10 September a new hurdle was placed in Draghi’s path, in the form of an emergency case brought by German MP Peter Gauweiler (and 37,000 other signatories) to the German Constitutional Court to treat the OMTs as a significant change to the EMS already under consideration by the Karlsruhe Court, whose ruling was due the following day, with a view to obtaining a postponement. But the Court promptly rejected the new case, and on 12 September it swept away that final hurdle, as widely and confidently expected, though reserving to a later date the assessment of the implications of OMTs. Spreads, euro exchange rate and stock exchanges resumed their initial response.

"Super Mario to the Rescue" read a New York Times column praising Draghi for his latest plan on Sunday 9 September (and on Monday 10 in The International Herald Tribune), comparing Draghi to “a star soccer player able to dodge through opposition and turmoil to achieve his goals.”


"I prefer to see him as Andrea Pirlo, the Italian midfielder with 360-degree vision, never hurried, always assured, master of the short and the long pass, bane of Germany, a fantasist who hits the target with precision," reads the column.


In particular the columnist Roger Cohen praised Draghi's ability to overcome German opposition to seeing his bond-buying plan come to life, describing how "Super Mario" is able to undo Germany "...with a series of feints that have left hardline Bundesbank bruisers looking as nimble and effective as beached whales"... "Little by little, Mario Draghi, the Italian president of the European Central Bank, has taken an institution whose overriding mission was to keep inflation in check...and turned it into a lender of last resort prepared to throw everything into buying the distressed euro-zone sovereign debt of countries like Spain and Italy and so preserve the euro".

After the European Summit of 28-29 July Mario Monti had been likened to Mario Balotelli, another footballer who also had contributed to the Italian team’s victory over Germany a few days earlier. But Monti’s would have remained a Pyrrhic victory without the subsequent backing of Draghi’s unerring diplomacy and inventiveness, that produced the “Big Bazooka”.

The OMTs have been widely criticised, not only by the usual adversaries of the euro (for instance in the British press, that immediately disparagingly dubbed them On My Tab), but also by respectable, pernickety commentators nitpicking on some aspect or other of Draghi’s scheme.

In his FT column, Martin Wolf argues that a conditional programme of bond purchases is not credible “because the ECB is unlikely to cause a financial crisis the moment a country fails to meet conditions”, by cessation or, worse, reversal of OMTs. But a bazooka can always change its target, trifling with the ECB on conditionality would - of course - be very dangerous; it would be more worrying if there were no penalties, or only lenient ones. Wolf is right, of course, in recommending a more aggressive monetary policy promoting more growth and jobs in the periphery. Since Germany is unlikely to accept this, he concludes that the ECB has only won some time. Even so, for once time comes cheap, and the progress is undeniable.

It has also been alleged that concentration on the short-end of maturities would have no effect on longer and especially 10-year bonds on which the spread over Bunds is measured. Worse than that, investors would sell 10-year maturities to buy those under three years, thus worsening the spread. But the proof of the pudding is in the eating: 100 points fall in the spread as a mere announcement effect is no joke. And the fall in the yield on shorter maturities (capable of rising above longer to signal an imminent danger of default) is usually followed by a yield fall in longer maturities.

We are now confronted with a dilemma, whether to starve because of the austerity imposed by a programme, or to starve because of the high spread (argues Marcello de Cecco, Repubblica A&F of 10 September). But a 100 points fall in the spread, other things remaining equal, frees non negligible resources (the best part of €20bn in Italy’s case) that can be used to stimulate the economy and promote growth.

However, one remaining ambiguity of OMTs is whether the up-to-three-years-bonds would or would not be renewed at maturity. If they were not, this would set a limit, possibly a very serious limit, to the ECB control over monetary transmission mechanisms. But if they were renewed, Mario Draghi could no longer argue that OMTs do not represent debt monetisation. And if they were not, the possibility would return of the spread rising to non-sustainable levels when a country re-attempts market access, or even of failure to access financial markets at any price.

In this case the likely ensuing default would inflict a loss on the ECB, falling fairly and squarely on all of its shareholders (including non EMU members) proportionately to their ECB shares. This could be regarded as a form of genuine mutualisation of the failing government’s debt, without the burden unfairly falling on the richer EMU members as it would be the case with the ill-starred, ill-conceived standard Eurobonds, understood as bonds covered by joint and several responsibility of EMU member states. Importantly the ECB loss in case of default could be covered by the present value of the seigniorage that the ECB possesses in the hidden depths of its balance sheet, all €3.5 trillions in the famous, unchallenged estimate by Willem Buiter (2011).

The ECB Firepower

The idea of multiplying the EFSF/ESM firepower by using purchased government bonds as collateral to borrow from the ECB thus proceeding to buy more bonds, and so on, was firmly rejected by Mario Draghi at the press conference of 2 August after the ECB Governing Body meeting.

Draghi said that he was “a little surprised by the amount of attention that [the possibility of an EMS banking licence had] received in recent press coverage, and in public opinion”… “After all, I have said at least twice that the present design of the ESM does not allow this. It is not up to us to issue a banking licence – this is a matter for the governments. What is up to us to decide is whether the ESM – evenwith a banking licence – can actually be a suitable counterparty that is eligible for central bank financing. And I have said at least twice – at a press conference, and on other occasions – that the current design of the ESM does not allow it to be recognised as a suitable counterparty”  (emphasis added).

Moreover, Draghi referred to “a legal opinion of the ECB on this, which was issued way back [on 17] March 2011”. The Press Conference report actually gave the link to that legal opinion.

Specifically, the ECB legal opinion argues that “Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB [European System of  Central Banks]. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU … is one of the basic pillars of the legal architecture of EMU both for reasons of  fiscal discipline of the Member States and in order to preserve the integrity of the single monetary policy as well as the independence  of the ECB and the Eurosystem”.

Article 123 of the Consolidated Treaty on the Functioning of theEuropean Union of 2009 (ex-Article 101 of the earlier consolidated version of 2006) stipulates that:

“1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

Although: “2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.”

The legal merits of the case rest exclusively on the ECB's own interpretation of its own rules, not on a Higher Court or on an “authentic” interpretation. Nevertheless, clearly we must take no for an answer: regardless of the legal position there is no willingness in the ECB Governing Body to transform the ESM into the Lender of Last Resort (to governments) arm of the ECB. Draghi’s rejection of this weapon is compounded by similar declarations by Merkel, Schauble, CDU politicians, the Dutch and the Finns.

What about the ECB acting as an EFSF/ESM agent, within the relatively small EFSF residual budget (about €150bn) and/or - subject to the approval of the German Constitutional Court expected on 12 September - the limited but more substantial ESM (€500bn), with a view to reduce the spread on the bonds of “virtuous” governments?
Here there are more encouraging developments:

1)      On 20 August the Bundesbank Monthly Report confirmed its President’s view that “bond purchases are problematic and lead to risks for stability”. At the same time Jorg Asmussen, the other German representative on the ECB Governing Body, actively and loudly supported “unlimited ECB [government bonds] purchases, for the ECB wants to take out any doubts among market participants about the future of the euro” (Eurointelligence.com, 21 August);

2)      The details on the use of the EFSF/EFM as an anti-spread shield are still under discussion, but the proposal has already been endorsed by Angela Merkel repeatedly over the last month, while the (bad) idea that threshold spread levels would automatically trigger bond purchases has been denied by the ECB;

3)     The credibility of Jens Weidman’s stance has been pre-emptively eroded by the revelation that, back in 1975, the Bundesbank had actually broken its own policy principles and possibly its own statutes by purchasing German government bonds to the equivalent of 1% of its own GDP at the time. (see FT, 7 August, and the excellent piece by Evelyn Harriman of BNP Paribas.

True, the German Central Bank buying German bonds is not the same as the ECB buying Italian and Spanish bonds, but if the ECB bought government bonds of all the EMU member countries, in the same proportions in which they hold ECB shares, re-distribution should not be an issue. As I wrote in my previous post in answer to a comment by a reader:

"Suppose the ECB bought a balanced packet of 100bn of EMU government bonds in the same proportions in which EMU countries hold shares."

"Roughly 30% of ECB shares are held by 10 EU members who are not EMU members (with the UK at 14.5%), the rest is divided among EMU members: Germany 18.9%, France 14.2%, Italy 12.5%, …, Spain 8.3%, Greece 2%, Portugal 1.75%, , Ireland 1.11%, … Malta 0.06%. Therefore the bond packet bought by the ECB would contain 100/70 or roughly 1.43 times each EMU member’s share in ECB capital, eg Spain €11.869 bn."

"Suppose that subsequently Spain defaults and its bonds lose 50% of their value. Germany [as ECB shareholder] loses 0.189*0.5*11.869bn euro, or €1.1216205 bn. An equivalent amount out of the €18.9bn outstanding German debt purchased by the ECB could be cancelled, and so on for all  corresponding losses of other EMU members."

"Non-EMU-member Shareholders would have to be compensated by the ECB for 30% of the loss of value of Spanish bonds, i.e. would have to be paid dividends of 0.30*11.869 bn euro; all ECB outlays to come from ECB profits (including seigniorage if need be, in which case non-EMU members might not be entitled to compensation …)."

"In conclusion, EMU non-members would be compensated for their participation in the cost of Spain’s default with dividends, while EMU members would be compensated by the withdrawal of a corresponding value of their bonds (without prejudice for the present entitlement of non-EMU members to benefit or not to benefit from euro seigniorage)."

So, there is no reason for peripheral (i.e. high spread) eurozone members to panic - yet. Where there is a will there is a way. And financial markets believe in the “Draghi rally”.

The ECB weaponry

The current euro crisis was named by Nouriel Roubini and several bloggers as “a slow motion train wreck”. In the last twelve months the trains have continued their collision course and actually have accelerated their speed, but the crash is not a foregone conclusion. There are still courses of action - though admittedly problematic - that might avoid the collision.

Germans are opposing the so-called “mutualisation of European government debt”, through the issue of bonds for which each and all EMU member states would be responsible jointly and severally. Quite reasonably, we argued in our last post, for inevitably they and the few AAA-rated members would end up paying for all.

Germans are also opposing an increase in the funds of the European Stabilisation Mechanism, much less reasonably in view of German exposure to the euro crisis. Indeed, the operation of the ESM as an anti-spread shield, which seemed to have been agreed at the Economic Council of 28-29 June and would gain a bit of time to look for other solutions, is being delayed when it is most urgently needed, by the temporizing tactics adopted by the German Constitutional Court. 

Also, Germans are not even contemplating the sheer possibility of reflating the German economy, most unreasonably because this not only would cost them nothing but would benefit them first and then the whole eurozone by reducing the German trade surplus and facilitating overall re-balancing of the entire eurozone. Paul Krugman had suggested that Germany should pay all of its citizen a 1000 euro voucher to spend in Southern Europe - an excellent proposal which naturally fell on deaf ears.

The current euro crisis has reached a new depth, with bankrupt regions and metropolitan cities in Spain (Valencia, Mursia, Cataluna) and in Italy (Alessandria; allegedly Sicily; with another 10 cities feared to be at risk of default given high debt and bad investment in derivatives, see La Stampa, 23 July); record spreads; rating downgrading and negative outlooks leaving only Finland at a stable AAA grade; a tough line on Greece taken by the troika (EU, ECB, IMF); and the inexorable recession induced by excessively fast fiscal consolidation.

In these circumstances, the European Central Bank is the only institution left that has the means to intervene with any effectiveness. Granted, the ECB is not allowed to act as Lender of Last Resort to governments, because of the No Bail-Out clause in the Treaties. It can acquire government bonds of countries under speculative attacks on a limited scale under its Securities Markets Programme (SMP), that started on 10 May 2010, which however has already come under criticism. And in December and February the ECB has injected a total of €1 trillion of liquidity into the European banking system through its Long Term Refinancing Operations (LTRO, also re-labelled as Lourdes Treatment and Resuscitation Option, Eurointelligence.com 28/04/2012). This could be repeated, but not indefinitely, and in any case it is a rather blunt instrument, for only a fraction of the injected liquidity finds its way to support government bonds.

Nevertheless there are still two awesome, unused arrows in the ECB’s quiver.

One of the ECB weapons is the possibility of leveraging the European Stability Mechanism (and/or the European Financial Stability Facility for its residual life) via a banking licence. The government bonds purchased by this/these institution(s) would be used as collateral to borrow from the ECB additional funds to finance further purchases, and so on.

Last December the European Union President Herman Van Rompuy himself suggested that the ESM would be more effective if it becomes a "credit institution." The Germans immediately (WSJ on line, 8/12/2011) and repeatedly afterwards rejected such an idea, with reference to both ESM and EFSF. But it turns out that this is a matter of ECB policy, not subject to a German veto: the ESCB [European System of Central Banks] and ECB Statutes,  Art. 18 on Open Market and Credit Operations, stipulates that:

“18.1 In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:

— operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in Community or in non-Community currencies, as well as precious metals;

— conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral [emphasis added].” And

“18.2. The ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions.”

The EFSF/ESM are undoubtedly “other market participants”, and Italian and Spanish bonds are still regarded by the ECB as “adequate collateral”. And it is the ECB itself to establish “general principles” and announce the “conditions” for such transactions. (I am grateful to Carlo Clericetti for pointing this out in a comment to my earlier post and in his article in Repubblica - Affari e Finanza). No German veto can be exercised, Mario Draghi can do it if he really wants to do it.

The second arrow in the ECB’s quiver is the conduct of a monetary policy like the Federal Reserve Quantitative Easing. This has been recommended by many commentators in the past, but Eurointelligence.com of 24/7/2012 reports an article by Federico Fubini in Il Corriere della Sera of the same date.  “According to Fubini, a European QE is not against the EU Treaties, if the ECB would buy governments bonds from every Eurozone countries [emphasis added]. … Bank of America-Merrill Lynch also said yesterday that the ECB should start a QE as soon as possible. "It’s a way to change that situation, to break the European stalemate," analysts said.”

The odd thing is that both the original article by Fubini, and the earlier statement by BoA-ML, do recommend Quantitative Easing but make no mention of the alleged compliance with EU Treaties “if the ECB would buy governments bonds from every Eurozone countries”. Maybe this was an after-thought by the Eurointelligence.com Director Wolfgang Munchau, or by another collaborator. In any case, the qualification is brilliant. If the ECB purchases a balanced package of government bonds in the same proportions in which countries hold shares in the ECB, there is no mismatch between the two, and nobody - including the Germans - has any reason to complain. Presumably a satisfactory way of compensating gains (including the capital thus raised by the richer countries) with losses (inflicted by the poorer ones in case of default) could always be settled beforehand.

It is true that the ECB has a capital of only €6bn in the process of doubling over 5 years, but - even setting aside Paul de Grauwe’s powerful argument that a Central Bank does not need equity capital at all - the ECB has off-balance-sheet resources of the order of at least €3.5 trillion being the estimated present value of its seigniorage (see Buiter, 2011).

The existence of such formidable weapons in the ECB armoury does not indicate whether and when they will be used. But the very fact that they might ought to set a limit to the downwards spiral of credit ratings and the escalation of spreads. 

Today Mario Draghi, in London at the Global Investment Conference, declared:  “We are ready to do everything that is needed for the euro. And, believe me, it will be sufficient”… "It is impossible to immagine that a country might exit the Eurozone”, … and “the control over spreads is part of the BCE mandate when they impede monetary transmission mechanisms”. He was not bluffing, and financial markets believed him, bringing Italy’s spread down by over 50 points to below 470 points, and the euro exchange rate up by over 1.5 cents.

POSTSCRIPT

Mario Draghi's speech at the Global Investment Conference, London, 26 July 2012. 

The Monti-Merkel Double Act

A simpleton, or a con-man, might attempt to persuade the richer members of a club, like the Germans the Dutch and the Finns in the Euro-zone, to accept the mutualisation of European governments debt through the large scale issue of Eurobonds with joint and several responsibility of all members. For inevitably those richer members would end up paying for all. No other kind of Eurobonds would solve the euro crisis, whether project bonds or mini-Euro-bills on a small scale, or with pro-rata responsibility, or Eurobonds issued by any European agency other than the European Central Bank (that is statutorily prevented from issuing them) and which in view of the minute size of the EU budget would be necessarily treated as junk bonds.

A simpleton or a con-man, or perhaps a wrecker, someone knowingly making unacceptable suggestions thus providing an alibi for the refusal of more plausible, useful suggestions, such as raising the size of the European Stabilisation Mechanism, or re-balancing and reflating the German economy.

Why, then, have Mario Monti and Francois Hollande so insistently and persistently, indeed obsessively pressed for the issue of such Eurobonds, ignoring loud and clear, repeated refusals? That Hollande should do it should not surprise: he is a well-meaning socialist, and an ill-advised beginner with no previous experience in government. But why Monti, the shrewd economist and experienced former Eurocrat?

There is a rational explanation. By knowingly making an unacceptable demand, Mario Monti gave the German Chancellor a wonderful opportunity to take a spectacular stance: “Not in my lifetime!”. It is no accident that according to a poll conducted after the EU summit her popularity rating rose to the highest level recorded in the last three years.  The poll also confirmed strong support for her stance in the euro-zone debt crisis, showing that 66% of Germans were satisfied with her performance, an increase of eight percentage points from a month before and the highest reading since 2009 when she won a second term. “Some 58% of Germans believe Merkel's stance in the euro crisis is correct and decisive, although 85% of those polled also expect the crisis to get worse.” (Eurointelligence.com, 7 July). 

At the same time, Angela Merkel obliged by making, in return, moderate, ambiguous and double-edged concessions, that involved support for the re-capitalisation of Spanish banks, the deployment of ESM funds to provide Monti’s “anti-spread shield” through the purchase of virtuous governments’ bonds (and not just to finance imbalances by rogue governments under troika’s supervision), as well as the Europe-wide monitoring of major banks with ECB involvement, a step construed as an anticipation of a banking Union. Francois Hollande got a modest investment injection of 120-130 bn euro, of which only 10 bn could be regarded as additional to already available resources. A win-win solution for all, then? Certainly enough for Mario Monti to return home to a hero’s welcome, portrayed on Facebook like the footballer Balotelli who on the same day scored the crucial winning goals against the German team. The threat of the Monti government crisis subsided. Italy’s 10 year bonds’ spread over German Bunds fell significantly though temporarily.

It is immaterial whether Merkel and Monti staged a concerted Double Act, or Merkel reacted predictably to Monti’s Eurobonds pressing, with Monti then demanding a modest reasonable concession which Merkel made more comfortably than otherwise might have been the case.

That Merkel’s concessions were moderate, ambiguous and double-edged it became clear very soon; indeed it took financial markets only 48 hours to have second thoughts about the deal. Partly, the devil is in the details, and the concessions were downsized when the details were specified.

The ESM was expected to inject equity directly into banks, breaking the link between banks and government debt, whereas it was clarified by officials that a national government guarantee would be retained; and the Karlsruhe Constitutional Court is taking its time to study the ESM and Fiscal Pact before taking a decision; and the ESM involvement will have to wait for new Europe-wide monitoring of banks to be established to the ECB satisfaction, probably not before 2013.

The size of the ESM remains what it was before, 500 bn euro of which 275 bn are already earmarked and committed to the support of Greece, Portugal, Ireland and Spain. The maximum liability that might be incurred by the Germans as a result of ESM operations therefore remains unchanged, in spite of the broadening of ESM responsibilities towards banks and holding down spreads of “virtuous” countries. We do not know yet what the spread ceiling will be; the ESM intervention will not be automatic but will require a specific request by a country, which might be deterred from making it by the stigma that will necessarily be attached to such a request. The ESM will buy government bonds through the ECB as its agent, thus to a Martian the process will be initially indistinguishable from the ECB acting as Lender of Last Resort to Governments; but any earthly investor will be aware that the ECB intervention will be limited at the very outset to the residual 225 bn funds uncommitted at present and, as pointed out cogently by Paul de Grauwe, will start selling his bonds of the governments involved long before those modest funds come to an end, thus triggering off the rise instead of the fall of the spread.

“Monti obtained the Anti-Spread Shield”. “Yes, and he was given a brand new Damocles’ sword in return” (a cartoon in Il Fatto Quotidiano of 10 July).  The so-called Anti-Spread Shield provides a mouthful of oxygen ("una boccata d’ossigeno", commented an Italian former Premier, or rather we should call it "una Bocconi d’ossigeno").  It is not a solution, but a way of “buying time for a solution without actually providing one” (Paul Collier, 10/07/2012). At a cost, of course: the probability of a crisis is reduced, at the cost of making the crisis all that much more serious if and when it occurs - not necessarily a superior trade-off.

At a Press Conference of 9 July in Rome, Monti was asked whether he regarded the current and unchanged size of the ESM as adequate. He answered that interventions could be effective even on a small scale, but that he “might be wrong”. So he might, just think  how the UK and Italy were kicked out of the European Monetary System by a couple of Hedge Funds in 1993.

Clearly the time has come now to forget and bury Eurobonds, even in the long term. To recognise that so-called structural reforms will have no positive effect on growth for at least the next five years; and that austerity has already gone too far and more austerity can only yield more recession, worsening debt/GDP ratios and spreads. That the ESM size needs increasing, the sooner the better, and/or be granted a banking licence so as to enable to ECB to legitimately lend to it and raise the scale of its operations. And that the time has come for Germany to end its rabid obsession with inflation and austerity, and raise wages and public and private expenditure reducing its external imbalance (surplus) and turning on its growth wheels.