Marcello de Cecco (1939-2016)

The Department of Economics and Statistics of Siena University held a day-long conference in memory of Marcello de Cecco on 17 September, which would have been his 77^thbirthday. 

I first met Marcello in October 1963 in Cambridge. Our dear common friend the late Bruno Miconi, a fellow research student in economics, introduced him to me. I already knew and appreciated Marcello from his contributions to Mario Pannunzio’s Il Mondo, but I found him even more impressive in person. Flamboyant, brilliant, learned, ironical and witty, yet approachable, friendly, generous. We got on well immediately. I have been fortunate in having him as a friend and colleague not only in our Cambridge years but also at Siena University, at the European University Institute in Florence, and at the Sapienza University in Rome – in almost daily contact for a total of over 25 years out of the over 50 years of our association.

Marcello was an alert and insatiable observer of current economic, political and social affairs, never satisfied with simple explanations but searching for deeper causes, enquiring “come va il fatto”. I remember his surprise when the daily Il Fatto Quotidiano that follows a similar inquisitive approach was published. Bruno Miconi used to say that Marcello should have been a film scriptwriter.

A Pembroke man, Marcello was held in great esteem by his supervisor Michael Posner; given his interests in international finance he was also in touch with Kingsman Richard Kahn, who however suspected him (injustly) of monetarist inclinations, because of his contacts with Chicago and Milton Friedman. Marcello had created a considerable intellectual niche for himself through his work on Eurodollars – dollar-denominated deposits held outside the US, mostly in Europe, thus escaping regulation by the Federal Reserve Board including reserve requirements. In this area at the time he knew more than his teachers and his expertise was appreciatively recognised and utilised in seminars and discussions. We both were invited to become members of the Monday Group, a seminar in Economics held regularly if reservedly in King’s. We shared an interest in the history of economic thought, indeed in a little known Russian pioneer of mathematical economics, Vladimir K. Dmitriev; Marcello edited the Italian version of his Economic Essays on Value, Competition and Utility, I edited the English version. When it became apparent that we were working on the same thing Marcello simply said that nobody had a monopoly on that author. At a Faculty seminar we presented a joint criticism of the Modigliani-La Malfa model of the interaction of monetary and real aspects of the Italian balance of payments. Later we co-operated in other research projects, especially in Florence.

Marcello was unique – among Italian students in Cambridge – in that he had come with his Mother, not wanting to leave signora Antonietta on her own back in his home town of Lanciano (pronounced as if written Langiano). They looked after each other well. Somehow, in spite of linguistic obstacles compounded by the regional variety of food nomenclature, his mother always succeeded in securing from the butcher her desired cuts of meat. Marcello gave the delightful account of his mother meeting Piero Sraffa in Cambridge Market Square, when she greeted Mr Sraffa with: “I am delighted to meet you, Professor; my son has spoken very highly of you …”. Marcello theorised the optimality of driving only second hand cars, but he chose only beautiful comfortable large ones, including a memorable Jaguar. When a lectureship was advertised at the University of East Anglia, I encouraged Marcello to apply and supported his candidature strongly. His appointment was a great success, and there, too, he met Julia Bamford – the other great woman behind the great man – so that I could boast of involvement in his taking both a job and a wife.

When the prospect of Italy joining the Euro began to be widely discussed, in 1992 on the eve of the French referendum on the subject Marcello gave enthusiastic endorsement of Italian membership. He wrote an article for Repubblica – Affari e Finanza, entitled I disgregati del 2003, which marked the beginning of his long collaboration to Repubblica (18/09/1992, reprinted in L'economia di Lucignolo, Donzelli, see Marcello’s obituary by Carlo Clericetti). In that article Marcello described an apocalyptic picture of Italy as a member of a Latin Union (with France, Spain, Portugal and Greece) ten years later: backward, underdeveloped, impoverished, authoritarian, repressive, bigoted and male-dominated; the article ends with a decrepit professor, who dares teaching politically incorrect views about the evolution of the international monetary system, being arrested and taken away by police. By contrast the member states of the Mittel-European Union thrive and prosper even more than the Anglo-American Federation, and hire the young unemployed migrants from Italy, who send food parcels to their parents at home in spite of this being officially frowned-upon.

Marcello’s enthusiastic endorsement of the euro was tempered, when it actually happened, only by his disapproval of Berlusconi’s failure to contain price increases in the changeover from lira to euro, something experienced only by Greece and there to a much smaller degree. Marcello’s enthusiasm was right: the euro brought about significantly lower interest rates; that the fiscal space was not used to reduce public debt and on the contrary encouraged greater indebtedness is another matter. The euro also brought about a rate of inflation lower than that achieved in Germany by the Bundesbank itself, and greater European and global integration of trade and Foreign Direct Investment. It did not bring about economic growth, but this was due to poor economic policies and various factors both on the demand (e.g. increasing inequality) and supply sides (productivity slowdown, etc.).

Ten years after, there was a lot to justify Marcello’s evolving position as a Eurocritic. Austerity policies enshrined in the Treaties under German hegemony were self-defeating and suicidal, Marcello was a Keynesian dyed-in-the-wool and knew it well. The German trade surplus, which Marcello attributed primarily to the post-Transition integration of Germany with Eastern Europe regardless of the weakness or strength of the euro, contravened EU rules but was unduly tolerated, and pushed trade deficit countries to run public budget deficits. Improvements could have been made, even without renegotiating the Treaties. Failure to make progress not only towards a Federal Europe design, but even towards piece-meal improvements, justify Marcello’s latest position as Eurosceptic, especially considering that he never indulged in advocating Exitaly, the Italian exit from the Euro that many advocated and still advocate lightly and unthinkingly. On the Euro, Marcello was always right.

For Marcello, the current crisis of the Euro was triggered by the Deauville Summit of 19 October 2010 at which Angela Merkel and Nicholas Sarkozy announced that at least part of any default on public debt would be born by bondholders. At the time I disagreed strongly with Marcello: why should investors who had benefited from large interest differentials, knowingly taking the associated risk, not have to bear the entire cost of default? If worried by that risk they could always have covered themselves as much as they wished by buying Credit Default Swaps. Yet, with the benefit of hindsight, now I am inclined to agree with Marcello. It was the prospect of bail-in that created the spread and effectively split the euro area.

By displaying the richness and depth of Marcello’s contributions of a lifetime, the Siena Conference stressed how dependent on his wisdom many of us had become. Today I find myself often wondering what Marcello would have said about current problems. Many Conference participants asked themselves what he would have said about Brexit: the consensus was that his natural diffidence towards Britain as a free rider of European integration, and the various exemptions repeatedly negotiated by the British (no Schengen, no common currency, the British rebate), would have led him to conclude that European integration might have progressed and improved without Britain. But we have no hard evidence that he would have taken that line. And we have no clue on what view he would have taken about the European migration crisis or the Islamic threat or the US elections with their problematic presidential candidates. It is at difficult times like these that we miss him most.

P.S. On the Siena Conference see also contributions by Emiliano Brancaccio, 
Paolo Paesani,  Salvatore Settis and Carlo Clericetti.

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).