Euroarea: Premature, Diminished, Divergent

1. Expected Benefits and Costs of a Common Currency

The formation of a Common Currency Area is usually expected to generate at least seven gross benefits for its members.  

First, a reduction of transaction costs, such as the cumulative cost of converting one currency into another (and then another). 

Second, an increase in competition, given the greater transparency and comparability of prices once they are all expressed in a common currency.  

Third, a reduction of the rate of inflation, if the management of the common currency is subjected to greater discipline by an independent Central Bank targeting low inflation.  

Fourth, the elimination of exchange rate risk in transactions among member countries within the common currency area.  

Fifth, a lower interest rate associated with both lower inflation and the elimination of exchange rate risk.  

Sixth, in addition to all these factors expected to promote trade integration within the area, the promotion of greater foreign investment, given the investors’ ability to repatriate profits freely in the same currency in which they are earned.

Finally, there are the benefits expected of greater financial integration, which would provide among other things a form of implicit insurance against asymmetric shocks.   

Conversely, there are also at least three gross drawbacks to be expected by the members of a Common Currency Area.  First, the loss of national monetary policy, potentially serious in case of asymmetric shocks.  Second, the loss of the national exchange rate as a policy instrument, especially the loss of currency devaluation as a means to enhance national trade competitiveness.  Third, the fiscal discipline involved for national governments by membership of the Area. 

On balance, there is an expectation of positive net benefits from the establishment of a Common Currency.

2. Actual Benefits and Costs of the Euroarea

The creation of the Euroarea has resulted in a mixture of actual benefits and drawbacks of different sizes, trends and net balance over time.  Savings in transaction costs in currency conversion clearly have been grossly exaggerated, since those costs are incurred only for a possible currency mismatch between monetary revenues and expenditures.  Prices can be easily expressed in any currency chosen as numéraire, so that greater transparency is a delusion.  Inflation has been tamed successfully by the European Central Bank and brought down below the best earlier performance of the Bundesbank, but by 2013 labour unemployment has reached record levels in the Euroarea.  Interest rates have fallen with the introduction of the euro and gradually have converged to roughly a uniform low level maintained for seven and half years until 2010 when the spread between national borrowing rates and the lowest rate paid by a member country (Germany on its long term Bunds) has widened spectacularly, together with the cost of insuring against country default with CDS (Credit Default Swaps).  Banking integration within the Euroarea turned into a mechanism of contagion.  Asymmetric shocks – a serious concern when the Euro was established – have not been a major problem, but the inability to implement an external devaluation has brought about alternative and costly measures of internal devaluation i.e. deflation of wages and prices.  Fiscal discipline in the form of concerted austerity, within the whole Union and not only in the Euroarea, has depressed GDP and employment in the area as a whole and especially in the Southern members states, to a greater extent than the resulting reduction of debt thus raising debt/GDP ratios and widening their divergence (on this point see below). 

Since the Greek crisis of 2010 and successive crises in other member countries the possibility has been seriously and widely discussed of the Euro-area splitting into its national components with the restoration of national currencies, or at least splitting into groups such as a Nordic and Southern group with a currency respectively stronger and weaker than the Euro as it is today.  (See Cambridge Journal of Economics, Special Issue on Prospects for the Eurozone, Volume 37 Issue 3 May 2013, downloadable free of charge). While initial calls for Euroarea break-up were initially expressed by rightwing circles, recently they were joined by leftwing circles (for a critique see Andrew Watt, Why Left-wing Advocates Of An End To The Single Currency Are Wrong, 10-07-2013).

3. The Euro-Area: three failures

The Euroarea has suffered greatly from two major design failures, which are the original sins of the Common Currency, and from the member states’ increasing divergence from a common economic pattern instead of converging.

The first failure consists in the Euro’s premature birth.  The Common Currency was supposed to be the very last stage of economic integration, “crowning” all the other prior stages: after political integration, after fiscal integration including a European budget on a large enough scale to allow for a European fiscal policy, after defense and foreign policy integration.  Instead of which when the euro was set up, and still today, there is no European government, but only a movable collection of national Ministers that mostly legislate in place of a Parliament which remains largely a debating Club, next to a powerful European Commission of unelected Commissioners and powerful civil servants with executive powers, while policy-making remains at the inter-governmental level.  The European budget was set at a derisory 1%-2% of European GDP (instead of around 20% as the US Federal Budget) and always balanced ex-post (thus without the possibility of a primary surplus, let alone one large enough to service bonds issued by the EU, which in any case the EU has no need or reason to issue because it is not allowed to run a deficit).  In both defense and foreign policy only the first embryonic, bureaucratic steps towards European integration were taken. 

The approach followed in Euro creation was the exact opposite of what it should have been, technically, not to mention democratically: the Common Currency was established out of sequence deliberately, precisely so as to create, through a kind of “controlled dysfunction”, the pressures and tensions that it was hoped would push forward “la finalité politique” and all the other integration stages that are still missing.  This was a risky strategy that worked only temporarily and should have been rapidly followed, but was not, by filling in the missing stages in order to succeed.

The second failure of the Common Currency design was the creation of a diminished European Central Bank.  The ECB was made independent – following the then fashionable theories of rational expectations and the alleged lack of a trade-off between inflation and unemployment associated with them – like the US Federal Reserve, the Bank of England and the Central Bank of Japan.  However – unlike these sister institutions but on the Bundesbank template – the ECB was also totally disconnected from fiscal policy.  The ECB was supposed to target inflation at a rate below 2%, though close to it; to disregard employment concerns unless and until the inflation target was met, but above all was prevented from buying government bonds whether they were issued by Europe (which the EU was not supposed to issue, other than through the European Investment Bank) or by member states.  

And when it was set up the ECB did not have any of the other traditional functions of a Central Bank: bank supervision, bank re-capitalisation and resolution in case of insolvency, deposit insurance – all functions that were retained by National Central Banks, and still are except for some devolution in progress of bank supervision to the ECB. 

Inability to fund public expenditure, to supervise, re-capitalise and resolve banks and insure deposits made the ECB only half of a Central Bank, or possibly even less than half.  There have been initiatives to establish some version of a “banking union”: strictly speaking there is no such a thing, and one would look in vain for such an institution in the textbooks on International Integration. There are only make-shift provisions to somehow alleviate the lack of those traditional Central Bank functions on the part of the ECB.

The third failure of the Euroarea is, after almost 10 wasted years of successful operation with low and uniform interest rates, the EMU member states’ failure to converge to the statutory parameters fixed by the Maastricht Treaty for EMU accession and by the euphemistically labelled Growth and Stability Pact for all EU members.  This is true both of monetary convergence – of long term interest rate on 10 year government bonds, and of the rate of inflation – and of fiscal convergence maintaining the budget deficit and public debt respectively below 3% and 60% of GDP, in addition to two-year stability of the exchange rate between the national currency and the Euro.  EMU countries also failed to converge to other, real parameters that had never been targeted but – in view of the Euroarea premature and incomplete design – should have been targeted, like labour unemployment, unit labour costs (wage rates possibly remaining uneven but proportional to labour productivity), the trade balance, the share of bad loans in bank portfolios.  Instead of converging, the relevant parameters of Euroarea members have become increasingly divergent during the recent crisis.

A premature birth would have been alright if the European Central Bank had been designed on the Bank of England or the Fed or the Bank of Japan template instead of the Bundesbank.  Neither a premature birth nor a diminished Central Bank would have mattered if member states had converged to common monetary, fiscal and real parameters.  But the combination of these three failures, including increasing divergence, is potentially lethal.  The Euroarea as it is today might be able to struggle on still for an unspecified time, but ultimately is undoubtedly doomed.

4.  Recent Developments

In 2010 the interest rate spread widened between the Southern members of EMU and the most “virtuous” Nordic members of EMU, notably Germany – indeed too virtuous in view of its excessive success in promoting net exports currently of the order of €210 bn or 6% of its GDP, without any mechanism or policy attempt in Germany or in Europe to eliminate or even reduce that imbalance that has been very damaging to all other EMU and EU members and ultimately to Germany itself.

 

The history of the following three years to date is that of partial, slow and ineffective improvements, and of the courageous and imaginative unconventional measures introduced by the ECB President Mario Draghi to make the ECB function almost like a genuine Central Bank against stern German opposition. 

In 2010-2013 two temporary EU funding programmes provided instant access to financial assistance to Euroarea member states in financial difficulties: the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).  In September 2012 they were replaced by the permanent ESM (European Stabilisation Mechanism, while the EFSF and EFSM will continue to manage transfers and programme monitoring for the earlier bailout loans to Ireland, Portugal and Greece).  However the ESM was somewhat under-funded (€500bn) to be able to cope with a large-scale crisis that might include at least one of the larger member states, and subject to the adoption of recessionary austerity and painful reform programmes under Troika supervision (EC, ECB, IMF).

 

Two new unconventional instruments were introduced by the ECB under Mario Draghi’s leadership, in order to restore monetary transmission mechanisms: Long Term Re-financing Operations (LTROs), through which the ECB provided injections of low interest rate funding to euro zone banks against wide-ranging collateral, and Outright Monetary Transactions (OMT) through which the ECB could purchase government bonds of troubled countries in the secondary markets – a master stroke whose sheer announcement has had a stabilizing impact on financial markets without the ECB spending a single cent yet.  Recently interest rate cuts were made, down to a record low of 0.5% and announced to be persistent and possibly ready to fall further down to reach the negative range. 

These developments have been persistently opposed especially by German representatives within the ECB Board and challenged as improper or outright illegal (including by bringing complaints to the German Constitutional Court in Karlsruhe).  Germany also has been opposing vigorously any suggestion of even partial mutualisation of debt within the Eurozone through the issue of Eurobonds subject to collective and several responsibility of member states – an understandable objection as Germany would risk to end up with sole responsibility as the most creditworthy party (though similar operations both in the early stages of the United States Federation and in 1862 in United Italy are said to have been advantageous to all parties involved). 

Of course the ECB has access to large-scale resources which are not recorded in its balance sheet, namely the present value of its seigniorage on the Euro (the profits obtained from monetary base issues, the interest obtained from the investment of past issues, the anticipated inflation tax i.e. the loss in real value of the stock of monetary base caused by expected inflation, as well as the unanticipated inflation tax).

The present value of ECB seigniorage was estimated by Willem Buiter to have a present value of the order of €3.3 trillion (in “The Debt of Nations Revisited: The Central Bank as a quasi-fiscal player: theory and applications”,  2011).  Its use to retire a sizeable part of Euroarea members’ debt in the same proportions in which they hold ECB shares would solve the Euro crisis without transforming the Eurozone into a “Transfer Union”, as it would not involve any redistribution across member states.  Potentially inflationary consequences of such an operation could be neutralized by reducing the size of the ECB balance sheet (selling assets and reducing loans), sterilizing monetary liabilities, raising obligatory reserves and raising the remuneration of excess reserves in order to induce banks to keep them inactive.  However this kind of operation would go against the grain of German and other Nordic members’ monetary conservatism and is unlikely to be undertaken.   

Hopes have been expressed of a softening of German opposition to the creative transformation of the ECB, or at least of its staunch support for austerity, after the German elections of September 2013.  But there are always frequent elections in every country at the national, regional and/or at the European level (next in 2014), and German opposition does not encourage the notion of a change of mind even in unlikely case of political alternation in power.

5. What now?

The missing integration stages and the missing institutions could be filled in, and convergence promoted more seriously and vigorously than in the past.  It is not clear whether all this could be done far enough and fast enough to resolve the current crisis, but this is unknown and is not a good reason not to try.  Or the Euroarea – as it is being suggested with increasing frequency – should and will split into its member countries, or possibly into a Nordic and a Southern currency areas with different common currencies (it has even been suggested that the two currencies might still be managed by the ECB with different targets and policies). 

By exiting the Euroarea and restoring a national currency, a country would be able to conduct its own monetary policy, presumably reflating its economy and choosing its own desired trade-off between inflation and unemployment. It could, if it wished, choose a Central Bank template still independent but also able to fund government expenditure (like the Bank of England), except that this might not be much use seeing that even by exiting EMU a country, as long as it still remained in the EU would have to adopt austerity policies, imposed on all EU members by the so-called Growth and Stability Pact. 

The exiting country could restore international competitiveness via nominal devaluation of its currency, instead of having to do it via painful and unpopular internal deflationary policies of wage and prices. And it could default – unilaterally or by agreement with its creditors – and bail-in creditors thus reducing its debt, as it could if even it remained a member but without having to agree with the Troika (EC, ECB, IMF) the terms of the bail-in and without ECB and EC (but possibly still with IMF) assistance.  Of course, EMU membership remaining one of the requirements of EU membership, a country leaving the Euroarea would sooner or later, if not at once, have to leave the EU – a non negligible cost of Euro exit. 

Exit from the Euro might be forced onto a country by a bank run, in conditions in which the ECB could not guarantee emergency liquidity assistance: such situation was approached in Cyprus in 2013 when the government initially failed to agree on the terms imposed by the Troika for bailing-in its banks.  At that point the only way to maintain liquidity would be the introduction – by the National Bank or the Treasury – of a national currency, say a National Euro, initially issued at par with the Euro.  Subsequently the new national currency would inflate and devalue, for it would have to float so that the euro does not disappear from circulation due to Gresham’s law.  Indeed the new national currency would probably inflate and devalue at shockingly high rates.  Interest rates in the new currency as a result would increase fast relatively to those of the euro.  Euro exit by several small or just one large country would probably trigger off a run on the banks of other weak Euroarea members and unleash an unnecessary domino effect.

If and when the new national currency regained parity between its floating rate and the rate at which it had been originally issued against the euro, the operation could be reversed: the country could re-join the Euroarea and the National Euro converted back into Euros.  Until then Euro cash would become foreign exchange in the hands of households and companies, current accounts and all debt and credits would be converted into the new currency at par, which by itself would reduce the size of all debt.  International debt technically would remain nominally denominated in Euro or other foreign currencies (at least for the greater part of debt incurred under English Law), but creditors would have to resign themselves to debtors’ default and to de facto bail-in.  Devaluation would improve competitiveness if it was real (nominal devaluation not being offset by higher inflation) and sufficiently large. 

Frequently there have been suggestions that the new national currency should not replace the Euro but circulate in parallel with it.  Unfortunately there are no miracles in economics, a parallel currency would be a messy and doubtful solution.  Considering that internal devaluation and default are options even within the Euro, and that fiscal discipline remains one of the obligations of EU membership even for a country exiting the Euroarea the only advantage of leaving the Euro would be greater freedom to default, at the cost of losing some European support by the EU and the ECB, but still subject to both assistance and conditionality by the IMF.

In conclusion there would not be much of a net gain from Euroarea exit, especially considering that exit with default would bar a country from access to international markets for longer (up to twenty years or so) than orderly default and bail-in as in the cases of Greece, Ireland or Cyprus.

As for Germany (and possibly other Nordic countries) leaving the Euro, as recently suggested by George Soros, their exit probably grossly under-estimates German losses from revaluation of the Nordic vis-à-vis a hypothetical Southern Euro.

6.  “If I wanted to go to Rome I would not start from here”

Clearly if one had wanted to construct a Common Currency Area one should have not proceeded in the way that was followed by the EMU, and certainly would not wish to start from the current state of affairs in the Euroarea.  But starting from here perhaps the best course is to press on as far and as fast as the limited consensus among members will take the weaker and more vulnerable members, towards filling in the missing elements: building some kind of Banking Union; supporting ECB progress towards a de facto proper Central Bank; sustaining political integration and fiscal integration, raising the size of the European Budget; trying to re-launch European investment initiatives and funding European instead of national debt.  

To these purposes it would be expedient to threaten an exit vigorously and increasingly rather than actually leaving the Euroarea.  At the same time a country could, still remaining in the Euroarea, and if democratic institutions were sufficiently robust, mimic with internal devaluation the effects of an external devaluation that leaving the Euroarea would allow – but only if this is regarded as essential to re-launch growth.

Austerity Can Kill You

In 1962 the RCP (Royal College of Physicians) published a Report on Smoking and health  in the UK. Using research by Sir Richard Doll and Sir Austin Bradford Hill, the Report established conclusively the link between smoking - including passive smoking - and lung cancer, other lung diseases, heart disease and gastrointestinal illnesses. It caused a sensation, and received an ambivalent, often hostile response from the media, governments and society. In 1962 tobacco "smoking was omnipresent, accepted, established." "[In the UK] around 70% of men and 40% of women smoked". It was "a world suffocated by the swirling clouds of tobacco" - "in pubs, cinemas, trains, buses, on the streets, and even in hospitals and schools." [from the RCP-Royal College of Physicians report on Fifty years since Smoking and Health – progress, lessons and priorities for a smoke-free UK, 2012]. 

Gradually government action reduced this phenomenon.  By 2012 "... smoking is no longer the norm. Our schools, hospitals, pubs, cinemas and public transport are subject to smoke-free legislation. [In the UK] Only 21% of the population smokes. Government, media and society have largely accepted the need to protect people, particularly children, from much of the harm associated with tobacco smoke." Still, in the UK it took fifty years to achieve such a large reduction in smoking incidence. Smokers are still 21% of the population too many, they represent glaring evidence of either irrationality or addiction or both, and the persistence of vested interests by tobacco and cigarettes producers.

Austerity - aiming at a balanced government budget, reducing expenditure and raising taxation even in the middle of an economic recession - also has been the norm for a very long time, and still is enshrined in the statutory policies of EU and EMU, of IMF and ECB. Yet we have known at least since 1936 (with the publication of Keynes' General Theory), indeed since 1933-35 (the dates of Michal Kalecki's anticipations of Keynesian propositions, see Robinson 1976 and Nuti 2004) that austerity can cause unnecessary, involuntary unemployment of labour and irreversible losses of income and consumption.

In our time and age austerity is more incomprehensible than smoking, were it not for the irrational fear of inflation in the middle of a recession, the generalised addiction to hyper-liberal ideologies and the vested interests of those who think they benefit from labour unemployment keeping workers "in their place". What is worse, austerity today is much more widespread than smoking, it is on the rise and is officially supported by our national and international authorities more than it ever was, while at least smoking is steadily declining not least because of progressive health policies worldwide.

Feasible full employment

In 1943 Michael Kalecki could write that “A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plant to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports”. As long, of course, as such government spending programme is “financed by borrowing and not by taxation”. Kalecki even dealt with the case of highly indebted countries, which also could afford and attract loans to finance government expenditure as long as interest was paid out of a capital levy.

Opposition to such a policy of full (meaning high and stable) employment would be political: "(i) opposition in principle to government spending based on a budget deficit; (ii) opposition to this spending being directed either towards public investment – which may foreshadow the intrusion of the state into the new spheres of economic activity – or towards subsidizing mass consumption; iii) opposition to maintaining full employment and not merely preventing deep and prolongued slumps”. Such objections subside in the slump, and are revived in the boom, thus generating what Kalecki called a "political cycle" and a generally lower average degree of employment over such cycle than otherwise feasible. 

But the feasibility of Kaleckian-Keynesian full employment policies soon ceased to enjoy the support of a "solid majority of economists". The effectiveness of expansionary fiscal policy was challenged on an escalation of arguments.

From deficit spending to expansionary fiscal consolidation

First, it was argued that government expenditure would “crowd out” private investment. This idea neglects the possibility of private investment on the contrary “crowding in” additional expenditure due to the activation of its accelerator effect of higher primary demand. On the contrary, Dennis Robertson (in a talk given at Princeton in 1953) argued that at least some of the additional savings out of the income generated by government spending would not represent a leakage but would be channeled into additional investment, and called this “the Kalecki effect”.

Second, Ricardian equivalence was invoked, tentatively put forward by David Ricardo in the early 19th century and re-discovered by Robert J. Barro in 1974. When government expenditure is raised, funded by borrowing, economic agents discount the future payments of higher taxes that they anticipate having to pay to service the higher debt. The effect is the same as it would be if expenditure was funded directly by an immediate higher tax: lower private consumption offsetting higher government expenditure. (The reader is invited to perform a mental experiment: is this how he/she responds to a fiscal stimulus by the government? I certainly don't).

Third, in the early ‘seventies the theory of so-called rational expectations was introduced by Robert Lucas and others, which was a tendentious misnomer. They should have been called expectations successful by definition. The efficient utilization of all information available, by all economic agents, makes markets efficient. Nobody is ever surprised. Multipliers could then be lower than unity.

Fourth, in the 1990s and 2000s a series of empirical studies propounded the idea of “Expansionary Fiscal Contraction”. They argued that closing the budget deficit via higher taxes and/or lower expenditure can be and by and large is expansionary: see Giavazzi and Pagano (1990, 1996); Alesina and Perotti (1997); Alesina and Ardagna (2010). Blanchard (1990, then Professor at MIT, before joining the IMF as Chief Economist in 2008) explained how this was due to the promotion of private sector-led growth, for the reasons already mentioned above: Ricardian equivalence, increasing confidence, a favourable impact on expectations, declining borrowing costs, a weaker currency. This would hold also for "extreme" fiscal contraction or consolidation.

Growth in a Time of Debt

But the culmination of the expansionary fiscal consolidation thesis, supported by the so-called "austerians"' - "advocates of fiscal austerity, of immediate sharp cuts in government spending" (Krugman's definition) - is a paper by Harvard economists Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt" (2010). On the basis of a new dataset of forty-four countries spanning about two hundred years, incorporating “over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances”, Reinhart and Rogoff find that “the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.” 

The notion that government debt exceeding 90 percent of GDP has a significant negative effect on economic growth became a decisive supportive argument for austerity by national and international leaders, from ex-vice-presidential candidate Paul Ryan, chairman of the USA Congress budget committee, to EC Commissioner Olli Rehn, and authoritative commentators. Thus Keynes's proposition that “the boom, not the slump, is the right time for austerity” was falsified, austerity becoming a good policy for all seasons in highly indebted countries.

The tide is turning

The proposition of "Expansionary Fiscal Consolidation" was immediately subjected to many criticisms and was gradually discredited both on theoretical and on empirical grounds.

Already in November 2008 the IMF Managing Director Dominique Strauss-Kahn took the initiative for a sizeable global fiscal stimulus of the order of 2% of Global GDP. In an interview with IMF Survey Online on 29 December 2008 Olivier Blanchard – by then IMF Chief Economist, and Carlo Cottarelli, Chief of the IMF Fiscal Affairs Department, called for bank recapitalization (time consuming) and monetary expansion (ineffective at low interest rates) and made a strong case for fiscal stimulus: "In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different"… "If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past: deflation and liquidity traps, expectations becoming more and more pessimistic and, as a result, a deeper and deeper recession. If, instead, a fiscal stimulus is implemented but proves unnecessary, the risk is that the economy recovers too fast. Surely, this risk is easier to control than the risk of an ever deepening recession." The IMF raised its lending, increased its own resources and relaxed somewhat its conditionality, but its commitment was intermittent and short lived. The ECB, under the leadership of Jean-Claude Trichet, soon was advocating an early exit strategy from both monetary expansion and fiscal stimulus.

In October 2010, Chapter 3 of the IMF World Economic Outlook examined “the effects of fiscal consolidation — tax hikes and government spending cuts—on economic activity.” It found that fiscal consolidation typically reduces output and raises unemployment in the short term, especially if it occurs simultaneously across many countries, and if monetary policy is not in a position to offset them. Only in the longer term, can interest rate cuts, a fall in the value of the currency, and a rise in net exports usually “soften” but do not offset the contractionary impact.

Baker (2010) criticises Alesina and others (1995, 2006) for their use of cyclically adjusted deficits, while policy driven deficit adjustments behave in a keynesian fashion. He also criticises Broadbent and Daly (2010) on the ground that known cases of expansionary consolidation occurred for very narrow output gaps relatively to the large ones that occur in the current crisis.

The September 2011 IMF Fiscal Monitor warned that “too rapid consolidation during 2012 could exacerbate downside risks”: “Further tightening during a downturn could exacerbate rather than alleviate market tensions through its negative impact on growth”.

In 2012 Carlo Cottarelli stressed the “schizophrenic” attitude of investors with regard to fiscal consolidation manoeuvres: their initial enthusiasm is followed by the fear of consequent recession, so that governments are “damned if they do, damned if they don’t”.

The IMF World Economic Outlook (October 2012) contains a large Box by its Chief Economist Olivier Blanchard and Daniel Leigh arguing that fiscal multipliers have been under-estimated by IMF forecasts and policy documents, by the OECD and the European Commission. Recent IMF research suggests that fiscal multipliers are in the range 0.9 to 1.7, rather than the customary assumption of their being around 0.5. In other words, the cost of fiscal consolidation has been grossly under-estimated. In January 2013 Blanchard and Leigh presented a longer paper expanding their argument at the American Economic Association Annual Conference. However, according to the auhors “More research is needed.”

But more research was already available to the IMF: Guajardo, Leigh and Pescatori (2011) investigated "the short-term effects of fiscal consolidation on economic activity in OECD economies." "We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.”

And Batini-Callegari-Melina (2012)
-  discredit the need for cutting public/social expenditure, for especially in a downturn expenditure multipliers can be up to ten times larger than tax multipliers;
- find absolute values for multipliers of the order of 2.5 instead of 0.9-1.7 as in the IMF World Economic Outlook (2012);
- find aggressive consolidation much more expensive than gradual in terms of GDP.

In May 2013 Jeffrey Frankel criticized various papers by Alesina and other co-authors (Giavazzi, Ardagna and Favero), all claiming that fiscal consolidation is not contractionary in a recession. Frankel’s objections are based on a recent paper by Alesina's original coauthor, Perotti, criticizing the dating methodology used, and pointing out that some of the fiscal consolidations used by Alesina et al. were announced by governments but never implemented. Thus Frankel concludes that Alesina "has not been receiving his fair share of abuse” (Eurointelligence.com, 22/5/2013).

At the same time Alesina and Giavazzi softened very considerably their original position. In May 2013 they actually recommended the Italian government to overstep the 3% deficit threshold for two years – for “that three per cent should not be a taboo” – offering the EC in exchange  immediate tax reductions on labour incomes and planned gradual and permanent expenditure cuts in the following three years. The European Commission would not close the excess deficit procedure for Italy at end-May but should be willing to approve such plan and verify its implementation. At the same time, credit to households and enterprises should resume through bank re-capitalisation conditionally funded by the EMS.

The non-existent 90% threshold

The Reinhert-Rogoff notion of a critical 90% threshold of the debt/GDP ratio was immediately criticized by Irons and Bivens (2010) who argued that causation run backwards, in that slower growth leads to higher debt-to-GDP ratios rather than the other way round. Moreover “there is no compelling reason to believe … that gross debt of about 90% will necessarily lead to slower economic growth… In fact, the greatest threat to economic growth is policy inaction fueled by deficit fears.”

The final blow to the Reinhart-Rogoff 90% debt/GDP dogma came from Herndon, Ash and Pollin (2013), who replicated the analysis by Reinhart and Rogoff 2010 using the original data. Apart from a coding error, which made only a small contribution to their conclusions, Reinhart-Rogoff selectively excluded available data for several Allied nations—Canada, New Zealand, and Australia—that emerged from World War II with high debt but nonetheless exhibited solid growth. And summary statistics were all weighted equally regardless of the duration of high debt and growth performance. Herndon et al. (2013) conclude that “… when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0.1 percent as published in Reinhart and Rogoff”. It turns out that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

Reinhart and Rogoff (2013) admitted some of their errors and omissions but argued that these do not alter their ultimate austerity-justifying conclusion: excessive debt depresses growth. But two subsequent studies have claimed that, on the contrary, slow growth appears to cause higher debt (as Irons and Bivens 2010 had already argued). Dube (2013) finds that growth tends to be slower in the five years before countries have high debt levels. In the five years after they have high debt levels, there is no noticeable difference in growth at all, certainly not at the 90 percent debt-to-GDP level regarded by Reinhart and Rogoff as the threshold of non-sustainability. Kimball and Wang (2013) present similar findings. This point is accepted by Reinhart-Rogoff (2013): "The frontier question for research is the issue of causality."

But suicidal policies persist

Such an amazing, cumulative and final discrediting of the alleged expansionary (severe at that) fiscal contraction approach, and the associated 90% threshold to debt sustainability, does not appear to have had much impact on actual policies, especially on German-led European policies, with EU and especially EMU countries tied to the "suicide pact" (Joseph Stiglitz) of so-called Growth and Stability.

The latest EU Fiscal Compact or TSCG – Treaty on Stability, Coordination and Governance – demanded a balanced budget provision to be inserted in member states’ national constitutions, subject to a maximum structural deficit of 0.5% of GDP. There are penalties and automatic adjustments in case of inobservance, subject to the verification and rulings of the European Court of Justice. Financial assistance programmes under the ESM – the European Stability Mechanism that come into operation in March 2012 – from March 2013 are conditional on prior TSGC ratification.

From 2015 countries exceeding the statutory debt/GDP ceiling of 60%, required by both the Maastricht Treaty and the Stability and Growth Pact, are expected to reduce the excess debt by 1/20 of the current gap every year until the ceiling is reached – which for a country like Italy at over 130% involves a budgetary surplus of over 3.5% a year for 20 years.

The IMF (2013) Report criticized the Troika’s [EC, ECB, IMF] handling of the Greek crisis over the last four years, but concluded that all was for the best and their policies would not be any different today in the same circumstances. In July 2013 a conference of German economists advocated that a debt/GDP ratio of 90% - Reinhart and Rogoff’s fated but dubious threshold – should trigger off automatic debt re-structuring and bail-in.

Austerity is like compulsory smoking

In conclusion, the Keynesian-Kaleckian view of capitalist dynamics is alive and well. The IMF itself has been reviving it and providing theoretical and empirical backing for it, by stressing the high cost of fiscal consolidation, but at the same time continuing to officially recommend and impose such fiscal consolidation. While providing the strongest case for a fiscal stimulus, IMF research is being used even by their more enlightened officials to recommend gradual rather than abrupt fiscal consolidation, instead of the fiscal stimulus that would be appropriately needed. Obstacles to full employment policies are still of a political nature today (resistance to a capital tax to service exceptionally high sovereign debt, in addition to the drive to maintain workers’ discipline through unemployment). The time for a Kaleckian (and Keynesian) over-due revival is now, but until it takes place we are all condemned to suffer from the impoverishment and the unemployment caused by the deepest, man-made, economic crisis in human history.

                            REFERENCES 

Alesina, A. and R. Perotti (1995). “Fiscal Expansion and Adjustments in OECD Economies”, Economic Policy, 207-247.

Alesina, A., S. Ardagna, and F. Trebbi (2006), “Who Adjusts and When? The Political Economy of Reform”, IMF Staff Papers, V. 53 Special Issue, Washington.

Alesina Alberto and Francesco Giavazzi, (2013), “Crescita, una proposta alternativa: Quel tre per cento non sia un tabù”, Corriere della Sera, 17 May.

Baker Dean (2010), “The Myth of Expansionary Fiscal Austerity”, CEPR, October.

Barro Robert J. (1974), “Are government bonds net wealth?”, Journal of Political Economy 82(6), pp. 1095-1117.

Batini Nicoletta, Giovanni Callegari and Giovanni Melina (2012), “Successful Austerity in the United States, Europe and Japan”, IMF Working Paper 12/190, July, Washington.
Blanchard Olivier J. (1990), “Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries: A Comment”, NBER Macroeconomics Annual Vol. 5, (1990), pp. 111-116, MIT Press, Cambridge, Mass.
Broadbent, B. and K. Daly (2010), “Limiting the Fall-Out from Fiscal Adjustments”, Goldman Sachs Global Economics Paper 195.

Cottarelli Carlo (2012), “Fiscal Adjustment: Too Much of a Good Thing?”, Posted on January 29 by iMFdirect.

Dube Arindrajit (2013), “A Note on Debt, Growth and Causality”, Draft forthcoming, May 30.

Giavazzi Francesco and Marco Pagano (1990), “Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries”, NBER Macroeconomics Annual Vol. 5, (1990), MIT Press. Cambridge Mass.

Giavazzi Francesco and Marco Pagano (1996) "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.

Guajardo Jaime, Daniel Leigh and Andrea Pescatori (2011), "Expansionary Austerity: New International Evidence", IMF WP/11/158, Washington. don Thomas, Michael Ash and Robert Pollin (2013), “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Political Economy Research Institute, Working paper n. 322, April 15, Amherst.

Irons John and Josh Bivens (2010), “Government Debt and Economic Growth: Overreaching Claims of Debt “Threshold” Suffer from Theoretical and Empirical Flaws”, Economic Policy Institute, 26 July, Briefing Paper #271.

International Monetary Fund (2010), “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation.” World Economic Outlook, Chapter 3, Washington.

International Monetary Fund (2013), “Greece: Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement,” June, Washington.

Kalecki Michal, (1933) Proba teorii koniunktury [An Essay on the Theory of Business Cycle], Instytut Koniunktury I Cen, Warsaw. As “Outline of a theory of the of Business Cycle”, in Kalecki, 1971.

Kalecki Michal (1934), “On foreign trade and ‘Domestic Exports’”, translated from Polish in Kalecki (1971).

Kalecki Michal (1935), “A macrodynamic theory of business cycles”, Econometrica 3, July, pp. 327-44.

Kalecki Michal (1943), “Political aspects of full employment”, The Political Quarterly, p. 332-331.

Kalecki Michal (1971), Selected essays on the dynamics of the capitalist economy 1933-1970, CUP, Cambridge.

Keynes J. Maynard (1936), The General Theory of Employment, Interest and Money, London, Macmillan.
Kimball Miles and Yichuan Wang (2013), “After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth”, QUARTZ, 29 May.

Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers,” IMF Working Paper, January 2013.

Lucas Robert (1976), "Econometric policy evaluation: A critique", Carnegie-Rochester Conference Series on Public Policy 1 (1), pp. 19–46.

Nuti Domenico M. (2004), “Kalecki and Keynes Re-visited”, in Zdzislaw L. Sadowski and Adam Szeworski (Eds), Kalecki’s Economics Today, Routledge, London and New York.

Reinhart, Carmen M. and Kenneth S. Rogoff (2010), "Growth in a Time of Debt", NBER Working Paper No. 15639, January.

Reinhart, Carmen M. and Kenneth S. Rogoff (2013), “Responding to Our Critics”, The New York Times, 25 April.

Robinson Joan V. (1976), “Michael Kalecki: a neglected prophet”, New York Review of Books, 23, 4 March, pp. 28-30.

A CORRECTION:

In my answer to Branko (see Comments to this post) I wrote:

"If the size of the fiscal multiplier (which is the weighted average of the multipliers applicable to various expenditure cuts and tax rises involved) is greater than the current debt/GDP ratio, as the latest IMF researchers suggest, then fiscal consolidation raises such a ratio."

I should have written:

"If the size of the fiscal multiplier (which is the weighted average of the multipliers applicable to various expenditure cuts and tax rises involved) is greater than the inverse of the current debt/GDP ratio, as the latest IMF researchers suggest, then fiscal consolidation raises such a ratio."  

Berlusconi Is Ineligible

In an article in Sole-24 Ore of Sunday 26 May 2013 (Ineleggibilità e Democrazia dei Partiti: Le ragioni legali che i saggi non svelano) Giuliano Amato adds his voice to those such as Valerio Onida, Luciano Violante, and now no less than the new leader of the PD, Gugliemo Epifani, who oppose the notion of Silvio Berlusconi's non-elegibility to Parliament, alleged by many on the ground of his conflict of interest as beneficiary of economically significant TV concessions by the State. 

The eminent jurist and statesman rejects the argument used by others that, since the relevant legislation has not been invoked for twenty years, it cannot begin to be applied now. It would be like arguing, he writes, that, if a serial killer has not been condemned for his first six murders, he should be acquitted once he is caught for his seventh murder. The trouble, Amato argues, is that the Electoral law of 1957, which is still in force, is not as clear-cut as the law on murder.  That law declares ineligible, among others, "those who on their own account [in proprio] or as legal representatives of companies or enterprises are involved with the State by concessions or administrative authorisations of considerable economic significance [in qualità di rappresentanti legali di società o di imprese risultino vincolati con lo Stato per concessioni o autorizzazioni amministrative di notevole entità economica]...".  Berlusconi, argues Amato - as has Valerio Onida, a former President of the Constitutional Court and one of Napolitano's "wise Men" - is neither the legal representative of such a company, nor a direct concessionary, even though he is the uncontested main shareholder, the "boss, l`ideatore e il regista".  According to the Italian Constitution, norms that limit any rights cannot be interpreted extensively, for in that case the hostility towards laws ad personam would be replaced by a peculiar predilection for interpretations ad personam.  Therefore, Amato concludes, Parliament was right in applying , on purely legal and not on political grounds, a literal interpretation of the law. If main shareholders of concessionary companies were intended to be ineligible an amendment to that effect should have been approved beforehand; many such amendments were presented over the years but, for better or worse, were never approved. 

Amato explains that in his approach he is giving voice to his own "jurist's soul".  By the same token, let me voice my own "economist's soul" on this matter. 

A shareholder holding a 100% share in a company that is granted an economically significant State concession is literally undistinguishable to all intents and purposes from a person holding such a concession on his own account.  The application of inelegibility to a 100% shareholder in such a company would not violate either the spirit or the letter of the law.

At the other end of the range of conflicts of interest specified by the law, a legal representative of a company that enjoys the same state concession will have a significantly reduced interest in that concession, with respect to a 100% shareholder, and therefore a reduced conflict of interest.  In fact such a legal representative would benefit from the concession only if, and to the extent that, his compensation is enhanced by the company profitability contributed by the concession. This could happen, for instance, through bonuses related to company performance, or through the allocation of company shares and/or options on favourable terms.  Let us say that the legal representative has a conflict of interest with the State equivalent to that of a shareholder holding x% of company shares, where that x% can and normally does represent a minor shareholding fraction in the company in question.

The position of a major shareholder in a company that is granted a significant State concession is clearly intermediate between that of a concessionary on his own account (or of a 100% shareholder in a concessionary company) and that of a legal representative whose benefit is a small fraction of the concession profitability.  Therefore the ineligibility of a major shareholder in a concessionary company is not in any sense an "extensive interpretation" of a rule to a different category of subjects for which that rule was originally intended, violating the Constitution, but simply an "inclusive interpretation" that applies the same rule not only to the extreme cases contemplated by the law but also to cases intermediate between the extremes. As if the law punishing serial murder and maiming by shooting was also applied to serial murder by strangulation.

Some might regard my argument as casuistic, indeed jesuitical. Anybody who might think so should consider that the same contention could be raised against a literal interpretation of the rule that glosses over the macroscopic conflict of interest that Silvio Berlusconi has enjoyed for the last twenty years.

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.