Eichengreen: Show Italy Tough Love
Here’s a bit of bald Twitter self-promotion for you:
Turns out that the interview in question is of UC Berkeley Prof. Barry Eichengreen himself, conducted by Die Welt writer Tobias Kaiser. (That link in his tweet opens a PDF of the interview. Of course it is in German, but no need for Google Translate when you’ve got the EuroSavant!)
Well, who among us who publishes on the Net can ever be immune from such cross-posting temptation? Besides, he has some interesting things to say on the current transatlantic debt crises, and his piece was even retweeted, and so implicitly endorsed, by Doctor Doom himself.
Prof. Eichengreen emphasizes that, whatever else might be going on currently in the Eurozone, Italy and Spain must now be the focus of policy-makers’ attention. That is not so insightful per se – German Chancellor Angela Merkel is in Paris today to meet with President Sarkozy and presumably the public finances of those two ailing Mediterranean states will be high on their agenda. (Not that top-level officials from either will be present; that’s not always necessary when the EU’s two big powerhouse-states are having discussions.)
Rather, the interesting nugget from Eichengreen’s interview is his “tough love” stance towards Italy. Economic growth there is vital for resolving that country’s fiscal problems, and by extension for averting a general economic crisis and euro-collapse. The problem is that the Italian economy has not exhibited very much growth in the past few years. Something drastic has to change there, meaning that there have to be substantial reforms in the way the economy is run, and Eichengreen is confident that the Italian economic elites realize this and are ready for same.
But of course it is the political types – currently with Silvio Berlusconi at their head – who have to be convinced to carry through any such reforms. What if they refuse? Then, according to Eichengreen, the European Central Bank should be ready to withdraw its support, by ceasing its purchase of Italian government bonds.
Of course, as he recognizes, this will inevitably lead to debt “rescheduling,” another way of expressing the concept of default. But Eichengreen does not flinch from the possibility; rather, he says that other Eurozone countries (especially Germany and France) should get ready for it in the sense of getting their banks prepared to absorb losses from any Italian default, by building up their capital. They probably have at least until the end of 2011 to do this, in the worst case.
On the one hand, it is probably true that Italy won’t be able to dig itself out of its mess without some thoroughgoing reforms. But on the other, Prof. Eichengreen is being rather blasé about what happens if the ECB’s bluff is called so that it might feel its credibility requires it to stand aside and allow an Italian default. Maybe that sort of thing is contemplated a bit more easily from way over on the Pacific coast.
