China

Cool calculation not enough for Europe

2012-05-31Asia Times

BEIJING - The four major financial institutions of Italy - Unicredit, BancaIntesa, Generali and Mediobanca, together controlling some 60% of the Italian economy and with assets well in excess of 1 trillion euros (US$1,25 trillion) - presently have a combined capitalization of less than 50 billion euros. Because they have investments in one another and their stocks are very dispersed, one can reasonably think that with less than 10 billion euros in well-planned acquisitions in the market, one could gain control of them and thus power over all of Italy.

These are not simply the numbers for the de facto conquest of Italy, but also numbers illustrating the fragility of the country - and thus of the euro. A bank run that could spread, like a mortal flu, from Greece westward could first hit Italy, the country whose troubles would inevitably drag down the rest of Europe and of the world. As these financial institutions are leading buyers of Italian Treasury bonds, any spike in the bonds' interest rates or further drop in the stock prices of the four could easily bring Italy to its knees.

Italy already faced this problem last year. After a torrid summer of market speculations that shook the euro and the world, Rome and the European capitals found Prime Minister Mario Monti, the man who could take the situation into his hands. However, if a new crisis were to hit Italy, the country would have no one better than Monti to appoint as prime minister to regain international trust. In the summer, with fewer trades in the market, minimal movements can have a huge impact up or down. Last year, the hot summer burned the Silvio Berlusconi government: will this year burn Monti and the euro?

The situation is very uncertain. On May 26, the International Herald Tribune reported [1] that money is starting to leave Spanish banks, as common people in Madrid believe their country will follow Greece out of the euro. On May 23, on Il Corriere della Sera, Massachusetts Institute of Technology and Harvard economists Francesco Giavazzi and Alberto Alesina warned that a bank run originating in Greece could crash the euro.

Two days earlier, in the Financial Times on May 21, chief economics editor Martin Wolf argued that the expulsion of Greece from the euro would have a bigger global impact than the bankruptcy of Lehman Brothers, which started the 2008 financial crisis. They all pleaded for major steps toward greater fiscal and de facto political union of the euro zone.

They could be wrong, and the exclusion of Greece from the euro perhaps could be digested - or this is just an empty threat to scare the Greeks into the necessary fiscal discipline. But in any case, the idea of the iron-clad unity of the euro has been dented, and markets can now operate to effectively break the currency by working on the different interest rates of state bonds, as they have been doing, or on the weak banks in the area, roughly as they did in 1992, when they brought down the European Monetary System.

They can do that with a certain degree of confidence because the European Central Bank (ECB) does not have unlimited firepower, and there is not enough money in the world to save the weak links (countries) of the euro from a concentrated attack. Rich and well provided for as it may be, the ECB is not backed by a central European fiscal institution, and it cannot print money at will to stave off any panic or speculation runs.

If these attacks were to come, only the ability to print money at will could save the day. This implies some form of political union, which many countries - including those in the euro's driver's seats, Germany and France - have been reluctant to push forward.

This is occurring for many reasons, of which the main are, in a nutshell, distrust of the discipline of their fellow Europeans and distrust in their own ability to manage their fellow Europeans. The loss would not only be for Greece, Spain or Italy, but for Germany, too. If Italy, the second industrial country in Europe, were to leave the euro, the value of the German euro would dash up, making German exports less competitive with Italian ones, and this could drag down the whole German economy.

Then is Germany playing chicken with Greece and the world? One hopes so, and hopes that the new Greek elections will turn the country in the direction of greater discipline.

But what can a wily Greek politician do now? He could preach to his people that he wants to keep Greece in the euro at any cost. If he manages to do that by bargaining for the best conditions, he could claim victory because he has bent the Germans to his will; if he doesn't, he could blame the selfish Germans, who kicked Greece into misery while putting the whole world into jeopardy. He would win either way, so any politician worth of this name could play in this way.

So why should he behave differently since the country seems lost anyway? If it stays in the euro, life will be hard; but if it moves out, life will be even harder. But all in all, there is no hope of a better tomorrow, except in a very distant future. These are among the arguments leading some Italian economists, for instance Paolo Savona, to suggest that Italy should prepare to exit the euro.

With an orderly exit, it could be easier to protect key Italian assets like the four major financial institutions, which otherwise would further depreciate and become targets for cheap international acquisitions. The big four could then be bought for 2 billion euros - not even the 10 billion euros projected earlier.

Then the real question in this crisis at this moment is not figuring out the numbers involved in the problems or the practical recipes to solve them, say by building institutions strong enough to keep Europe together but federal enough to hold on national prides.

There is no time and commitment large enough for this. The real question is about how to find the trust to be European - not German, Italian, French or Greek - and to create the hope for a better, common tomorrow.

Trust and hope can't be a matter of arid calculations. Certainly, hard facts have to be taken very seriously and have to be factored in. Otherwise, as Nobel Prize-winning Canadian economist Robert Mundell said, one becomes Jacobin, Utopian. But there is always a leap of faith in jumping into any solid investment or business or political venture, and one takes it with a hazy gut feeling of trust and hope.

Perhaps it is from this position that we should start considering the present predicament, and at this point, we should stop writing. But for the sake of argument, here is a possible quick solution to the crisis, which could stem the tidal wave coming from Greece.

Germany and France have to relinquish parts of their national state powers to the European Commission, which then must have greater clout for intervention. It is understandable that now Germany, as it will ultimately be called on to foot the bill, doesn't trust a profligate foreigner with its own finances and the finances of Europe.

Then perhaps there could be an agreement for a German president of the commission who is a little less "German" and more European, for instance a member of the Green Party in the European Union parliament. This man (or woman) should inspire trust and give hope to all Europeans, and swiftly move to put in place the European measures to contain the crisis and restart the European economy.

Will German Chancellor Angela Merkel spearhead it? She is the one who can do it. People who know her say she is a cold calculator, a physicist by training, and she is waiting for the right moment to yield to a political compromise that extracts the highest return for her and her country.

Here, with limited information, we can't tell. We know only that if Germany had agreed to a plan to save Greece two years ago, Europe and the world would now be better off and have paid less, and that now moving into the summer, the dangers of many things going wrong are bound to increase.

Note
1. No bank run yet, buy money is starting to leave Spain, Landon Thomas and Raphael Minder, International Herald Tribute, May 26 2012.  (2012-05-31 Asia Times)

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