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     May 10, 2012

Time is tight as Europe quakes
By Francesco Sisci

BEIJING - Stock exchanges worldwide fell on Monday following European election results that punished the rulers who had agreed to the German-backed austerity measures.

In France, Francois Hollande won the presidency by promising to reverse many policies of his predecessor, thus scaring markets over the uncertainty about what will come. In Greece, the long-time fuse of the euro crisis, elections simply didn't produce any clear result and had the country teetering on the brink of political chaos.

Italy, where there were only limited administrative elections, provided possibly the worst warning sign. An executive from a large industrial company, Ansaldo, was shot in the legs in an


action bearing eerie resemblance to those of the Red Brigades, the terrorists who plagued Italy in the 1970s and 1980s.

It is not yet clear if Germany and the economically virtuous northern countries, so far scared of being dragged into the crisis of their neighbors, will reconsider the draconian economic policies they have been imposing on the rest of Europe and will agree to start a careful, expansive financial policy that could rekindle growth in less virtuous European Union (EU) countries.

In any case, short of a new political and economic compromise between France and Germany, the two main pillars of Europe, the euro could easily wobble off the brink, dragging the rest of the world economy with it. In this case, Berlin could also be the first crushed under the rubble of the ensuing economic earthquake.

Germany's longstanding worry with expansive measures granted to its neighbors is basically an ethical concern. The Greek case proves to them that money conceded to restart the local economy could be used just to line politicians' pockets and expand unaffordable and inefficient welfare schemes. To check those expenditures, Germany or the EU should take the political reins of those countries - something that Berlin is apparently unwilling to do for two reasons.

One, it is scared of ruling these non-German countries with German methods (the only ones, naturally, Germans know), something that could rekindle never-forgotten anti-German sentiment in half of Europe. Two, it is also scared of giving up power to the EU bureaucracy, pervaded by, in German eyes, inefficient officials who could run Germany according to ineffective EU rules, unfit for Germany.

Moreover, whereas the failures of Germany's neighbors should permit in theory a "German invasion of Europe", why should economically sound Germany be punished with a "EU invasion" that would hurt its political independence and could corrupt Germany to the level of the unethical and not virtuous nations?

It is hard to get out of this political and cultural deadlock, and so far the only way forward has been by trying to wiggle some elbowroom for the survival of the euro zone - but with no real long- or medium-term perspective. Time is running short, and the shots in Genoa do not bode well for the situation.

Curiously, in all this debate, one crucial issue, which has been raised from time to time, has failed to draw due attention. In Italy, the EU country with the largest state deficit and thus the one more likely to start a real euro meltdown, economists like Paolo Savona and Francesco Giavazzi have suggested the possibility of the sale of state assets to achieve a one-time drastic cut in the total amount of outstanding debts. This would free resources from the payment of interest on debts and get some cash for productive investments.

The proposal has been bitterly resisted by the political elites, who fear the loss of their power, which is upheld by their control and de facto possession of those assets. It is hard to win them as they claim the sale of state assets would be tantamount to making the rich richer and the poor poorer - and would jeopardize the power of the state. Here, ideology, the right's concerns about national strategic missions, defense of old privileges, and populist slogans are all cast in one mold and very hard to beat.

Yet perhaps, this is also a problem of knowledge and of people's rights. In California, Bill Mundell - the son of Robert Mundell, who won the Nobel Prize for economics and is known as the "father of the euro" - suggested in a recent article about California [1] that it should be first important to know what the state's assets are and how much they are worth, with a state balance sheet to assess them. This lesson could then be moved from California elsewhere - to Italy, for instance.

People have the right to know this, and it could very likely help in the current predicament, as the markets would feel more confident once they know that, notwithstanding 1.9 trillion euros (US$2.5 trillion) in Italian debts, Italy is not an economic wasteland. Moreover, it could also help create a popular sentiment of empowerment for the common people, who have been feeling like innocent victims of the mess that politicians created for them.

They would know what the state has (that is, they have), and only after that could they decide what to do with it: sell it, don't sell it, how to sell it, sell it in part or as a whole, et cetera. This would not be the dreaded fire sale of state assets, but a more tranquil Italy could buy some time for Italy and the other European countries to assess the new political reality following the recent elections.

Could the idea of the son then help to save what the father contributed to creating?

It is not clear, but it is clear that France and Germany will take longer than just days to establish a new political compromise and in the meantime anything could happen.

1. See here.

Francesco Sisci is a columnist for the Italian daily Il Sole 24 Ore and can be reached at fsisci@gmail.com

(Copyright 2012 Francesco Sisci.)

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(24 hours to 11:59pm ET, May 8, 2012)



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