Cool calculation not enough
for Europe By Francesco Sisci
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.
Francesco Sisci is a
columnist for the Italian daily Il Sole 24 Ore and
can be reached at fsisci@gmail.com
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