November 18, 2011

TRNN Debate on Austerity and the Eurozone

Paulo Manasse and Mark Weisbrot debate the Euro crisis, post Berlusconi and Papandreou
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TRNN Debate on Austerity and the EurozonePAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Jay in Washington. In Europe, the crisis continues, perhaps continuing to unravel. But that will be the subject of today's show. In Greece, Prime Minister Papandreou is out, Lucas Papademos is in. He's a former VP of the European Central Bank. And in Italy, Berlusconi is out and Mario Monti is in. Monti is a former head of competition policy at the European Commission. He's also the chair of the European Trilateral Commission, and he's an international advisor to Goldman Sachs and Coca-Cola. Now joining us to talk about the underlying structural issues in Europe and how--the European crisis and the eurozone and how they should be faced are Paolo Manasse. He's a professor of macro economics and international economic policy at the University of Bologna. He worked as a consultant for the World Bank, the Inter-American Development Bank, and was a consultant at the IMF. And Mark Weisbrot. He is codirector of the Center for Economic and Policy Research in Washington, DC. And he joins us--he's also a regular columnist at The Guardian. And he joins us from Washington. Thank you, gentlemen, for joining us.



JAY: So, Paolo, let's start with you. Both of these new leaders seem quite committed to the bailout packages, to the policies of austerity. What is your opinion on how they are likely to approach the crisis?

MANASSE: Well, I think that starting--let's start from Italy. I mean, Italy is coming out from, you know, almost 15 years of Berlusconi, so this is a real big, big, big change. And what Mario Monti will be trying to do with this technical government is to, you know, pull enough consensus, try to pull enough consensus from Parliament to share the sacrifices [incompr.] that should lead to two objectives. One is fiscal consolidation. We need to, you know, decrease our debt. It's very high. It's 120 percent of GDP. And two, it has to kind of jump-start growth, because the real problem in Italy--and that's, you know, kind of typical, I mean, and very peculiar--is that in the past 15 years, you know, GDP has been completely flat. We have almost no growth in terms of per capita income, actually. We went back to about 15 years ago after the crisis. And it's how do you do this? It's not going to be easy. But the only way we could possibly, you know, achieve these two objective is to try to kind of have some sort of, you know, sharing of the sacrifices. And this is why he's trying to pull, you know, people from different sides of politics and to have at least the support from two opposite parties. This is going to be difficult, because remember that unlike Greece, Berlusconi was very controversial. For a supporter, he was a sort of messiah, and for, you know, his, you know, opponents, he was some sort of, you know, mafia leader. So to try to pull together these two coalitions is going to be very, very difficult. And that's the big problem Mario Monti's facing. In Greece, the problems are a different nature. Greece is coming out from at least three or four years of huge cuts, huge sacrifice. The GDP is going down the drain. Unemployment is soaring. And, you know, Greece is in terrible shape. It's already in default, technically. I mean, you know, the debate about, you know, how much--how large the haircut will be, you know, if it's going to be 20 percent of outstanding debt or 50 percent is--or even more. So it's--the situation is already totally deteriorated. And so Greece is what--if things go wrong with Monti, Greece is what Italy would look like in a couple of years. But we are not there yet.

JAY: Right. Mark, what's your take?

WEISBROT: MANASSE: Well, I have a different take on it, because, you know, I agree that people are worried that the scenario that has unfolded in Greece could easily--could unfold in Italy. In fact, that's what the markets are really--been panicking about, because-- .But the problem is not that Italy won't enact the reforms that the European authorities are trying to force upon them; the problem is that they will. If they do, that is how you got the Greek scenario. The Greek government cut the budget, tightened their budget, and that slowed the economy, and so then revenues to the government fell and they had to cut even more in order to meet the targets that were forced upon them. And so they went into a downward spiral. Their interest rates on their debt went up, and that added to their costs. And so this is exactly--. And then, of course, now they're shrinking at 5.5 percent annually. Their debt is 166 percent of GDP. It was 115 percent, which was actually manageable, when they started this program back in January or May 2010. So if Italy goes down the path that the authorities--which are the European Union, the European Central Bank, and the IMF--are forcing upon them, they could very much end up like Greece. And that is why you see their yields already soaring past 7 percent in the last week, which adds quite a large amount, actually, to their interest burden. And, by the way, that's what really matters. It isn't just the percent of GDP that's debt; it's how much they're paying in interest. So this is really--it's the policies that are completely wrong. It's not so much a debt crisis as a crisis of bad policy coming from the highest levels and being forced upon the peripheral countries, including Italy, Greece, Spain, Portugal, and Ireland.

JAY: Paolo?

MANASSE: Well, I think--I agree to some extent, but I don't--really don't think that Italy will follow this path, and for a number of reason, first, because it doesn't have to, in the sense the Italian problems are very different from Greece. I mean, our budget, in terms of primary budget, that is, excluding interest payments, is in balance. So it's basically zero. It's a small surplus. So, of course, when you add interest, then it goes, you know, to a 5 percent deficit. But 5 percent is not 32 percent, as was Greece when--at the start of the crisis. So if you manage to reduce the interest costs, our balance is much better--in much better shape than Germany and France. So the real issue there is to convince the markets that some of the structural reforms, you know, will be done for real. And the social reform are not just wide budget cuts. It's something very different that Monti will do. There will be some reform of the pension system. And remember that in Italy there are these sort of seniority tensions in which thousands of people, you know, retired in their early--I mean, late 30s, and this is very unequal. There are reforms of a labor market where we have kind of people which are kind of industry worker, about 50 years of age, more or less totally covered against anything that could ever happen to [them]. They cannot be fired. Nothing can happen to them. And we have, you know, young people with no protection whatsoever, total flexibility, no pension, no guarantees, no unemployment subsidies, and so on. So this--and then we have a lot of rents on the economy. We have the association of journalists, professors, taxi drivers, lawyers, and you name it. They are, you know, defending their own jobs with teeth, and they are kind of, you know, putting up huge barriers to competition. So this is the sort of thing that Monti will have to do. The budget cuts will be there, but they don't need to be huge, as far as [so long as] markets see, perceive that this reform measure--that to some extent are measure that are kind of increasing equality, because Italy's a very unequal country, particularly the young and the old and the, you know, old and young generation, the [crosstalk] that is the sort of thing he'll have to do. And once he convince the market, I think as interest rates will go down eventually, then no cuts will be--actually be needed, because, as I said, the primary balance is already in a small surplus.

JAY: Mark, so what do you make--that these are the issues that Monti has to address?

WEISBROT: No, I really don't agree. I mean, sure, some reforms are necessary. We need reforms in the United States, too. You know, it's like the right wing here argues that you have to cut Social Security and Medicare in order to get us out of the slow growth, high unemployment trap that we're in. That's not true. I mean, they can do anything they want with regard to pensions in Italy. It's not going to make any difference in terms of--Europe is already sliding close to [inaud.] They just lowered their projections to 0.5 percent growth for next year. And Italy's projections actually have been lowered since they agreed to the austerity. The IMF has lowered their projections in the last six months because of the $75 billion that they're going to cut, or 1.7 percent of GDP, over the next year. That will slow the economy. That will make their problems worse. And the other reforms, some of them are good, some of them are bad. You know, we don't really need to--it's not going to help to cut pensions in Italy and it isn't going to convince any markets that they should have confidence. The markets are looking at whether they're going to be able to--whether, you know, they're going to be able to pay their debt, maintain their debt service, and--or whether they're going to end up like Greece. And they're not--I agree that they're not--probably not going to end up like Greece, because they won't do the things that Greece did. There'll be a lot of resistance to it. And so hopefully they'll come out of it. But right now, they're doing quite badly, and the policies that they're adopting are making it worse. That's the basic national income accounting of the situation.

JAY: Paolo, what do you make of that, that the fundamental thesis that austerity is needed in order to create confidence for the bondholders and the banks, that that's the fundamental problem, that policy, it actually leads to deeper recession? I think that Mark is more or less making that point.

MANASSE: Yeah. But you have to remember--I mean, I get this point. I mean, it's an old point. But we are starting from a situation in which the ratio of revenues, tax revenue to GDP in Italy is around 47 percent and the ratio of government expenditure to GDP is around 50 percent. Now, we're not talking about the US, okay? We are talking about a country which has a huge role of the state, in which, you know, major [sic] in cities run the water supply and the electricity, and they do it very, very badly. I mean, the cost of electricity, of gas, of water in Italy is huge. And this leads to a lot of corruption in the country. So we're not talking about squeezing. You know, we are talking about taking out of the politician, you know, plate a lot of waste. This is what we are talking about. And in terms of solvency, I agree that this is the key, but, you know, solvency, from a technical point, depends on basically three parameters. One is the primary balance and the ratio of primary [incompr.] to GDP. And that's fine for Italy, because, as I said, it's almost--is in balance. Then you have two key other issues. One is the real interest rate, which is now going on the roof, you know, through the roof. And the second--the third, actually, parameter is the rate of growth. So what Monti will have to do--and he knows it very well--will be to convince markets that, you know, these reforms will actually--will be able to increase the rate of growth, which have been stagnant over the past years. And if that happens, then interest rates will come down, even without huge adjustment in the primary deficit. So the real issue is to boost growth, to try to convince market that, you know, this is something that will work, because if that happens, then solvency will be taken care of. Remember that just one year ago, the situation in Italy was not that different in terms of fundamentals. You know, GDP was 120 percent, as it is now, you know, and the primary balance were more or less the same. What was different? The difference was the credibility of the government was not tainted yet. Now Berlusconi has totally lost his credibility, not only for the sex scandals and these sort of things, but his lack of management of the economy. So that was, you know, something that changed and drove us interest rate from--you know, the spread from 2 to almost 6 percent, to 6 percent. So that means that, you know, with the same level of fundamentals, you may achieve--you know, things maybe go very bad and can, you know, possibly go back to where they were one year ago. That is what Monti's doing. He knows very well that a kind of very--straitjacket will lead the economy into depression. But I think he will avoid this mistake and will try to--you know, to address the solvency problem and try to push the rate of growth up. That [is] what I think he will try to do. But that is not going to be easy, because, as I said, you have to, you know, go under interest of very powerful lobbies. The lawyers in Italy, they have--the Parliament is full of lawyers, even [incompr.] lawyers of Berlusconi, you know, then, you know, all sort of profession needs to liberalize very badly. And there is also a question of efficiency and, you know, privatizing all this waste of resources that is kind of [crosstalk]

JAY: Well, Paolo, just to make sure I understand, so you think that the big issue facing Italy actually is privatization. That's where the efficiencies are going to be found.

MANASSE: No, no, no. No, no. The big issue is the rate of growth. And the other big issue is--.

JAY: But how do you increase growth? What's the fundamental strategy for that?

MANASSE: Yeah, that's going to be the tough thing, because, you know, to raise growth, you have to kind of remove all sort of things that kind of inhibit growth. And what are these things? In Italy the situation is that you have plenty of lobbies that defend their own interests with their teeth. I mean, the unions is not the one particularly tough on that, but you have lawyers, you have, you know, notaries, you have taxi drivers, you have, you know, people in--who do small trades, you have a powerful confederation of industries. So you have all this sort of--all sort of barriers to entry in those market that make it very, very difficult, for example, to young people to find a job.

JAY: Alright. Paolo, let me get Mark in. So, Mark, I think you agree on one thing together, which is growth is the issue, but I don't think you have the same point of view of how to get to the growth.

WEISBROT: No, I don't see anything in this story that promotes growth, really. Whether you're cutting pensions, making it easier to fire workers, some kind of reform of taxi driving, that's not going to--you're not going to get growth out of that or from privatization. I mean, the big threat to Italy [incompr.] two threats to Italy right now. One--or three, really. One is the actual austerity, which, if you cut 3.9 percent of GDP out of the budget, which is what they're pledged to do over the next couple of years, you're going to slow growth or put the economy into recession. Two is what they're doing to Europe overall, which is also putting the regional economy closer to recession. And three is the interest rate on those bonds, which is causing a financial crisis in Europe. And that's, by the way, not--that's not going to go away just from Italy adopting these reform. That's a problem of the eurozone. That's a problem--. How did these bond rates go up so high? It wasn't anything Italy did. It was Greece and the imminent default on Greece, which, by the way, they haven't taken care of either yet. They're going to need at least 80 percent haircut there, and they're not even close to that. So this is a problem of the European authorities making a mess out of the regional economy. That is number one. And Italy making their economy worse is number two. And the austerity, of course, is the big part. And these structural reforms, yeah, okay, fine, some of them, as I said, you know, most of them are bad, just to hurt people more. Some of them will make things better. You know. And--but they--none of them are going to address the most immediate problem, which is threatening not only Europe, but actually the whole world economy right now.

JAY: So, Mark, just very quickly: so if the objective is growth, what should be done?

WEISBROT: The most important thing--well, for the European authorities, which are making these decisions, by the way--it's not the Italian government, really. They're just being, you know, pressured to comply with what the European authorities are deciding. And they need to restructure the Greek debt and really write off enough so that it's sustainable, so they don't have to default. And they have to guarantee the interest rates on Italian and Spanish bonds, which the ECB can do but refuses to do. They refuse to take any of the measures that our Federal Reserve has taken in the United States which could resolve that problem. And then they have to have--they have to actually have a stimulus instead of--the reverse is what they're doing, that is, the policies to shrink the economy. They have to have expansionary policies to actually grow. Those are the three things that Europe has to face up to. And this idea that the confidence fairy, as Paul Krugman calls it, is going to come to the rescue, I just don't buy it.

JAY: Okay Paolo, just a final word to you. What do you make of Mark's prescription?

MANASSE: Well, I mean, it's kind of funny. They look very close to what Berlusconi has been saying all over. You know. And what Berlusconi's been saying all over is that it's not the Italian--fault of Italy, it's just a question of speculation by foreign markets, and it is all the fault of Europe, and it's all contagion from Greece, and has given, you know, default to everybody else. I don't think that [incompr.] is true. I think that's kind of, you know, propaganda. It was propaganda for Berlusconi. I'm a bit surprised that I hear exactly the same stories from liberals in the US. I think it's a question of perspective. I mean, you have to take into account that Italy is a very different kind from the US. It's very, very different. As I said, you cannot go through expansionary policy when you have a ratio of government spending to GDP of already 50 percent, huge inefficiency in the public sector, tax pressure which is, you know, about 48 percent of GDP--revenues over GDP. So there is no space for expansionary policy in Italy. There is space for expansionary policy in Germany, in Holland, maybe in France. And then what should be done, I mean, those countries should expand. And that--you know, I agree. But Italy cannot do that with a debt ratio ratio 120 percent. It simply doesn't have the opportunity to do that. I think, you know, just there is no space for that. So the only thing they can do is just to try some sort of, you know, measure to boost the rate of growth. And I agree that you cannot expect this sort of policy to give results in the very short terms, because, after all, we are talking about the so-called structural reform, and these structural reform are basically, you know, you know, good for the supply side of the economy. But you cannot do much--in Italy, at least--on the demand side. So the point, I think, is that Germany should take care of the demand side and should run expansionary policy. You know, Germany has also a huge current account surplus. But Italy and, you know, countries like Greece don't have that option, and they should kind of try to boost their supply side to boost the rate of growth. I don't think there is any other things. Then there is a question of architecture of Europe that is just crazy. And now we don't have, you know, a lender of last resort as the Fed. The ECB is not willing to do so. You really have to ask yourself, from an American point of view: would you go--you know, how much would you be willing to do to save Canada, for example? You know, you probably won't want to waste your money to save Canada if Canada were in dire straits, which it's not. But that is what the Germans are saying. You know, why should a kind of central bank kind of [incompr.] to Italy? Why should we pay for their pensions? You know. They're--you know, it's crazy. It's crazy. They will not--from a political point of view, you know, Europe is not a country. Europe is a kind of coalition of nations with very opposite interests. And it's very hard, you know, just to convince the Germans that they should bail out the Italians. It's understandably so. I think the same question would arise if the US was asked to rescue Canada. I mean, they probably [incompr.] say, you know, to the hell. So it's very difficult to do that. So my--.

JAY: They probably would have to do something about Canada, seeing as that's where most of their energy comes from. But at any rate, Mark, I need to give you a chance to respond before we conclude.

WEISBROT: Well, I--you know, I think if we--if you have a common currency, a currency union and a common central bank, well, then, that central bank has to be a lender of last resort, not just for the private banks but for the sovereign governments too. Otherwise, you're stuck in this situation where the only way you get out of it is, you know, basically to shrink your way out: you just go through a long recession, and maybe depression, and then eventually, if you succeed, if you're lucky, the rest of the world pulls you out--or the economy. And that's basically what we're being presented here with. You know. And I think--you know, what's really going on here is that the European authorities have a vision. They want to remake this, you know, Italian or the Greek economy in the image that they would prefer. I personally don't think it's terrible. By the way, France has a higher percentage of GDP that is the state than Italy, but nobody's screaming about how that has to change. So why do they want to change Italy? Because they can, okay? They want to dismantle some of the welfare state there, because this is--the problem is that these authorities see the crisis as an opportunity. It's kind of like what Naomi Klein wrote about in The Shock Doctrine. They don't want to let this opportunity go by just because it's going to cause a recession in Europe for them to do this. They know that once the economy's growing again, it's going to be harder to for them to force the changes upon the Italian people that they don't want and wouldn't vote for. And the same for Greece, and the same for Spain. And so this is what they're doing. They're playing with fire. They're pushing this financial system to the brink of implosion. They're slowing the entire world economy. They're going to hurt our economy here, because they want certain reforms that the people of Italy and Greece and other countries won't vote for. It's the opposite of democracy, it's the opposite of sound economic policy, and nobody should go for it.

JAY: Okay. Okay. I've got to give you 20 seconds, Paolo, and then we're going to wind up. Just a very final word.

MANASSE: Yeah. Well, I mean, as you were saying, I mean, "they who" is not the international speculators, I hope. These are institutions. And we have in the European Parliament [incompr.] voted by all nations and who have, you know, kind of--this "they" is maybe the ECB, but the ECB is not dictating anything to anybody. You know, it's just making clear that its own mandate is limited. Now, I agree that it's the fault of the European architecture that we don't have a lender of last resort. I agree that's a big problem. But you have to remember that the way--crazy way in which Europe had been built--that is, from the roof downward--was exactly supposed to avoid the lender of last resort, because this was the only way that the Germans were convinced to give up, you know, the Deutsche mark. You know, they were afraid like crazy that they will have to kind of print money to save and to finance Italian deficits, and that's why they put all these debt ratios and limit in the Maastricht Treaty and so on. So the only possible way that the Germans were, you know, convinced to join the euro was to put, you know, these strict limits to the possibility of the central banks to finance budget deficit in the countries. Now, this may be crazy now, it turned out to be crazy, but that's the way it is. And it's going to--what I'm saying is going to be very, very difficult to convince the Germans, you know, that they should do that. They would rather go back to the Deutsche mark and split from the rest of the, you know, peripheral countries. And I don't think, you know, they will be ever convinced that they should kind of have central banks like the Fed, because that would mean political union, and they don't want political union. That's, you know, as simple as that.

JAY: Okay. Well, let's just say this is just the beginning of discussing a very complicated issue. Thank you both for joining us.

MANASSE: Thank you.

WEISBROT: Thank you.

JAY: And thank you both for joining us on The Real News Network. And we will continue this discussion in further episodes soon. Thanks again for joining us on The Real News Network.

End of Transcript

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