Unemployment at the Heart of Italy’s Economic Crisis
Italian President calls on Five Star and Lega to choose another Finance Minister if they wish to form a government. Economist Bill Black and Mark Weisbrot discuss the political dynamics and the economic crisis
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
Financial markets in Europe settled down somewhat when the president of Italy announced that there is the possibility that Italy may be able to avoid another election. Now, President Sergio Mattarella gave the two populist parties time to figure out if they can come to an agreement on an alternative for finance minister, someone other than Pablo Savona. The two populist parties, Lega and the Five Stars, proposed a euroskeptic candidate, which threw all of Europe into turmoil. In a frantic effort to prevent the Italian crisis from becoming a European crisis, the EU has just approved a 55 billion euro program to provide incentives for investments.
On to talk about the Italian political crisis that is sending economic tremors throughout Europe we have two guests. Mark Weisbrot, joining us from Washington, D.C., is the co-director of the Center for Economic and Policy Research, and is the author of “Failed: What Experts Got Wrong About the Global Economy.” And joining us from Bloomington, Minnesota is William K. Black, the author of “The Best Way to Rob a Bank Is to Own One.” He teaches economics and law at the University of Missouri Kansas City. Gentlemen, I thank you both for joining me.
MARK WEISBROT: Thank you Gerri.
BILL BLACK: Thank you.
SHARMINI PERIES: All right, Bill. Let me start off with you. Give us some context to what is happening in Italy, and then the reverberations it’s having throughout Europe.
BILL BLACK: All right. So it’s a full decade after the acute phase of the 2008 financial crisis. And as bad as that crisis was in the United States and the resultant Great Recession, it was vastly worse in much of southern Europe, including Italy. So as of the latest numbers available, Italy still has an unemployment rate over almost three times that of the United States, of 11 percent, and youth unemployment is still in the range of 30 percent unemployment. And what college graduates do in Italy is collect their degree and make sure that they have their passport, and they frequently leave the country to work elsewhere.
In other words, Italy is a place where the crisis, economically, was much worse. But also, the establishment has been progressively discredited. And increasingly, Germany has intervened in Italian politics. I mean, key elections and non-elections, as in Greece. And much of the Italian population is enraged. And as a result, the establishment parties that have long dominated Italy were crushed in the most recent elections. The biggest vote getter was the Five Star Movement, which is ideologically amorphous, run by a professional comedian, and is kind of lefty, sort of, but very skeptical of certain European institutions, which have, after all, failed, and have been pretty anti-Italian people. And the League, which has renamed itself from the Northern League, which was originally more of a separatist, the north was going to get rid of, the north of Italy is much richer, of the poorer south, and even had its prominent member, Mussolini relative, openly kind of fascist, and its biggest single issue is anti-immigrant.
None of these parties have the ability to form a government on their own. And under Italian law what happens is you have to propose a government in these situations. After months of wrangling, the two leading vote getters, Five Star and the League, who are, again, not natural allies, proposed a coalition government that would have a clear majority in Italy. But the, this proposal has to go to the president of Italy. And the president of Italy normally is a sort of a ceremonial position in a real fancy palace. But this president, when there isn’t a sitting government, has great power over proposed governments. And basically he said no, you cannot form a coalition that has as an economics or finance minister, someone who is opposed to Italy’s membership in the euro. And we can discuss that, but basically Italy’s membership in the euro was a terrible, terrible mistake, both from Italy’s standpoint and probably from the European Union in general.
And so this was blocking, was in response, in considerable amount, to pressure from Germany and the European Central Bank, which Germany also tends to dominate. It created, but it was sort of a deliberate creation, as well, financial instability for Italy’s bonds. This is, these are sovereign bonds of the government where they borrow money. And though, we call that spread, the difference between two interest rates. So spreads for Italian bonds shot up dramatically, albeit in absolute terms to still fairly low levels, and this was perceived as a crisis, and it’s in some sense a manufactured crisis. Mark, in particular, can explain to you how the European Central Bank could have called the whole thing down not quite immediately, and chose not to.
SHARMINI PERIES: Mark, how does this political situation then trigger financial crises, getting the ECB to actually allocate 55 billion dollars as a response?
MARK WEISBROT: Well, there’s, you know, the media narrative is that the fear of this finance minister, who had made statements against the euro before and didn’t disavow them after his appointment, that this was the markets, that this cast doubt on the euro itself. And of course that caused a reaction, or Italy’s membership in the euro, at least, which might bring down the euro entirely. And so that caused the markets to sell off Italian bonds. As Bill noted, the, it was the two-year bond where the most of the action was. And it increased, I think, by about 1.6 percentage points to 2.9 percent. Which isn’t, that hybrid is a huge, huge change, and a huge change in the value of those bonds.
And so that is what is seen as the crisis. But there’s a lot of other things going on as well, which we can talk about, but I think the main first point I would make is that in some ways it’s a reprise of 2011 and ’12, where you had this continuing crisis, and the Italian and Spanish bonds were the main focus of it, because those yields went all the way up to 7 percent in 2012. And at that rate, Italy couldn’t really pay its debt if it had to borrow at those rates and roll over bonds at those rates.
And so that really led, that was the crisis of the euro, and this crisis lasted about a year and a half, and it gave about a year and a half of extra recession that we didn’t have in the U.S. You know, as you know, we were the start of the Great Recession, and we had 18 months of recession, and then it was over, and the economy to recover. And Europe had a recovery of almost exactly the same length, a recession of almost exactly the same length, but then they fell into this other crisis, this other second year and a half or so of recession that was due to this financial crisis as a result of the uncertainty of the euro.
Now, here’s the main thing that most people don’t realize, and that is that that was completely unnecessary. The European authorities were using this to force primarily the southern governments, Italy, Spain, Portugal, Greece, to accept things, terrible things that people would never vote for. And that’s why they didn’t get rid of it. Finally, on July 12 of 2012, Mario Draghi, who was then the head of the Central Bank, and he’s Italian, they’re making something out of that in this crisis right now. But I don’t think his nationality mattered that much. He said, we’ll do whatever it takes to preserve the euro. And that put an end to the financial crisis, and then the economy recovered. The European economy began its recovery. And the interest rate on these bonds fell from its highs of 67 percent all the way down to 1 percent, you know, recently. And so that really shows you that they really don’t have to have this crisis at all. You could do the same thing right now. But what he’s doing is very similar to what he did for about, I think, 11 months was under his tenure at the Central Bank, during that financial crisis of Europe, using it to force a political change that people didn’t vote for. In this case it was getting rid of this finance minister.
Now, there’s a lot of fear in Europe and in these markets that they’ll actually, if they do force a new election, which could be either in July or September, that it will be seen as a referendum on the euro. So there’s a certain fear among the Europeans parties about that. I don’t really think that’s what it would be, and I think those fears are overblown, because right now, you know, the majority of people don’t want, in Italy, don’t want to leave the euro. There’s been no discussion of it, and no discussion is allowed. That’s kind of the ironic thing. I mean, they got rid of this, or they’re getting rid of this finance minister, proposed finance minister, just because he brought it up. And so, and they’re accusing him of having a secret plan to leave the euro. And but the thing is you can’t have a discussion, and that’s what makes it so difficult, even though, as Bill said, you know, the euro was a really bad decision for Italy and for most of Europe. It’s very hard to get out of it, because as soon as anybody raises the issue you can see what happens. Enormous pressure is brought to bear to not talk about it, and to just never, never bring it up again.
SHARMINI PERIES: All right, Bill. Bill, this week we saw Deutsche Bank, the third largest bank in Europe, had taken a real beating in terms of their announcement that they were having massive layoffs. And apparently this was triggered by overexposure to investment. Now, explain what that is, and if this has any relation to what Italy managed to trigger this week.
BILL BLACK: OK, so Deutsche Bank is one of the worst large banks in the world. And that’s probably an unnecessary equivocation. It may well be the worst. It also has just become public, as we’re doing this interview, that Deutsche Bank was actually rated as some degree of unsafe and unsound by U.S. banking authorities. Apparently a year ago, and this just became public. So exposure can mean all kinds of things, but basically it means that it’s bought a number of assets that are too concentrated in a particular area. Does that have all that much to do with Italy? Not directly. The fear is that when things go bad in a place like Italy, there can be nasty feedback effects in other places. And there can be a what is called a flight to quality, in which people sort of get rid of everything that is perceived of as being relatively higher risk, which would include Deutsche Bank, and then Deutsche Bank itself would have to pay higher interest on its bonds, and its profitability would fall.
So the main thing about Deutsche Bank is it is the German bank. And when the German government makes policy, like on capital requirements under the International Basel 3 capital requirements, Germany has been taking a position now for at least eight years to stop or delay any dramatic increase in capital requirement because of the fear that Deutsche Bank couldn’t meet those requirements. So that’s one of the overhangs. But far more in Italy, it’s the overhang of their own banks. So Italy has a number of bad banks. And here’s a surprise, the establishment wants to bail them out at public expense. And this is running supposedly contrary to European Central Bank policy, although European Central Bank has been in the business of bailing out big banks for a very long time. So in a logical consistency, isn’t the key. Anyway, those banking problems are in a background of this being a potential crisis. And there is pressure coming in particular from Germany about any increased fiscal spending in Italy. And again, Italy still is in severe recession levels of unemployment, right. So it really does need more stimulus at this time, and that’s being blocked.
What has happened that Americans need to know about is key German spokespersons have openly called for the financial markets to discipline Italian voters and that, that person, Oettinger, who’s a senior European Commission leader, is a key ally of Angela Merkel, who went public essentially at the same time, and said Italy better watch it or it would be treated like Greece. Now, the Wall Street Journal, of all things, said that that was an open threat to, that Italy better toe the line of the neoliberal austerity, or it would be have its economy crushed by a combination of the European Commission and the European Central Bank. And the Wall Street Journal actually put in words that their fear, I’ll quote it, even worse from the point of view of markets would be if Italian euro exit went well, encouraging anti-Europeans in other countries to push for a repeat. In other words, for other countries to do the same thing. So they’re actually putting in writing that their great fear is that if Italy were to withdraw from the euro it would not cause chaos, that it would actually be highly successful, and that there would be a broader economic recovery in the southern tier of Euro states that Mark just described. That’s how crazy, how obscene the, the neoliberal agenda is willing to put openly in print.
SHARMINI PERIES: All right. Mark, let’s switch over to you. Mark, give us a sense of how this situation can be managed well. What are the steps to be taken?
MARK WEISBROT: Well, that’s a tough one. I mean, depends who, who’s managing it, and for what. I think ideally, you know, Bill pointed to the problem. And I think we’ve touched on the main contradiction of the eurozone as it takes away the most important economic decisions that a government can make. First monetary and exchange rate policy, but then also fiscal policy as the power of the European Central Bank and the European authorities and their rules are used to force these countries into austerity, fiscal austerity, as well. So they lose their most important decision making powers. And the populists in Italy have, both parties that Bill mentioned, have raised this point, where is our democracy? And they actually said some funny things mocking the media and the politicians for complaining about how the spread is increased, the spread between the two-year bond, the two-year interest rate on Italian bonds versus German bonds. And they’re making fun of this idea that the markets should tell them who they should vote for, or of course also, the Germans or the European authorities generally.
So this is the real problem. Now, as I said, there’s obviously, there’s two ways that this can be changed. One, you can have change at the European level, and there are people who say this is the only way. And others would say, well, no, you know, people, countries will be better off getting out and getting control of their economic policy that way. And I think they can, actually. I think what Bill mentioned was just, he said was just openly said about Italy being better outside, and then inspiring others. That was said, the same thing was said about Greece at the time, was a major fear, actually, among European authorities, that Greece would leave and it would recover much faster. And there’s no doubt in hindsight, although some of us said it at the time that Greece would have been enormously better off taking a short term hit and then recovering very quickly. But the problem is that politically that’s very difficult. If these two populist parties, who have been kind of militant about, for example choosing the finance minister, they’re not saying they’re going to leave the euro, and they’re not going to talk about it. And Podemos in Spain doesn’t talk about it either. In fact, they’re very much saying that they’re going to stay there. And then of course, the Syriza in Greece ended up winning power, and they, of course, steered away from that issue entirely.
So they don’t, in those they don’t even, they’re not even allowed to use the bargaining power that a country like Italy or Spain would have if they just said OK, we do have a Plan B, like this new proposed finance minister had said before, they could possibly get some concessions from the European authorities instead of this insistence on not only austerity, but basic reforms that, in labour law and other things that attack the welfare state. So I think if a party really was willing to take the chance, I think what they would try to do is to provoke a long, a longer-term discussion about the euro. Get past that barrier first. Say OK, let’s talk about it. We’re not leaving, because that would provoke an immediate crisis and capital flight. And it’s very hard to manage. But then just say let’s, let’s talk about the pros and cons. And then, you know, when you have a real majority of people on your side, which you don’t have in any of these countries, even in Greece you didn’t have a majority that was willing to leave the euro or even wanted to. And then I think you could have a solution.
Of course, the other tactic is the one preferred by people like Varoufakis, for example, who argue that the only change possible is to change the European institutions themselves. But that’s very problematic because they’re not accountable to any electorate.
SHARMINI PERIES: All right. Bill, two things. First, let’s get to this incentive package that the EU released. 55 billion dollars, billion euros. Why are EU countries so quick to get their wallets out and pay for a program which seems mainly aimed at keeping Italy in the EU, rather than letting Italy break off or letting the people of Italy is what they should or should not do?
BILL BLACK: All right. So let me start by going back to something that Mark said, and just making something a little more explicit. He was absolutely right about the whole thing. But he described, remember, that Draghi basically let the whole southern tier of Europe twist slowly in the wind with Great Depression levels of unemployment and a financial crisis, because of the rising debt costs, for a significant time period. And that that helped throw all of the eurozone back into the Great Recession and caused enormous misery. Part 1.
Part 2, that Draghi then fixed it, made the spreads that we’ve talked about virtually disappear between German and, say, Italian bonds not by doing something substantive, but by simply announcing I’ll do whatever is necessary to deal with this spread. Right? So he could have done that on day one instead of, roughly, day 365. So they can deal with the current supposed crisis, which, you know, that should be in scare quotes anyway, and it’s a scare tactic. The ECB caused it, in many ways, by signaling to the markets, go ahead, we hope you’re going to do nasty things and it could have prevented that and could stop it at any time.
As to the fiscal number, there already was-. The European Commission is a very weird institution. But in any event there’s sort of kind of this bond investment fund that they created. Now, this is a bizarre thing in economics, where they’re acting like aggregates don’t matter. In other words, are you, on aggregate, actually have a stimulus package. And they’re just saying, acting as if, oh, if I spend something on infrastructure, even if I’m running an austerity surplus, boy, that will really stimulate the economy. So that’s not true. But it means that they’ve got a big slush fund for political reasons, even though it doesn’t actually reach on aggregate levels any material stimulus. And so it’s easy to draw on that which is already created, and allocate some money to Italy that would have been allocated to Italy, anyway. In other words it’s essentially cost free, and it’s, it’s all politics.
SHARMINI PERIES: All right, gentlemen, I thank you so much for joining us today. There’s a lot more to talk about, but we leave it there for today. I thank you for joining us, Bill, and Mark, I thank you for joining us.
MARK WEISBROT: Thank you, Sharmini.
BILL BLACK: Thank you.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.