Archive for category Economic crisis
Greece and the EU
Posted by Scott Erb in Economic crisis, European Union, François Hollande, Greece, Merkel on February 9, 2015

Greek protesters in support of the Syriza party, a left wing party that dominated last month’s elections.
In 2008 the global economic crisis unmasked the structural weakness of the economies of southern Europe. Greece was by far in the worst shape. In 2010 the EU brokered a bailout deal for Greece, predicated on the country embracing a very painful austerity program. In 2012 Syriza campaigned against the cuts and urged Greeks to chart a course not dictated by the EU. Greek voters, skittish about loosening ties with Europe, said no, and Syriza won just 78 out of 300 seats. Three years of painful recession later and the Greeks have had enough – Syriza won 149 seats, just short of an absolute majority. The left wing party joined in a coalition with ANEL, a small right wing conservative party to form a government.
Greece has a debt of about $500 billion, 180% of it’s GDP. 60% of that debt is owed to the Eurozone, so a default would have serious, though not disastrous implications. Very little of that debt is held by Greece. After the election Greece’s 10 year treasury bond yield skyrocketed to over 10%, meaning rising the debt would be prohibitively costly.
Syriza’s leader, new Prime Minister Alexis Tsipras, vows to keep this campaign promises, all of which violate the conditions of the bailout. These include increasing the minimum wage, cutting property taxes, increasing pensions, rehiring fired public sector workers, and giving free electricity to those “suffering the most.” Since he doesn’t want more debt, the only way to do that is to print money – but Greece is in the Eurozone and monetary policy is controlled by the European Central Bank (ECB). So what next?
One might wonder if Tsipras is out of touch with reality, wanting to increase spending to get out of debt. But he makes a good point that austerity simply increased the scope and depth of the recession. The ‘bailout’ benefited Eurozone banks more than the Greek people. He believes his policies would stimulate the economy so that Greece will be able to pay back its debts and show itself to be solvent.
Unfortunately the Greek economy was built on sand – debt and public sector employment hid the fact the Greek economy is structurally flawed. Just ending austerity won’t change that, nor alter the dynamics that created the crisis in the first place.
Last week Tsipras and his Finance Minister Yanis Varoufakis visited European leaders to try to assure them that they weren’t going to rush out of the Eurozone, and to convince them to support a bridge loan to fund the government through September. On Sunday Tsipras said that the Euro was a “fragile house of cards” and if the Greek cards were pulled it would collapse. On Wednesday Eurozone finance ministers are meeting to discuss what to do next.
Tsipras is playing a game of chicken – pushing the EU to accept his policies and offer help in exchange for Greece holding on to the Euro. More importantly, if he were to leave the debt owned by Eurozone banks would become toxic, threatening a banking crisis.
Still, the threat to the Euro is much smaller than it was back in 2010, or even during the election of 2012. At that point high bond yields threatened a number of countries, especially Spain and Italy. Today Italy’s bond yield is 1.76%, while Spain’s is 1.38%. Those are below the US yield of 1.94%! This suggests the fears of contagion no longer exist and Greece is being treated as an isolated case. With 19 countries now using the Euro – Lithuania joined last month – it could withstand a Greek departure.
But the Prime Minister does not want to leave the Eurozone, and therein lies the rub. Greeks know that leaving the Eurozone would put them on a path towards increased isolation and continual crisis. He’s betting he can arrange a bridge loan through August, and that while Greek debt is high, the Greek economy is small. The cost to the EU member states would not be prohibitive.
While some European leaders are sounding cautiously optimistic about making a deal with Tsipras, German Chancellor Angela Merkel is having none of it. While not dismissing anything out of hand, she says it’s up to Greece to come up with a plan. Tsipras has said he’s working on further reforms designed to mollify EU critics, but it’s unlikely he’ll convince Merkel, who fears this will simply enable Greece to go back to its old ways.
My predictions:
1. Those predicting the end of the Euro will be disappointed. Countries are politically committed to monetary union as the best way to assure economic stability. Businesses and banks – the people who really run the show – are almost unanimously in favor of it. Now that Italy and Spain are no longer seen as “the next to go” if Greece leaves, the Euro is not in existential danger.
2. Tsipras and EU leaders, particularly German Chancellor Merkel and French President Hollande, will engage in tough negotiations, but are likely to reach a deal. It’s in their interest. The EU leaders do not want their banks to suffer due to the Greek debt they hold, nor do they want instability associated with the first departure from the Eurozone. Prime Minister Tsipras knows that the Greek economy would be severe crisis if he actually tried to go back to the drachma, perhaps worse than the last few years of recession.
3. The agreement might work. Merkel needs to be firm on the need of Greece not just to stimulate their economy, but to restructure it. Greece needs to develop a productive and sustainable economy. They do not have one now. Tsipras has to recognize that reality..
The telling point is that nobody involved wants Greece to leave the Eurozone. It is in their interest to maintain it, even strengthen it. It is in the EU’s interest to have Greece develop a sustainable, productive economy. The bailout and austerity program didn’t work – even though the Greek voters gave it a chance back in 2012. With some creative thinking, it may be that contrary to expectations, the victory of Syriza may end up being good for the EU.
An American Hero: Alayne Fleischmann
Posted by Scott Erb in Corruption, Economic crisis, Global Depression on November 7, 2014
Alayne Fleischmann is risking her career and all her assets by going public with information about the fraud perpetuated by JP Morgan Chase, a Wall Street bank.
If you really want to read about how dirty the big banks are, take the time to read through this piece, published in Rolling Stone by Matt Taibbi. Here’s a very condensed version. Everyone knows that the 2008 economic crisis was caused not by the real estate market or sub prime loans, but by a nearly $700 trillion dollar per year market in unregulated derivative bonds.
The banks were making so much money with these bonds that they got in bed with dirty mortgage brokers (i.e., the biggest ones) who engaged in inflating the incomes of people applying for loans, approving without documentation, and creating wild mortgage packages that would have payments low the first two years then kick in to incredibly high rates. All of this created a massive bubble, as people saw prices rising and wanted in. The banks then doubled down and made more money. By 2005 these bonds were backed by mortgages that would never be repaid.

Note how fast over the counter (unregulated) derivative trade increased after 2000 – it was the motor of the economic crisis, and still could be hiding financial shenanigans.
In short, the crisis of 2008 was a free market creation, caused by unregulated big Wall Street banks selling bonds they knew were bad – leaving investors from schools, fire departments, retirement accounts and the like holding the bag. Moreover it caused a massive recession and structurally weakened the world economy. Never has there been a more convincing case that proves capitalism does not work without regulation, and that big money will game the system thinking only of itself if allowed the opportunity.
Yet there is more. Once the collapse hit, the US was faced with the real possibility of a credit crunch that would not only hit banks and the mortgage market, but also even the ability of consumers to buy cars or use credit cards. That was a looming threat in October 2008, and the immediacy of that threat was handled through TARP – the so called bail out.
So act one: bail out the players who gamed the system, whose executives made billions, leaving both investors and the world poorer. Yet not to bail them out would have intensified the crisis to the point of causing a great depression.
Act two: the Justice Department of the new Obama Administration would work with the banks to try to avoid them having to pay massive fines, or have the extent of their corruption made public. That’s what Fleischmann’s case shows. Rather than go after the big banks for their fraud and crimes, Attorney General Eric Holder choose to get in bed with them and help them cover their tracks. Why?
Again, to avoid a credit crunch and not to gum up the recovery. With the big banks on the ropes, the recovery could fade. If trust in the remaining financial institutions started to fail, we again would risk depression. The big banks were not only too big to fail, but too big to even hold accountable.
Consider this brief monologue from the film Syriana in which corruption is defended – it’s a more common view than we might want to believe:
In Syriana the government wants the merger of two oil companies to go through, despite clear corruption. “We’re looking for the illusion of due diligence,” one attorney declares. But because increasing access to oil is so important, they really don’t want to dig. In this case, the settlements with Chase and other banks created only the illusion that the Justice Department wanted to keep the banks accountable. Fleischmann’s revelations we know how deep and thorough the corruption had become.
So what next? Will JP Morgan Chase set out to destroy Fleischmann as an example for anyone else who might want to come forward? Will others come forward to give her cover and tell the full story? Will her courage create a desire to really dig to the bottom of what happened?
Alas, this stuff is complex. That’s why so many people don’t get the reality of what caused the crisis, and find it easy to blame things like government policy on home loans. Yet the more we learn, the more we see that Wall Street has immense control over US policy, in part because of their dominance of the economy. If the banks fail, the world economy is in peril.
Yet this is unsustainable. As the big banks again gain record profits, with only a meager effort to regulate them after the collapse, we’re setting up the next big crisis – perhaps worse than the last one. One can only hope that heroes like Alayne Fleischmann show the courage to tell the world what’s really going on, and how whether Republican or Democrat, no one has the guts to take on Wall Street.
The Ones that Saw it Coming
Posted by Scott Erb in Consumerism, Economic crisis, Media, Psychology, Values on February 1, 2014
Although Wall Street got away with creating the worst economic crisis since the Great Depression, there were some who saw it coming, sniffed out the true nature of the mortgage backed bonds and the craziness of an out of control under-regulated housing market. Those people are the subject of the Michael Lewis book The Big Short mentioned in the previous post.
They cover a range of character traits. There is the self-promoting Greg Lippmann whose desire to spread the news in bombastic fashion helped convince a number of people that the housing market was a bubble and the securities backed by those mortgages were toxic. Then there is Steve Eisman, a blunt, honest hard nosed investor who would offend just about everyone he met. He started as a conservative Republican but realized as he learned about the game on Wall Street that the real mantra was “fuck the poor.”
The first one who really sniffed out what was happening was a one eyed doctor turned stock blogger turned investor, Michael Burry. He read through the material with an almost superhuman patience and attention to detail. He realized that the investments were crap, especially the bonds backed by subprime mortgages. When his son was diagnosed with Aspergers syndrome he realized he had it too. That had given him the focus to figure out what everyone else was missing as early as 2003 – and also explained the lack of social skills that alienated his investors who were planning to sue him before suddenly his bets paid off. They never thanked him.
Ultimately they figured out that not only were the big banks creating mortgage backed bonds that seemed to pass off risk, but when they didn’t have enough of those they packaged the bonds into CDOs that, thanks to rating agency incompetence, would magically turn BBB mortage backed bonds into AAA investments. Then they took it a step further with synthetic CDOs. To Burry, Eisman, Lippmann and a few other characters Lewis describes, this was blatant fraud. For Eisman it was a moral cause – the big banks were pulling in billions, earning their traders bonuses in the tens of millions – because they were able to create bonds so complex that the rating agencies didn’t realize they were crap. Investors thinking they were getting very low risk bonds were being fleeced.

CDO’s were a method by which banks could take low rated bonds and package them to create a AAA rated toxic bond
The thing that shocked them, however, is that when the inevitable collapse hit, the big banks themselves were exposed. They had rigged the game, but played the sucker anyway. Corporate leadership didn’t understand the way this new derivative bond market operated, and individuals looking only to maximize their bonuses didn’t care about the long term. At some point they had to keep playing because that was the only way to keep the game alive. But it was unsustainable.
What I find intriguing is the personality characteristics of those who figured it out. They share a few traits. First, they were honest and not afraid of what others thought of them. In a world where most people seek approval from others and want to be liked/appreciated, these guys didn’t care. Eisman would blurt out comments offending powerful CEOs giving a talk, not care what he wore to the golf course, and genuinely didn’t seem to mind what others thought of him.
Second, they were remarkably self-confident. If it were me figuring out the insanity of the derivative market and how the big banks were setting the entire world economy up for disaster, I’d say “wait, these are the most intelligent big institutional investors on Wall Street – they must know something I don’t.” And while the thought crossed their minds now and then, they had confidence in their analysis and conclusions. They were willing to place multi-million dollar bets on an outcome the media, Wall Street and government dismissed as impossible.

Some of most entertaining moments in Lewis’ book are the ways in which Steve Eisman would confront the big players on Wall Street and tell them their products were crap. Eisman’s latest crusade is against for-profit on line universities
Finally, they were oddly moral. For Eisman it was righteous indignation at how big money was not only screwing the small investor but also putting democratic capitalism at risk. For Burry it was a strong sense that the truth mattered, and he needed to follow it. Lippmann was grandiose and self-promoting, but was up front trying to help others see what was happening. In fact, they all tried to shout out warnings only to find that the rich and powerful either responded like deer in a headlight or laughed them off.
Jamie Mai, Charlie Ledley and Ben Hockett, who created Cornwall Capital and discovered first that even the AAA rated CDOs were certain to fail, were pre-occupied by what this meant for society as a whole. The system was sick, could it potentially fall apart?
Those traits: honesty, lack of concern for what others think (as long as you’re being honest), self-confidence and a strong moral streak gave them the capacity to truly comprehend what was happening. They were not intimidated by the big names in media and on Wall Street who dismissed such concerns, did not feel like “I must be wrong because the big guys all say differently,” and stoked a sense of moral outrage and purpose.

Once considered an economic guru, Alan Greenspan’s cheap credit and anti-regulatory stance now make him a villain in this story
There is something to learn from this example. These traits gave them the capacity to avoid the hypnotic effect that culture, media and “conventional wisdom” can have on people. All around experts repeated the mantra that “the bonds are safe, housing prices won’t fall, this is real, the money will keep growing…” They did not fall victim to the power of those suggestions; instead, they saw through the facade and ended up turning a huge profit.
They not only saw through it, but it was obvious to them. Now whether one reads the book by Micheal Lewis or one of the others out there dissecting the crisis (The End of Wall Street by Roger Lowenstein, All the Devils are Here by McLean and Nocera, House of Cards by Cohan about the end of Bear Stearns, etc.), it is so obvious in hindsight that one has to ask “how could they have been so stupid? How did more people not see it coming?”
The answer: groupthink and a kind of cultural hypnosis due to the power of pervasive suggestion. The only way to keep one immune from falling into such a trap is to foster true honesty, not worry what others think if acting honestly, be self-confident, and have a moral core. Not only might one see through scams and thus make money (or avoid losing it), but one will also live a life less controlled by the hypnotic suggestions permeating our culture and media, and instead develop the capacity to be true to oneself.
They Got Away With It
Posted by Scott Erb in Economic crisis, Markets, Politics, US Politics on January 26, 2014
The new semester is underway and I’m teaching an honors course: “Consumerism, Politics and Values.” We start with the book The Big Short by Michael Lewis, describing the housing bubble and derivative market mania that caused the collapse of the economy in 2008.
The housing bubble and subsequent crisis was created by the big banks who were able to pull off the equivalent of a high stakes ponzi scheme and get away with it. Alan Greenspan, onetime devotee of Ayn Rand, even admitted that events had proven his “markets get it right” philosophy wrong.
Markets don’t always get it right; unregulated, markets can create calamities. We shouldn’t forget what happened.
Back in 2000 we entered a recession thanks to the puncturing of the dot.com bubble. It had been a classic bubble and when the bubble burst the economy went into a needed recession to balance out the excesses of the late 90s. Then on 9-11-01 al qaeda attacked the US with a devastating blow to the American economy. The blow wasn’t a direct result of the terrorist attack, but an indirect one – the federal reserve decided to offer extremely cheap credit to help pull us out of the recession. That turned out to be poison. That is the one area where the government shares the blame – bad monetary policy. But that alone could not have created this crisis.
The housing bubble was also not a sub-prime lending problem, nor one related to Fannie Mae and Freddie Mac. They had their faults, some extreme, but nothing they did could have caused the economic collapse. What happened can best be viewed by considering risk and incentives.

It doesn’t take a genius – this is adjusted for inflation home prices since 1890 – look at the insane bubble after 2002!
Risk: Between 2002 and 2005 virtually all risk was removed from the mortgage market – or so it seemed. Banks and mortgage brokers knew they’d sell their mortgages to one of the big Wall Street banks. That meant they had no risk – so every home loan was a win for them, regardless of whether the lender could pay it back. The banks then took the mortgages and turned them into mortgage backed derivative bonds which they sold, pushing the risk to the investors. These bonds received a AAA rating from the rating agencies, meaning they were viewed as the safest form of investments. 98% of mortgages get repaid. Investors gobbled them up, thinking they were essentially risk free. There was, it seemed, no risk!
Incentives: Mortgage brokers thus had incentive to cheat – to make loans they knew couldn’t be repaid. This started the housing market booming. As prices went up, banks, brokers and buyers had incentive to create risky mortgage instruments. Since value was going up so fast, it appeared that if you could buy a house at $100,000, it would be worth as much as $150,000 in two years. So if you couldn’t afford a standard mortgage, you could buy one with artificially low payments for two years. At that time the house would be worth more, you could refinance at a standard rate and take out a home equity loan for easy money. Everyone wins! Meanwhile, the banks gobble up more and more mortgages as they are making massive amounts of money – hundreds of trillions of dollars in mortgage backed derivatives!

Derivatives include futures markets and anything where the value is derived from something else. But the huge spike in derivative trade from 2000 to 2007 was due to unregulated mortgage backed bonds
As with any bubble, everyone thinks all is great until it pops. Housing prices started to drop in early 2007. The first pain was in the worst loans, the subprime market. No one panicked – that market wasn’t big enough to cause a crisis. Little did people realize that the entire derivative bond market, even bonds with the best loans, were toxic.
Soon prices started to drop. Thanks to the people at CNBC and the other business “reporting” networks, people had the belief that real estate prices might level off, but wouldn’t go down. While some like Peter Schiff had been warning people, most of the media were predicting real estate price growth as late as 2007. People simply didn’t believe the party was ending.
Many people were directly affected. People who had adjustable mortgages planning to refi with a higher value ended up bankrupt. People who bought the AAA ranked derivative bonds ended up losing their entire investments. This included groups like fire departments and school systems which thought a AAA bond was no-risk. People who had been doing real estate speculation thanks to the rising prices went from being nouveau riche to old fashioned poor. Those who simply bought houses at record high prices ended up under water – they often owe tens or even hundreds of thousands of dollars more than their homes are worth.
Of course, this all lead to massive loses on Wall Street and an economic downturn that is still with us today. People totally outside the housing market lost their jobs or their investments when the economy tanked. The ones who suffered the most were the poor. The wealthy can take a hit on their portfolio and still enjoy nice homes and an easy life style, after all.
Yet the ones who did this – the ones who created the derivative bonds and then worked to disguise or avoid risk, taking massive short term profits even knowing that in the long run everything could collapse – they’re doing well. No one had to repay their bonuses or their income from the bubble years. Most simply found new work. Sure, Bear Stearns, Lehmann Brothers, and a number of other banks went under. Yet the people working there found other work. Some probably ended up with a dramatic downsize in lifestyle, but prison time or actual penalties? Nah, they were just doing business.
Many people are still livid about the lack of accountability, but that’s the its always been. The wealthy have power and clout, and can usually avoid accountability, especially if they’re in the financial sector. In this case both Democrats and Republicans accepted the free market mantra and refused even modest regulation. Yet tighter regulation might have avoided the collapse and we’d be at 5% unemployment now.

During the Clinton Administration Brooksley Born tried to regulate the derivative industry; Greenspan, Summers, and Rubin led the attack to stop her, documented in the PBS special “The Warning.“
It’s also proof – absolute proof – that the ideology that the market is always best is dead wrong. It is just as wrong as the Communist belief that a state run economy is more fair. Ideologies delude more than enlighten. Reality is messy, ambiguous and paradoxical. People enslaved by simplistic ideological beliefs tend to interpret reality in a way that suits their beliefs and avoid cognitive dissonance at all costs. We need accountability, rule of law, and transparency — especially in the market.
So now six years from the collapse we’re still reeling, trying to correct imbalances that could have been avoided. The people who created the mess and made huge profits off the bubble got away with it.
Welcome 2013!
Posted by Scott Erb in Climate Change, Democrats, Economic crisis, Fiscal Cliff, Oil, Values, World Affairs on January 3, 2013
The world did not end on December 21, 2012 and the country averted the so-called fiscal cliff. But perhaps the end of the Mayan cycle does symbolize change: the world has been on an unsustainable path and the direction is shifting.
Politically, the US is becoming more progressive. Ronald Reagan and Barack Obama are both larger than life Presidents, disliked by their opponents but pragmatic. Each compromised – Republicans forget the types of compromises Reagan made during his term – but focused on shifting the country’s direction. Reagan succeeded – for thirty years taxes have been going down and the debt has been going up. The growth in social welfare projects was halted, while social conservatism grew.
Those days are over. With states rapidly approving gay marriage, drug laws shifting (remember the vindictive nineties when Newt Gingrich was advocating the death penalty for even selling pot?), and the internet creating a more open and tolerant public, the culture wars are over. The social conservatives lost. A new generation is emerging less repressed, less convinced by social conventions, more willing to experiment and be open.
With the fiscal cliff deal people accept that tax reform is necessary to bring more revenue and stop living beyond our means. The only reason the debt’s gone up under Obama is the recession — something he didn’t create. Recessions radically increase the cost of government programs, decrease tax revenues and require spending to stimulate the economy. But Obama has signaled structural reform that will turn around the budget mess, even if the results won’t be clear until the economy is growing.
Until recently concern about global warming was losing support in public polls. That’s turned around. Things like Sandy, droughts, and historically high temperatures are convincing the public this is an issue. A generation of children are coming of age who learned environmentalism and science in the schools. Environmental activism is becoming cool again.
Beyond that the fossil fuel era is ending. Despite promising finds of natural gas and tar sands, global consumption has been rising fast and new finds will not be enough — though they make the transition easier if we are proactive. Saudi Arabia is past its peak and likely to become an oil importer by 2030. Right now the recession has kept oil prices low, but even with the world in the economic doldrums oil is near $100 a barrel. If growth returns, oil prices will rise dramatically.
Luckily, led by the EU, the rise of green technology is dramatic. Still, higher energy costs will force a shift in life styles. I doubt it will be the collapse predicted by some, but the days of cheap energy are ending.
The biggest shift is in technology. Social media and the internet started a revolution in the Arab world that will take years to play itself out. Those who think this is bad – or could have been prevented – are sorely mistaken. The regimes relying on fear and bureaucratic control are going to find that people are becoming informed and empowered, able to rise up. This started back in 1989 with the fall of Communism in Europe, but will grow and spread.
Even in Africa, where a genocide in 1994 and numerous wars involving some of the worst atrocities of recent history went unnoticed, a new activism is emerging. Though Kony 2012 faded, the connections people are making across borders make it likely that over the next few decades the African continent will have a rebirth. They own many of the scarce resources that the rest of the world needs; corrupt dictators are starting to fall.
Old political notions of sovereignty, national self-interest, and fear based policies are slowly giving way to interdependence, shared interests and hope. The world is waking up, change is coming. It will not be easy, there may be decades of instability and uncertainty before we see a better reality. But a new world is coming.
The biggest barrier to peaceful change are those who cling to old ways of thinking – fear, anger, greed, self-interest at the expense of others, and a ‘them vs. us’ mentality. The old mentality will not work in the world that’s emerging, and following the path of fear will yield crisis and conflict. But change is coming, yesterday has past, now let’s all start living for the one that’s going to last.
Say No to Berlusconi
Posted by Scott Erb in Economic crisis, European Union, Italy, Unions on December 10, 2012
Mario Monti announced he was resigning from the office of Prime Minister of Italy despite a heroic year in which the Italians did what most people thought couldn’t be done. He stabilized their finances and help brighten the outlook for the EU and Euro in the on going financial crisis caused by southern European lacking fiscal discipline.
Monti’s resignation, which will become official after the 2013 budget is passed, came as a surprise, sending shock waves through financial markets and the Italian political system. This sets the stage for a critical election in February.
When Monti came into office interest rates for Italian bonds were above 7%, and Italy’s budget deficit was growing quickly. Monti has managed to lower rates to 4.4% (meaning borrowing money is cheaper), though on news of his resignation it shot up to 4.8% Total debt has stabilized at 125% of GDP. Monti’s reforms included budget cuts, reform of the labor market and other policies not always popular with the public. As it became clear that Italians had the political will to deal directly with their problems, confidence in both the Italian economy and the Eurozone grew.
So why is Monti resigning? Monti’s government is a ‘government of experts’ designed to make pragmatic decisions with as little politicization as possible. Back in November 2011 Silvio Berlusconi resigned as Prime Minister after losing his majority, with international markets showing no confidence in Italy’s policies or leadership. Monti was chosen as a technocratic leader both left and right could agree on, but one without a political mandate.
On Thursday December 6 Berlusconi withdrew his party’s support from Monti’s government. Monti had always said that without broad political support a technocratic government was untenable. But this sets up a potential showdown.
In my opinion, Berlusconi has been a disaster for Italy. First elected Prime Minister in 1994 in the wake of the collapse of the Italian first Republic and the party system that defined it, Berlusconi promised to chart a new course for the country. He said his party Forza Italia (forward, Italy!) would make Italy a modern well governed state, absent the corruption and undisciplined economic policies of the old system. Despite being Prime Minister three times — from 1994 – 1995, 2001 -06, and 2008-11, he has not followed through.
In fact, Italy’s performed best when Berlusconi was not in office, including the job Romano Prodi did on economic policy in the late 90s to get Italy into the Eurozone. As Prime Minister Berlusconi mirrored the corruption of the first republic (he was convicted of fraud in October — he’s out free as he appeals, but that’s just the tip of the iceberg of his questionable and likely illegal actions), and the Italian budget mushroomed.
Unfortunately the Italians may vote him back into office. He claims he wants to stand again, and as media mogul he has the capacity to shape the narrative of the short election campaign. Despite his faults, his personality and appeal to conservatives means he’ll win a lot of votes.
Ironically global markets would be happier if a former Communist, Pier Luigi Bersani, were to defeat Berlusconi. Bersani’s center-left coalition has pledged support for Italy’s commitments and vowed not to go back to the kind of politics and spending of recent years. Berlusconi, however, has been skeptical of Italy’s commitments and has hinted that he wants to increase spending and undermine the work done last year by Monti.
Of course, Monti might himself run. He could hope to get support from centrists and moderates who want to transcend the polarized politics of the left vs. right, and reward Monti for the work he’s done the last year. Monti would not have the backing of a major party organization, but Italian campaigns are short, intense, and not that expensive.
A Monti victory would not only keep him in office, but give him something he now lacks – a political mandate. A technocratic party is supposed to avoid political controversy. When Monti pushed through labor law reforms, he met considerable opposition from Italy’s strong labor unions. Rather than picking a fight he negotiated with them and a compromise set of laws passed. With a political mandate, Monti’s hand in such negotiations would be stronger, though it’s unlikely he’d seek political confrontation.
This election is important for both Italy and the EU. If Monti were to win, there would be an enthusiastic response from markets and renewed optimism that the worst of the Euro crisis is passed. If Berlusconi were to return, Italian bond yields would rise and both Italy and the EU could be thrown back into a deep crisis. Moreover, Italy’s path out of a flawed and corrupt system of governance would be halted; Berlusconi represents precisely what Italians must reject.
Signs are good that Berlusconi’s shine has worn off. He’s down in the polls, and even he wanted more time to prepare for the next election. His fraud conviction and his record as Prime Minister overshadows his media appeal and charisma. By hanging on he deprives Italian conservatives of a viable alternative. When markets prefer a former Communist to a successful capitalist businessman, that says something!
Still, Berlusconi has had a remarkable capacity to come back and no one should underestimate his Machiavellian political skills. His return to power would be a disaster for Europe and Italy.
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