Da The Times del 08/08/2005
Originale su http://www.timesonline.co.uk/printFriendly/0,,1-37-1726064,00.html

Italy wonders if it is time to cut and run

di Anatole Kaletsky

FOR those who are too young to remember, Divorce, Italian Style was a 1962 movie in which Marcello Mastroianni plays a Sicilian nobleman married to an ugly, bullying and financially ruinous harridan, from whom he wants desperately to disengage. Unfortunately, he has no legal way to do this since the Italian legal system made no provisions for divorce. His only recourse, therefore, is to kill his wife.

This film is, of course, a perfect allegory for the Italian and European economies 40 years later. Italy today is under the thumb of an ugly, oppressive and financially ruinous harridan called the euro. The concept of divorce, separation or withdrawal does not exist under European Union law. What, then, is Italy to do? The story of Italy’s desperate economic and fiscal travails within the euro needs no repeating. Neither does the political attraction for Silvio Berlusconi of encouraging an anti-euro movement that would blame all Italy’s problems on the man who took Italy into the euro — his main political opponent in the forthcoming general elections, Romano Prodi. Until 1997, when the Socialist Government led by Prodi took Italy into the euro, Italy was the fastest-growing leading economy in Europe, consistently outperforming both Germany and France. Since 1998 it has lagged in every single year behind France and in all but two years behind Germany.

Starting with these economic and political premises, we arrive at a conclusion similar to the one reached by George Soros and the German Bundesbank in the summer of 1992: some time between now and the Italian general election next spring, the country’s continuing membership of the eurozone will become politically incompatible with the present monetary conditions.

Then one of two things will have to happen: either the European Central Bank (ECB) will have to ease monetary policy decisively to make economic conditions easier for Italy to live with — or Italy will have to withdraw from the eurozone.

The ECB’s official statements on monetary policy — that a cut in interest rates or a devaluation would have no effect on economic conditions — are just content-free propaganda: Soviet-style ideology designed to justify whatever happens to be the current policy of the ECB. This is clear not only from common sense but also from the econometric simulations based on past behaviour. The simulations illustrated, based on the Oxford Economic Forecasting model, show big improvements in GDP, unemployment and government finances from a monetary easing, combined with devaluation, and broadly similar results are churned out by the OECD and IMF models — and probably by the econometric models run by the ECB itself.

If, however, the ECB fails to ease soon after the summer, the Italians will be tempted to start rattling their chains and seriously threaten disengagement — which brings us to the question of why an Italian withdrawal should be taken seriously, even though monetary divorce in Europe is not allowed.

To understand this issue, we must focus on two unprecedented features of today’s monetary arrangements. The first is that the Italian Government has, in theory, given up for ever a fundamental right of any sovereign country — the right to determine what will constitute legal tender within its own borders. The second is that international investors have assumed this decision to be genuinely irreversible simply because the Maastricht treaty says it is.

The strange financial result of these two aberrations is that the spread between Italian and German government bond yields is only 0.2 percentage points and that many European banks — unprofitable German mortgage banks in particular — have invested hundreds of billions of euros on a leveraged basis to pick up the very modest, but apparently risk-free, profits from buying Italian bonds and going short of their German equivalents. As a consequence, a decision by the Italian Government to withdraw from the euro — or even a perception by investors that such a decision might conceivably be threatened by the Italian Government some time in the not-too-distant future — would trigger a financial crisis of monstrous proportions. not only (or even mainly) in Italy but throughout the eurozone.

But could Italy credibly threaten to recreate its own currency? So powerful is the dogma that withdrawal is impossible that only two legal scholars have ever seriously examined this issue. They are Hal Scott, of Harvard Law School, and Charles Proctor, a solicitor at Nabarro Nathanson and author of a new chapter on withdrawal from the eurozone in the sixth edition of Mann on the Legal Aspect of Money, a book described by central bankers as “the Bible” of international monetary law. Unfortunately for the ECB, in its role as the guardian of the European banking system, both these authorities agree on two points: first, that despite the prohibitions in EU treaties, the Italian Government would have the legal ability to recreate its own currency, although withdrawal would, of course, entail big financial and economic risks; secondly, that the Government would be entitled to rewrite Italian financial contracts, including its own bond obligation, into new lire — and that investors who claimed to be defrauded by such a “redenomination” could not expect support from British or American courts.

While detailed consideration of these arguments is probably premature, the practical implication is clear: If the possibility of an Italian withdrawal were ever taken seriously by the markets, foreign holders of Italy’s € 1.5 trillion public debt would face enormous losses, big enough to endanger the solvency of many non-Italian banks. In other words, the Italian Government is now in a position to kill the euro and wreck the European banking system merely by threatening to withdraw.

Italy will not become desperate enough to do this if the ECB cuts interest rates after the summer and the euro falls further. But if the ECB fails to deliver the expected monetary easing, or if Italy’s economic conditions deteriorate for any other reason, the Italian Government could demand a decisive easing of monetary policy, as it did in September 1992, and publicly threaten to withdraw from the euro if the ECB failed to comply.

Investors who want to be better prepared than they were before Black Wednesday for the looming confrontation between politics and central banking should contact Oxford University Press for a copy of Mann and the Legal Aspect of Money. Those who cannot face a 900-page legal textbook could at least rent a video of Divorce, Italian Style.

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