March 29, 2012
It would seem as though luck and central banking might not have much in common, but today I am going to argue that these factors may be about to create a very big problem for the eurozone.
If we cast our minds back to this time two years ago, the UK was gearing up for a general election. The incumbent, Gordon Brown, had mostly stopped mentioning his economic record as Chancellor since it was obvious to just about everyone that was willing to look that the national finances were looking unhealthy. At that point, I think it would be fair to say that the UK was financially the sick man of Europe. As we know, after a few days of negotiation in May, a coalition between the Conservatives and Liberal Democrats was formed. From there Cameron and Osborne quickly set about making changes.
If Britain had had an extra six to twelve months of Gordon Brown in charge, there would have been a real possibility of an IMF bailout. His credibility was mostly gone and the ratings agencies and markets were starting to turn on the UK. I would like to argue that this was lucky for Britain. The timing was very lucky. Instead, the markets turned to the next least healthy economy and Greece buckled under the pressure. We Brits have a saying for this, “There but for the grace of God go I”.
While the timing was lucky, the credibility that Cameron and Osborne brought to the situation postponed the problem. While looking back now it might not seem as though the problems have been fixed, it is clear that they are trying hard and doing some sensible things. The markets have confidence that they will stick with their plan and that progress is being made. Their credibility bought them enough time to make some changes and alter the course of the economy.
Now contrast that with Italy. A few months ago Berlusconi’s power was slipping and it was clear to many that he was not going to be the man to reform and save the Italian economy. In stepped Mario Monti. Whilst he did not arrive with a democratic mandate from the people, he brought many of the right things to the job which in turn brought breathing space to the Italian economy. From there he needed time to start making changes just as Britain had.
Time is not on his side. Already it seems as though ‘business as usual’ is being restored to Italian politics. As you may have read, he is trying to make labour market reforms. Your author is not an expert on these matters but consensus from the press seems to be that these changes are sorely needed. They are but one step on a long road.
Never mind. In an ISPO opinion poll in Corriere della Sera on Sunday, fifty four percent of the people polled have a negative view of his government. Monti himself has apparently threatened to quit if his labour market reforms are not accepted and a trade union, CGIL, has called for a general strike in protest.
No matter what happens, having used the available money in Greece, Portugal and Ireland there will not be funds to bail out Italy. It is just too big. Italy and Mario Monti have had a little luck but now they need more time.financialguy