Image Is Everything

Berlusconi is everybody’s favorite buffoon.
He sure is colorful.
More so than Zapatero, the other exiting Prime Minister in Europe.
That’s why the Italian Prime Minister is a better scapegoat for unsettled markets.
Doesn’t he represent the Italian character, which is, well, not serious? Based on this politically political incorrectness, and based on this alone, markets have dumped Italian bonds.
The euro-skeptics are at it again. How can Italians and Germans share a common currency? We all know the Italians will not be able to manage their finances properly. Market operators had it right all along. A European monetary system with Germans and Italians would never work. The Germans are hard-working, spendthrift and fiscally conservative. Compare that with the lazy Italians who live the dolce vita, not worrying about tomorrow. At best, Italy can only become a German vacation land, just another Club Med country.
So why let facts get in the way of these convenient clichés?
But facts are stubborn.
And the facts are also revealing.
Italy joined the euro with a debt-to-GDP ratio at 130%. A decade later it stands at 118%. Not exactly great, but the direction has been right. Even today, the Italian government’s deficit is below 4%, a much better performance than the US, the UK, France, Japan, etc.
Furthermore, Italy has a sound banking system that never got in trouble by buying fancy mortgage-backed securities. And, unlike Japan which suffers from a savings deficit, Italian households are still putting a lot of money under the mattress. The savings rate in Italy is 16%. In Japan, it is now down to 2.5%.
Opportunities arise when perceptions are erroneous.
Could we be experiencing one of those historic opportunities in the European bond market?
One thing is clear: Europe does not have a public debt problem.
Total debt in Euroland is still at a manageable 85%. Yet deficits are being aggressively tackled before they reach US or Japanese levels (100 and 200% respectively).
How can market operators claim that European countries will never adjust to German fiscal correctness when the opposite is happening?
All the PIIGS countries are showing that they agree to adjust through reforms and fiscal austerity rather than by devaluing their way out of their misery. Just the way the Germans intended to.
As the numbers above illustrate, Italy has been a disciplined founding member of the euro.
Ireland has taken very drastic measures after its banking failure and already the bond market is reflecting this.
Spain just elected a conservative government that promises blood, toil, tears and sweat. Just after winning a landslide election, the conservative leader already warned his country that he “didn’t promise any miracles”.
Portugal also changed majority but nonetheless remains under the radar screen.
That leaves Greece.
Well, if the Greeks do not get their act together, they’ll be asked to leave the euro. Good riddance.
No, Europe does not have a fiscal deficit problem.
Europe’s problem is elsewhere. Europe has an overdose of unaccountable technocrats.
Whatever the technocrats’ failings, their aura is so great that it does not matter. The Greek head of the central bank hid the country’s massive debt to enter the euro? No problem. Ten years later, he is asked to head a “technocratic government” to save the country’s finance. In this he was helped by non-other than Goldman Sachs.
So, who do the Europeans chose to head the ECB? Former Goldman Sachs co-conspirator Mario Draghi…
Neither of these technocrats looks like a buffoon.
Anyway, the Europeans have chosen austerity.
Printing money on a grand scale is out of the question. It did not work for Weimar Germany and today the Chinese too seem to be discovering that it is not a panacea.
Is the US next?
Happy Thanksgiving.

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