Italy follows Argentina down the same road to ruin

Italy follows Argentina down the same road to ruin >By Desmond Lachman >Published: March 17 2006 02:00 | Last updated: March 17 2006 02:00 >> An irony of Italy's unfolding political and economic drama is that many of the current holders of the country's bloated and ever-increasing government debt were once proud holders of Argentina's now-defaulted sovereign bonds. As Mario Draghi, Italy's new central bank governor, warns that the Italian economy has "run aground", and as prime minister Silvio Berlusconi vents about "the euro having been a disaster for Italy" in the run-up to next month's election, one has to wonder at what stage Italy's bondholders will get the feeling that they have been to this sad movie before. For quite aside from Italy's disturbing political and institutional weaknesses - as exemplified by the current fractious and polemical election campaign and by yet another big banking scandal that further besmirches the Italian financial system's reputation - the country's economic predicament is remarkably similar to that of Argentina in the late 1990s. Mr Draghi himself implicitly recognises this similarity when he asserts that Italy must improve its productivity performance if it is to have any hope of reversing the country's relative decline. The most striking similarity between the two countries is the rigid currency arrangements in which they locked themselves. As a reaction to its mid-1980s experience with hyperinflation, Argentina in 1991 nailed its currency to the convertibility plan cross. It did so in the hope of forcing on the country the low inflation and fiscal policy discipline that it had never before enjoyed. In a similar effort to impose macro-economic discipline, Italy abandoned the lira for the euro in 1999. It was hoped that high inflation and periodic lira devaluations would give way to fiscal discipline and structural reform. By abandoning its currency, Italy, like Argentina before it, gave up macroeconomic policy flexibility to stabilise its economy. Italy can no longer engage in periodic exchange rate devaluations to rectify losses in international competitiveness. And no longer having its own monetary policy, it has to accept the interest rates set by the European Central Bank even though these might not necessarily conform to Italy's circumstances. When Jean-Claude Trichet, the ECB president, recently tightened European monetary policy because of high oil prices, did he give much weight to Italy's cyclical weakness? If this is not bad enough, under Europe's fiscal stability pact, Italy is committed to strengthening its public finances at a time of cyclical weakness. Like Argentina in the 1990s, Italy's public finances are in a real mess. With a public debt to gross domestic product ratio in excess of 105 per cent, Italy is the most indebted of the big European countries. With a budget deficit of about 4 per cent of GDP, it is in clear violation of the Maastricht criteria. More disturbing still is Italy's lack of international competitiveness. Over the past five years, Italy has lost around 15 percentage points of competitiveness to Germany as wage increases in Italy were not matched by productivity gains. Italy's failure to modernise its industries and to move up the technological ladder has also left it exposed to the full winds of Chinese competition in an increasingly globalised economy. Italy's loss of macroeconomic policy instruments would not be of such great moment if its economy were booming. But over the past three quarters, the Italian economy has for all intents and purposes been in recession. Under the weight of high international oil prices, this recession is only likely to deepen. As was the case for Argentina, the only way out for Italy is to restore competitiveness through far-reaching structural reforms, especially in the labour market. However, if the present election campaign is any indication, one needs to ask how much more likely are such painful reforms in Italy today than they were in Argentina under Carlos Menem. One also needs to remember how difficult it will be for Italy to regain competitiveness in a very low inflation environment. In the absence of real reform, the most likely scenario for Italy will be a prolonged period of economic stagnation, if not recession, and an ever increasing public debt. This will likely lead the rating agencies to again lower their Italian outlook and force the ECB to periodically bail Italy out, notwithstanding the Bank's "no bail out" clause. However, in the same way that Argentina made the mistake of forever counting on International Monetary Fund goodwill to paper over its economy's weaknesses, Italy will be making a grave error if it postpones painful market reforms and relies instead on the indefinite indulgence of the ECB. The writer is resident fellow at the American Enterprise Institute > > >

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New Labour must recognise that Berlusconi is the devil

Blair's friend and ally lies in direct line of descent from Mussolini and poses a toxic threat to democracy

Martin Jacques
Thursday March 16, 2006

Guardian

We should not be surprised that New Labour has become embroiled in a scandal that involves Silvio Berlusconi. There is something entirely predictable about it. Tony Blair was perfectly happy to embrace Berlusconi, together with the former Spanish prime minister José Maria Aznar as an ally at the time of the breach between Europe and the US in the months prior to the Anglo-American invasion of Iraq. He has seen Berlusconi as a valuable ally in pursuit of his pro-Bush foreign policy. In fact, he has consistently been closer to Berlusconi than to centre-left leaders such as the former German chancellor Gerhard Schröder. This sense of affinity has even acquired a personal and family dimension, with the Blairs accepting Berlusconi's hospitality and taking their vacations with the Italian leader at his holiday home.

Blair clearly feels a political and personal rapport with Berlusconi. And this has set the tone for New Labour: Berlusconi is regarded as a man to do business with. This is deeply disturbing. How can New Labour regard Berlusconi in such a light? How can it fail to see and reflect upon the malign influence that he has had on Italian democracy? And what does the silence on such matters and warm embrace of the Italian leader tell us about New Labour itself?

Berlusconi is the most dangerous political phenomenon in Europe. He represents the most serious threat to democracy in western Europe since 1945. It might be argued that the far right as represented by such openly racist and xenophobic figures as Jean-Marie Le Pen and Jörg Haider poses a more serious danger, but such figures remain relative outsiders in the European political scene. Berlusconi does not. During his two spells as prime minister there has been a very serious erosion of the quality of Italian democracy and the tone of public life.

Democracy depends upon the separation of political, economic, cultural and judicial power. Berlusconi's ownership of the major television channels - and his control of the state-owned network, Rai, during his premiership - together with his willingness to use this media power for his own naked political ambitions, has undermined democracy. Further, he has changed the laws of the land at will - using his majority in parliament - to protect his personal interests and save himself from the courts.

The connection between Berlusconi and Italian fascism is not difficult to decipher. There has always been a predictable tendency to expect fascism to recur in its old forms; but that has never been the main danger. What we should fear is the reappearance of fascism in a new guise, reflecting the new global, economic and cultural conditions of the time, while at the same time drawing on national traditions. Berlusconi is precisely such a figure. He treats democracy with contempt: at each turn he seeks to undermine, distort and abuse it. He has no respect for the independent pillars of authority - prepared to accuse the judges of being stooges of the opposition and describe them as "communists".

By his indiscriminate assaults on anyone who stands in the way of his personal rule and enrichment, he has poisoned Italian public life. He lies in direct line of descent from Mussolini. The failure of New Labour to recognise this - worse, to befriend him, to regard him as some kind of ally, to accept his largesse and hospitality - cannot be dismissed as an oversight. It calls into question New Labour's - and the prime minister's - world-view and political judgment.

Tessa Jowell is not a political innocent. She is a leading member of the cabinet. She has been assiduously working her way up the New Labour ladder for many years. She has long been a Blairite, enjoying a relationship of trust with the prime minister. She has faithfully reflected his views in regarding Berlusconi as a politically sympathetic figure with whom New Labour, and its leading families, could do business. She may or may not have known the intimate details of her husband's financial affairs but she surely knew that he had acted for Berlusconi, helped him to avoid taxes, and assisted him in his efforts to resist the judiciary. And, no doubt, Jowell saw nothing wrong in this. After all, Berlusconi had the blessing of her prime minister - he was, broadly speaking, "on our side".

But Berlusconi is a dangerous man to become entrapped with. He deals in the dark sides of Italian political life. His party, Forza Italia, worked tirelessly to ensure that it inherited the mafia vote from the corpse of the Christian Democrats. His financial tentacles have abused and disfigured Italian political life. He regards the law to be malleable, negotiable and corruptible. He who sups with the devil should expect to reap the consequences. The problem is that Blair and New Labour have never recognised that Berlusconi is the devil. Instead they have seen him as a friend and ally. They have never recognised, or at least sufficiently cared about, the toxic threat he poses to Italian or European democracy.

There are two main reasons for this. First, he is seen as a global soulmate of Bush and Blair. Second, some of the values he represents - money, celebrity and power - are ones that Blair himself aspires to and admires. New Labour shares certain characteristics with Berlusconi, notably an indiscriminate worship of business and moneymaking, a belief in the power of the media, and a contempt for the left. We are witnessing a slow degradation of European democracy, of which Berlusconi is the most extreme and pernicious expression but of which New Labour, in a much milder form, is part-cause and part-consequence.

As the Italian legal process winds its way slowly through the evidence, no doubt more revelations will come to light. Whatever David Mills has done or not done cannot be regarded as the responsibility of Jowell, Blair or New Labour. But the fact that New Labour has been prepared to embrace such an insidious political influence undoubtedly helped to persuade Mills that Berlusconi was an acceptable client and Jowell that there was nothing untoward in her husband dealing with such a man and playing such an intimate role in his affairs. For that the prime minister must take the main responsibility. Just as with Iraq, Blair stands guilty of a monumental political error. What is at stake is no less than the democratic wellbeing of one of western Europe's largest countries and, as a consequence, the health of the European polity.

· Martin Jacques is a senior visiting research fellow at the Asia Research Institute, National University of Singapore

Martinjacques1@aol.com

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