What next: a Ro­man Europe?

Financial Mirror (Cyprus) - - FRONT PAGE -

As the Euro­pean Union be­gins to dis­in­te­grate, who can pro­vide the lead­er­ship to save it? Ger­man Chan­cel­lor An­gela Merkel is widely cred­ited with fi­nally an­swer­ing Henry Kissinger’s fa­mous ques­tion about the Western al­liance: “What is the phone num­ber for Europe?” But if Europe’s phone num­ber has a Ger­man di­alling code, it goes through to an au­to­mated an­swer: “Nein zu Allem.”

This phrase – “No to ev­ery­thing” – is how Mario Draghi, the Euro­pean Cen­tral Bank president, re­cently de­scribed the stan­dard Ger­man re­sponse to all eco­nomic ini­tia­tives aimed at strength­en­ing Europe. A clas­sic case was Merkel’s veto of a pro­posal by Ital­ian Prime Min­is­ter Mat­teo Renzi to fund refugee pro­grammes in Europe, North Africa and Turkey through an is­sue of EU bonds, an ef­fi­cient and low-cost idea also ad­vanced by lead­ing fi­nanciers such as Ge­orge Soros.

Merkel’s high-handed re­fusal even to con­sider broader Euro­pean in­ter­ests if these threaten her do­mes­tic pop­u­lar­ity has be­come a re­cur­ring night­mare for other EU lead­ers. This re­fusal un­der­pins not only her eco­nomic and im­mi­gra­tion poli­cies, but also her bul­ly­ing of Greece, her sup­port for coal sub­si­dies, her back­ing of Ger­man car­mak­ers over diesel emissions, her kow­tow­ing to Turkey on press free­dom, and her mis­man­age­ment of the Minsk agree­ment in Ukraine. In short, Merkel has done more to dam­age the EU than any liv­ing politi­cian, while con­stantly pro­claim­ing her pas­sion for “the Euro­pean project.”

But where can a Europe dis­il­lu­sioned with Ger­man lead­er­ship now turn? The ob­vi­ous can­di­dates will not or can­not take on the role: Bri­tain has ex­cluded it­self; France is paral­ysed un­til next year’s pres­i­den­tial elec­tion and pos­si­bly be­yond; and Spain can­not even form a govern­ment.

That leaves Italy, a coun­try that, hav­ing dom­i­nated Europe’s pol­i­tics and cul­ture for most of its his­tory, is now treated as “pe­riph­eral.” But Italy is re­sum­ing its his­toric role as a source of Europe’s best ideas and lead­er­ship in pol­i­tics, and also, most sur­pris­ingly, in eco­nom­ics.

Draghi’s trans­for­ma­tion of the ECB into the world’s most cre­ative and proac­tive cen­tral bank is the clear­est ex­am­ple of this. The enor­mous pro­gramme of quan­ti­ta­tive eas­ing that Draghi pushed through, against Ger­man op­po­si­tion, has saved the euro by cir­cum­vent­ing the Maas­tricht Treaty’s rules against mon­etis­ing or mu­tu­al­is­ing govern­ment debts.

Last month, Draghi be­came the first cen­tral banker to take se­ri­ously the idea of he­li­copter money – the di­rect distri­bu­tion of newly cre­ated money from the cen­tral bank to eu­ro­zone res­i­dents. Ger­many’s lead­ers have re­acted fu­ri­ously and are now sub­ject­ing Draghi to na­tion­al­is­tic per­sonal at­tacks.

Less vis­i­bly, Italy has also led a quiet re­bel­lion against the pre-Key­ne­sian eco­nom­ics of the Ger­man govern­ment and the Euro­pean Com­mis­sion. In EU coun­cils and again at this month’s In­ter­na­tional Mon­e­tary Fund meet­ing in Wash­ing­ton, DC, Pier Carlo Padoan, Italy’s fi­nance min­is­ter, pre­sented the case for fis­cal stim­u­lus more strongly and co­her­ently than any other EU leader.

More im­por­tant, Padoan has started to im­ple­ment fis­cal stim­u­lus by cut­ting taxes and main­tain­ing public spend­ing plans, in de­fi­ance of Ger­man and EU Com­mis­sion de­mands to tighten his bud­get. As a re­sult, con­sumer and busi­ness con­fi­dence in Italy have re­bounded to the high­est level in 15 years, credit con­di­tions have im­proved, and Italy is the only G-7 coun­try ex­pected by the IMF to grow faster in 2016 than 2015 (al­beit still at an in­ad­e­quate 1% rate).

Padoan has more re­cently cre­ated an imag­i­na­tive pub­licpri­vate part­ner­ship to fi­nance a des­per­ately needed re­cap­i­tal­i­sa­tion of Italy’s banks. And he has launched his ini­tia­tive with­out wait­ing for ap­proval from ECB and EU of­fi­cials, who blocked an ear­lier “bad bank” plan un­der Ger­man pres­sure. Fi­nan­cial mar­kets im­me­di­ately re­warded Italy for its de­fi­ance, with the share price of the coun­try’s big­gest bank, Unicredit, jump­ing by 25% in three days.

Italy’s in­creas­ingly as­sertive re­sis­tance to Ger­man eco­nomic dog­mas may not be sur­pris­ing: The coun­try has suf­fered from al­most con­tin­u­ous re­ces­sion since join­ing the euro. More­over, Padoan, who was for­merly the OECD’s chief economist, is the only G-7 fi­nance min­is­ter with pro­fes­sional eco­nom­ics train­ing. He un­der­stands bet­ter than any­one that mis­guided fis­cal and mon­e­tary poli­cies have been the un­der­ly­ing cause of Europe’s eco­nomic un­der­per­for­mance, and are largely re­spon­si­ble threat­en­ing to de­stroy the EU.

The re­nais­sance of Ital­ian self-con­fi­dence and lead­er­ship can also be ob­served in do­mes­tic and in­ter­na­tional pol­i­tics. Renzi was the only Euro­pean leader to in­crease his party’s vote share in the 2014 Euro­pean Par­lia­ment elec­tion, and his dom­i­nance of Ital­ian pol­i­tics has since grown. While pop­ulist pol­i­tics now threat­ens Ger­many, France, Spain and Bri­tain, Italy has turned its back on Sil­vio Ber­lus­coni, and Renzi has squeezed sup­port for the North­ern League and the Five Star Move­ment. As a re­sult, Italy has started im­ple­ment­ing labour, pen­sion and ad­min­is­tra­tive re­forms that were un­think­able in the past.

In for­eign affairs, too, Italy has be­come more as­sertive. The Ital­ian for­eign min­is­ter, Paolo Gen­tiloni, is col­lab­o­rat­ing with his pre­de­ces­sor, Fed­er­ica Mogherini, now the EU’s High Rep­re­sen­ta­tive for for­eign affairs, to cre­ate more prag­matic and ef­fec­tive Euro­pean poli­cies on Libya and the refugee cri­sis. Most sig­nif­i­cantly, Italy is lead­ing an ef­fort to re­pair re­la­tions with Rus­sia af­ter the Ukraine con­fronta­tion and to strengthen co­op­er­a­tion over Syria. This cam­paign ap­pears to be bear­ing fruit with a grad­ual lift­ing of EU sanc­tions against Rus­sia, start­ing this sum­mer.

Given the fail­ures of Ger­man lead­er­ship in Europe and the po­lit­i­cal vac­uum else­where in the EU, Italy’s de­ci­sion to raise its pro­file is surely right. As Renzi put it in a re­cent in­ter­view, “Af­ter two years lis­ten­ing, now I speak.”

It re­mains to be seen whether Italy can as­sem­ble a coali­tion of eco­nom­i­cally pro­gres­sive and po­lit­i­cally prag­matic coun­tries to over­come Ger­man con­ser­vatism and dog­ma­tism. But one way or an­other, Europe’s po­lit­i­cal econ­omy will have to adapt to the new type of global cap­i­tal­ism evolv­ing out of the 2008 cri­sis. With luck, a new breed of wily and ag­ile Ital­ian lead­ers will out-ma­neu­ver the blun­der­ing Ger­man di­nosaurs, whose out­dated rules and doc­trines are lead­ing the EU to­ward ex­tinc­tion.

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