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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?

Wednesday, January 21, 2009

You are independent of all logic Giulio Tremonti!

Italian Finance Minister Giulio Tremonti is a strange and controversial figure.The peculiar phrase in the title to this post in fact came out of the very mouth of Tremonti himself, though they were addressed to an astounded, if now world famous, US economist, Nouriel Roubini, in front of an equally amazed and bemused Davos audience. Since in these kind of matters it is normally better to watch what it is you actually say, just in case in the fullness of time your own words come back to haunt you - as the famous “If you don’t fully understand an instrument, don’t buy it” ones of Santader Bank chief Emilio Botin just did in the Madoff affair - I simply can't resist pointing out how lacking in logic the present Italian Finance Minister is himself at times.

This post came into my head on reading a report in the Financial Times, about a plan which Italy, currently the revolving (how appropriate this word is here) president of the G7, wishes to present to that august body, with the apparent intention of promoting all that much needed reform in the financial system. I was almost moved to tears by the elquoence and idealism of his words, and of his determination to get to grips with all those horrid "rogue economies".

We need a new global order,” (Tremonti) told the Financial Times in an interview. “We want to present a new icon – the legal standard – just as once there was the gold standard" A briefing paper he showed the FT begins: “The ‘Legal Standard’ could contain the minimum basic set of rules on propriety of international activities and transparency which the whole international community is expected to respect.” A mix of voluntary and binding codes would be closely monitored with a wide range of tools, including peer review, naming and shaming, indicators and “black listing ... for ‘rogue’ economies”.

But then I put my emotions to one side, and thought cooly and calmly for a moment: coming from a minister whose country ranking in the World Economic Forum Global Competitiveness Report lies somewhere near to that of Botswana (with all due respect to Botswana) this does seem all to be rather rich to me, my, my, it really does.

But then I read a report of an interview Tremonti gave last week to the French newspaper Les Echos:

Finance Minister Giulio Tremonti told French newspaper Les Echos in a Jan. 12 interview that Italy may not be faring as badly as GDP figures suggest because they don’t include the so-called black economy, worth about 17 percent of overall economic output, according government estimates.

And I thought to myself, mightn't an economy where the Finance Minister brazenly proclaims that 17% of output is to be found in the informal economy......well mightn't someone think that a country whose minister cited this fact as evidence for not doing too badly was itself one of those "irregular" economies that Tremonti wants to set us all so hard to work on "blacklisting". But then I read the latest utterance from his Prime Minister Silvio Berlusconi, and I understood what not faring badly actually means in a country whose politicians' grasp of the complexities of modern logical thinking leaves me just astounded:

Italian Prime Minister Silvio Berlusconi said the economy isn’t in “such bad shape” even after the European Commission and the country’s central bank predicted the worst annual contraction in more than 30 years. “It means we will go back by two years,” Berlusconi told reporters today in Rome, referring to the value of nominal gross domestic product. “That doesn’t seem so bad.”

Indeed, Giulio Tremonti does have this much in his favour, he never flinches in the face of having to change his mind. Only today he came out and abandoned his forecast (yes, only today) that the Italian economy would expand in 2009 and informed us that it is about to have the worst contraction in more than 30 years. Of course, it is just mere coincidence that the European Commission yesterday forecast a contraction of a similar order.

Interestingly here, Tremonti came out on 18 December and explicitly attacked the Financial Stability Forum, a group of regulators chaired by Bank of Italy Governor Mario Draghi. In comments to reporters at the European finance ministers and central bankers held in Paris, he insisted it would be “stupid to listen or take lessons from people who don’t understand anything” of the credit crisis. Ironically, one of these people - Mario Draghi - who apparently didn't understand anything had already forecast on January 15 that the Italian economy would contract by 2% this year (at the time Tremonti was predicting 0.5% growth). When question by reporters about the apparent disparity he limited himself to saying that The Bank of Italy forecast seemed “realistic”, but that the government’s own predictions were not yet ready. I mean, I know Liebniz and Newton did reputedly discover the mathematical calculus separately, but it is curious how the Bank of Italy, the EU Commission and the the Italian Government all come out with exactly the same number within a matter of days. Could this be another example of multiple scientific discovery, or is it just that they are using the same computer software and model.

Go Back To Turkey!

Moving back now to Nouriel Roubini and the Davos Meeting of 2005, I think I'll let Nouriel himself develop the point. As he put it on his blog at the time:

On Friday I was in Davos in a panel on the "Ups and Downs of EMU" (European Monetary Union) where ECB head Trichet, Italian Economy Minister Tremonti, a few other EU officials and myself were supposed to discuss the following questions: Will EMU collapse in the future? Which country will exit first? What will be the consequences of a break-up of EMU? How to avoid that? And what are the prospects for the Growth and Stability Pact? Unlike the other panelists that ignored the topic and spoke instead about all the good things allegedly associated with EMU, I took the questions seriously by considering some of the problems and risks faced by EMU and the risks of a break-up, especially for the case of Italy.

My remarks caused a stir with Minister Tremonti who interrupted me in the middle of my remarks, went into a temper tantrum and shouted - to the consternation of all participants - to me: "Go Back to Turkey!!". I happen to have been born in Istanbul.....I politely replied that I was an independent academic thinker being paid to present sensible analyses and arguments. And I also pointed out that Prime Minister Berlusconi, the boss of Mr. Tremonti, had declared in public that the "Euro has been a disaster for Italy". At which the minister rudely interrupted me again shouting: "You are independent of logic". At that point I decided to ignore him and finished my remarks. The only additional observation I can make now is that the minister did not just personally and rudely insulted me; he also insulted Turkey and the Turks, a civilized country that is following much more radical fiscal policies and economic reforms than Italy in order to join the EU. Moreover, such a public temper tantrum by the deputy prime minister of Italy - something apparently common to him as the italian press has reported - is a major embarrassment for Italy; Italy deserves better in terms of who should lead its economy and represent him in international public forums. As many members in the audience expressed their solidarity to me and their scorn of the minister tantrum after the end of the panel, this sad episode is a reflection of the sadder state of economic policy in Italy. And the Italian press, starting with the respected Corriere della Sera, has now reported this sad incident and scorned the minister for publicly embarassing Italy in a major international forum. Hopefully, since Italy and Italians deserve better rulers than this buffoon that made a fool of himself in public and embarrassed his own entire country, in April they will vote into the dustbin of history this mediocre individual and his entire administration. Certainly with pathetic rulers such himself Italy would be certainly bound to face economic disaster and eventually be forced to ignominiously exit EMU. Italy and Italians deserve better.

But such volte face from GuilioTremonti are nothing new. Take his new found enthusiasm for the euro, for example - in fact only this week he decried his own Prime Minister's earlier view that the Euro was a disaster, and asserted that in his opinion the euro project was a “totally sustainable” one. A conviction which now stands in somewhat strange contrast with the large queues which developed outside banks and ATMs in Italy during the first days of the new currency's existence since due to his then "eurosceptic stance" as economy minister there were marked delays in the introduction of the currency and a huge row about who was to blame in the Italian cabinet. In fact the row lead to the abrupt exit stage left from the Italian government of Foreign Minister Renato Ruggiero who was strongly critical of Tremonti's antics, antics which were implicitly defended by Prime Minister Berlusconi himself in allowing Ruggiero to be ousted.

And I could go on and on, citing, for example, his recent statements to the effect that further stimulus packages have no point since they simply don't work, an attitude which looks rather less the standpoint of a man of principle, and rather more like sour grapes from the Finance Minister of a country which quite simply can't afford any more stimulus due to the imminent threat of credit rating downgrades. The Europen Commission has said it expects Italy’s public debt to rise to 109.3 per cent of GDP this year, up from around 105% next year. This is what happens when you get a 2% contraction, and if we get deflation (falling prices) then things will get even worse without any increase in the actual deficit, and let's try not to think about what the rising cost of borrowing indicated by the credit spreads will mean.

“It’s not right to support demand by raising debt,” Tremonti said in a news conference in Rome. “The economic trend can’t be turned around with stimulus packages. Judging from the U.S., they have worked very little.”

As I said, I could go on and on, but at this point my head is simply spinning with this whirling-dervish-like crasp of the niceties of logical reasoning, so I think I'll leave it there. After all, we do have a crisis out there which we need to make the time to think about.


Piazza Armerina said...

First off, congratulations on being paid to speak at such a prestigious conference.

Don't pay attention to what Tremonti said, as it's simply a combination of defensiveness, guilt, pride, pretentiousness and arrogance. It is not very becoming - and easy to see through. But, it's a behavior that is far too common in all levels of Italian life.

Yes, Italians rightly blame their politicians, but it's clear to me that the Italian people need to look in the mirror, and they will find the culprit. Italy is probably the most problematic country in the EU, and its citizens are to blame. It has such a combination of negative characteristics that it's a wonder that tourists continue to fall in love with it.

The fact is, Italian economic downsizing will continue, and asset prices are irrationally overvalued. Eventually, Italy will be choked into submission, but it will be a drawn out process, as Italians will attempt to hold onto every vestige of individual power they can.

The rest of the world would be wise to stay away from investment there, it will only delay the inevitable.

It's best to stay on the sidelines and watch this soap opera continue to unfold.

Nihil said...

Speaking as an Italian, I strongly disagree with Prof. Roubini on one specific point: that “Italy and Italians deserve better”.

No, this government is exactly what this population deserves. It is an accurate mirror of Italian pettiness and sense of entitlement. It will keep us (them?) distracted through crisis and decadence with its loud squabbling and ineffective meddling, punctuated by drops of selfish charity marketed as serious stimuli. This is what was promised during electoral season, and this is what Italians chose with perfect awareness: some unwilling to make any effort for the better; some - having never heard of the prisoner’s dilemma - believing themselves to be voting for their own interests at the expense of some other social group; and a few even swallowing the package hook, line and sinker.

That the main political alternative in 2008 displayed a nearly identical level of corruption, incompetence, and masturbatory small-mindedness is a very weak excuse; the seeds of such an unbelievably awful ruling class have been sown over years, if not decades, of Italian selfishness and suicidal acquiescence. For my own little part, over the last few years I tried to support what small sparks of civilization could be found in this country, both at a local level and - through the Internet - at the national one. I saw those hopes fail, and will move to Sweden in eight months from now.

Italy remains a delightful place for spending money, and I would recommend it to anyone for their holidays, but there are few worse places for earning a honest day’s bread or building a family.