ITALY/G20: Nicolas Sarkozy had hoped to use his time as head of the G20 summit to achieve lofty goals like rethinking the global financial system and tackling commodity price volatility. But the French president has ended up doing little other than fire-fighting and his tenure may yet end with another major financial meltdown.
One of the most violent conflagrations ignited last week was when Greek prime minister George Papandreou shocked his European Union colleagues by declaring he would put the proposed Greek rescue package to a referendum. Following bullying and coercion from Brussels, any idea of democratic oversight was shelved, and Papandreou looks like he’ll step down.
Sadly Sarkozy and his EU buddies have made a hash of dousing the flames. While they did bully Greece into scrapping its plebiscite, they failed to achieve any consensus on a Tobin tax to make banks pay for their crisis, and broke a taboo by saying Greece may leave the euro. The risk of a disorderly default on Greece’s €300 billion of government debt remains as acute as ever.
Nor did Sarkozy, Angela Merkel and friends manage to persuade any non-EU nations to fund an enhanced euro rescue fund big enough to stave off euro contagion. Potential supporters including China just don’t see it as a particularly good investment, at least not without a more enticing quid pro quo.
The current crisis is a direct consequence of the euro’s flawed design (a currency union without a matching fiscal union), and the fact western nations have almost universally been living beyond their means for decades, as they sought to patch over rising social inequalities with massive public or private indebtedness. Their dysfunctional banking systems have not helped.
Italy’s fun-loving buffoon untrusted
One of the biggest worries for the world leaders gathered at the G20 summit in Cannes last week is Italy. They simply do not trust the country’s fun-loving buffoon of a prime minister, Silvio Berlusconi, to push through the called for deficit-reduction measures. By Friday, the market’s distrust of Italy was palpable, as the yield on Italy’s 10-year bonds reached euro-era highs.
Italy’s debt-to-GDP ratio of 120% is almost as high as that of Greece — and double the maximum laid down by the Maastricht Treaty. Even though the risks are to some extent attenuated by a high savings rate, which means that 40% of Italian government bonds are domestically held, which in turn leaves the country less vulnerable to the vicissitudes of international markets, and by the fact large portions of Italy’s long-term debt are at locked in at low rates, Italy’s anaemic GDP growth and weak governance is causing bond investors to doubt its ability to service its debts.
The patience of other leaders snapped on Friday, when they forced Berlusconi to allow IMF officials to monitor Italy’s progress with deficit-cutting. Speaking at the Cannes summit, Berlusconi denied this implied any loss of sovereignty.
If all that these IMF inspectors discover in Italy is a liquidity problem, then the euro ought to be able to limp along for a few more months. If they find a solvency crisis, much more imaginative measures, including changing the remit of the Frankfurt-based European Central Bank, are likely to be required if the euro is to be kept afloat.
An edited version of this article was published as the Business Comment in the Sunday Herald on 6 November 2011, under the headline “After Greece, Italy”