Economic Interests

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Archive for the tag “austerity”

Democracy struggles in the global recovery

Democracy has never been so popular. The Arab summer saw dictatorships overthrown and replaced with democratic intentions while in Africa the percentage of democratic countries has increased from 7% in 1990 to nearly 40% last year. The two giants in South America; Brazil and Argentina, have even managed to elect female leaders, something the USA has still yet to achieve. In the world as a whole, democracies roughly account for 60% of the world’s 196 countries, nearly doubling in the last two decades.

So the public should be happy right?

Wrong. The definition of a democracy is vague and the differences between elections in one continent to the next can be staggering. Some “democratic” countries are rather misleading as well; for example Hugo Chavez won consecutive elections, but was an autocratic dictator in all but name, widely considered to have rigged elections and bought votes. Russia as well holds elections, but the chances of President Putin losing an election are slim to none, with the Kremlin wielding a tight fist over the polling system.  That lowers the level of truly democratic countries to a less impressive 25% according to some statistics.

The Financial Times graph shows the election results that awarded the presidency to Vladimir Putin were controversial to say the least. 

Even those countries are now facing troubles. The global recession sprouted protest movements like “Occupy Wall Street” and started a trend that has culminated in the widespread trouble many countries are now experiencing. Brazil angered their people by overspending on the world cup, which has vastly trumped the costs for the South African World Cup, while neglecting the public services that will be so key to the a successful tournament. Turkey’s suppressive leader, Prime Minister Erdogan, has pushed his people too far, putting into law tight rules on alcohol and arresting journalists at a higher rate than that of China. Egypt meanwhile democratically elected the Muslim Brotherhoods front man Mohammed Morsi, who promptly handed himself dictator like powers and refused to listen to the secular opposition.

The world cup stadiums have come at too high a cost for most Brazilians, when the quality of living is nowhere near to that of the stadiums.

In the last two examples there can be seen a link, with both the Turkish and Egyptian leaders exploiting the lack of important institutions and constitutions to grant themselves greater control of the country. Winning majorities in the elections seemed to suggest a remit to do as they liked, without consulting the public, especially the percentage that didn’t vote for them. It’s not a coincidence that Brazil has seen the least hostile protests, with President Dilma Rousseff agreeing with the public’s right to peaceful protests (while quite rightly criticizing the small minority that turned violent).

Yet even the Western countries with stable democracies have seen unrest. Southern Europeans have become frustrated with the levels of austerity being enforced upon them by Brussels and Berlin. Greece has been the main recipient, but even the likes of France are starting to feel the tension, with the approval rating of President Hollande diving to a lowly 24%. Britain suffered more in 2011, when riots in London spread across the country and caused national panic. Though the origin was most likely the austerity the coalition was embracing to cut Britain’s large budget deficit, racial tensions were a common thread, with the London Met still dominated by the white British (around 80%) in a city where that is now considered a minority.

The British riots caused major panic, as some feared the country was spiraling out of control.

The USA however managed to largely bypass these protests, mainly by keeping up their spending levels and kicking the austerity can down the road. Only this year has Barack Obama actually looked to cut down the trillion dollar deficit he had been running consecutively in his first term, with the automatic sequester cutting budgets by $85 billion in 2013. Yet democracy hasn’t looked too rosy for the USA either. The deadlock between the president and congress has become a serious problem, with a polarised government failing to put policies through. A small tightening of the gun laws this year was rejected by the republican dominated congress mostly out of spite, while a recent farming bill (consisting of subsidies for farmers and food stamps) was rejected for the second year running despite holding policies both sides have traditionally liked. Even worse, both sides nearly forced each other to walk off the fiscal cliff at the start of the year, with the president reluctant to cut spending and the congress incessant on not raising taxes. Luckily both sides managed to reach a bipartisan agreement, though if anything this has emboldened both parties beliefs that their way is the only way.

The inability to agree with the more popular President Obama has seen Congress’s approval rating fall sharply to record lows. 

In the last 5 years democracy has taken a bashing, that much is easy to see. For every success like Myanmar, there is a monumental failure like Syria to counter balance it. Yet, many countries still strive for the democracy that the west has enfamed. Giving the public the ability to choose its leaders is a right many in the west take for granted, but something many societies go without. The protests are simply another form of democracy, giving a voice to a cause that the government might be ignoring or missing. In the three biggest protests right now, you can rank Brazil as the most democratic and Egypt as the least. Egypt could have stopped the protests that started last year by listening to the public and engaging them, rather than trying to stamp them down. Turkey started off in a similar vein, but has now tried negotiating with the protesters, especially with the Kurds, who threatened to take the protests to another scale. Brazil however, have largely allowed the protests to take place, and allowing for some violent episodes have seen the least chaos. The government is also opening up a dialogue with the protesters, agreeing to some of their demands for increased funding to the public services. The country still has a long way to go, and could have foreseen the public out roar that was building, but have so far acted in the most democratic fashion.

The protests might be shocking to see, but they are easily trumped by the actions of say the Chinese government in Tiananmen Square, or the conditions of the North Korean people who are denied any access to the outside world. Such dictatorship allows for such short term protests to be stamped down on quickly, but encourages longer term distrust and anger toward the controlling governments. The answer for the countries facing public unrest is for more democracy not less. Allowing the public to voice its frustrations can let off steam and negate anger building up and people acting out in frustration.  In the USA’s situation, more democratic bipartisan talks between the two parties would result in much higher success rate for important policies. The immigration reform coming through shows signs of this much needed bipartisan agreement, but party politics could still derail negotiations.

It must be remembered that there are much worse scenario’s than the current protests hitting democracy.

As Winston Churchill famously said “It has been said that democracy is the worst form of government except all the others that have been tried”.


The next EU Bailout?


The Euro Crisis has died down in 2013 after a turbulent 2012. This was not because of a lack of effort by Europe’s trouble makers; Italy ground to a halt when trying to decide a government, while Cyrpus were the latest government to need a bailout. Yet the cost of borrowing for many EU countries has been decreasing gradually regardless. This has mainly been down to the statement made last year by the head of the European Central Bank to “do whatever it takes” to save the euro, hinting at the bank finally becoming a lender of last resort to the rest of the eurozone.

But tricky times lie ahead for Europe. The Euro area declined on averaged by 1% in the first quarter of the year and unemployment has reached a record 12.1%. Protests and riots have been more common in recent years (with even Sweden now experiencing public unrest) leading to many extreme parties getting more public attention, campaigning largely on their respective countries leaving the EU.

So a big question remains; who will be the next country to request a bailout?

One likely candidate is Slovenia. With a budget deficit over 5% of their GDP, their finances are in disarray. The economy retracted by over 15% in 2008/09 and is not set to return to growth until at least 2015. The largely state owned banking sector, saddled with debt, has grown to 140% of GDP, with an estimated 20% of loans considered non-performing (extremely late repayments). The public debt is still rather low at around 60% of GDP compared to much of Europe, but the interest levels Slovenia have to pay for borrowing are rather high at near 6%, if that rises much higher in the coming months they may lose access to the international markets and require external help (i.e. a bailout). Much of Slovenia’s problems come down to the credit crunch, where easy credit fuelled a construction boom similar to that in Spain that promptly burst. Another problem was the size of the state, which kept a tight grip on the bigger markets, crowding out private competition and stopping innovation. With the government now employing austerity measures, the growth of these industries have stalled, with potential buyers now a lot harder to find in a recession hit EU.


Slovenia’s prime minister has announced a brave rejection of any bailout talks, instead talking of important reforms to the banking sector (a creation of a bad bank for the worst debts) and budget balancing austerity measures including: cuts to school subsidies, a recent 5% cut in nominal public sector wages and a new higher marginal personal income tax. Their crisis resembles more Ireland’s than Cyprus and some strong leadership is giving the country a fighting chance of avoiding an international bailout.

So if not Slovenia, who then?

Two countries that resemble Cyprus (the latest bailout victim) more closely are Malta and Luxembourg. Both are small countries with massively outsized banking sectors. Malta’s banking sector is nearly 800% of its GDP making it impossible for the government to bailout out the sector by itself if needed, while the government already has high public debt of around 70% of GDP. But Malta has relatively low unemployment and a controllable budget. Its banking sector is rather different in nature to Cyprus’s as well; instead of two big local banks full of dodgy russian money and heavily exposed to the volatile Greek economy, Malta banks are actually subsidiaries of foreign banks, with high capital ratios and profits. Luxembourg also has a large banking sector, roughly 23 times its GDP. But once again the banks are large foreign owned, differentiating it from Cyprus. The economy is also very strong; experiencing low growth in 2012 when the surrounding countries were in deep recession, holding low public debt and unemployment and possessing one of the large current account surpluses in the region. If that weren’t enough, the small country has the highest GDP per capita ratio in Europe, meaning its people enjoy a very high standard of living. Both countries are over reliant upon their financial sectors and are very exposed to shocks in the market, but neither are realistically on the brink of a bailout.


Rather more worryingly, a much bigger economy is at risk, one which has already had to accept a bailout for its banking sector. Spain withdrew around €40 billion from European Stability Mechanism to help recapitalize their banks (a EU organism set up to offer up to €100 billion in bailout funds to member states). Yet many believe this wasn’t enough and that problems remain in the troubled Spanish banking system. Spain has had to nationalise one of its largest banks Bankia, while most others have had to make large cuts to their balance sheets. If this wasn’t enough, the economy is in serious trouble. Spaniards are seeing a deep decline in their national output, likely to fall for an eighth consecutive quarter and unlikely to see growth until after 2015. Unemployment is at a record high of 27% of the population, nearly 60% for the young. The budget remains heavily unbalanced, with a deficit of 7% of GDP, leaving public debt high (though not as high as private debt). A construction crash has lost many young spaniard an entry into the work force and has caused a lot of bad debts in the banking sector. When times were bad for the EU, Spain and Italy have faced some of the highest borrowing costs. Many see Spain as the weakest member of the big club, and any serious bailout of the economy would cause massive fractures in the EU and could possibly cause a domino effect on the likes of Italy and so forth. Fortunately, the political scene is stable, with the government in power for the foreseeable future and elected on a mandate of budget balancing and reform. Such reforms and austerity are already under way, with labours cost having dropped in contrast to rises in Frances and Germanys and a 4% drop having been achieved in the budget deficit since 2009. Progress is being made, but it needs a stable environment and a strong recovery in europe wide demand for Spain to really recover and see of the need for a bailout. That is a big ask in a continent that has become synonymous with the word crisis. A bailout for Spain is largely not talked of, precisely because of the implications it could have for the future of the EU. Yet it probably remains more likely than a bailout for Luxembourg and Malta.


The reality is that many member states could require a bailout if matters turned for the worst, with Portugal another possibility after the rejection of austerity measures by the national courts. The lack of a proper system in place and the reluctance by the ECB to really put its money wheres it mouth is, means rich and stable countries like Germany will continue to fund the mistakes of poorer economies. A more united Europe could solve this, with the spreading of some of the debt between the member states an attractive idea, ending the vicious circle of national debts being inflated by bailouts and increasing the need for further bailouts. Politically it remains a tough sell, especially for Germany, but it would also show a strong and united Europe, something most national leaders would secretly like to see.

Slovenia are the strongest possibility for a next bailout, with markets lacking confidence in the economy and increasing the costs of borrowing to perhaps unstable levels. But a spreading of at least some of the debt  through Euro Bonds could greatly decrease the need for this guessing game.

The Myth of Successful Eurozone Austerity: Estonia

People seeking to rebut stimulus proposals often point to the example of small Baltic republic Estonia. This is the only Eurozone country to have deleveraged significantly enough to be called “Austerian”. Estonian Government Debt went from 7.2 percent to 6 percent of GDP, a remarkably high decrease. It also has a growth rate of 8%, not only one of the highest in the Eurozone, but also unique in the world.

Austerity Advocates also seem to have their private-sector oriented rationale vindicated. Estonia is a strong producer of entrepreneurs, notably including the creation of the worldwide internet calling sensation, Skype. They are also unhindered by government bureaucracy, red tape, etc. Therefore,this should surely be an example which indicates the efficacy and the desirability of austerity policies.

However, there are several chinks in the armor of that explanation. Firstly, Estonia made significant use of EU Structural Funds, borrowing 3.4 billion Euros (approximately 20% of Estonian GDP in 2011) during the years 2007-13. Now, in whichever way the government uses this money, it is effectively a Keynesian demand-side solution. In the Estonian case, however, the funds are supposed to be used to create more jobs in the entrepreneurial sector.This would therefore increase real incomes, therefore increasing consumer spending, pushing the economy forward.

Now, there are people who argue that Government spending does not push the Economy Forward. In the case of Estonia, however, it undoubtedly did do so. Historically, from 1995 until 2012, Estonia GDP Growth Rate averaged 11.6%, reaching an all time high of 4.80 Percent in March of 2000 and a record low of -5.90 Percent in December of 2008. The Estonian Economy began recovering at the start of 2009. Funnily enough, Government Spending began to kick in at the end of 2008, a month or two around the trough of the recession. Considering that Government initatives have a month or two to take effect, Estonia’s boom is more coordinated with a rise in Government Spending.

Second of all, Estonia is more export driven than any other Eurozone Economy, with 98% of it’s 2011 GDP coming from Exports of Goods and Services.This naturally means it is more dependent on foreign demand than any other of its European neighbors. One can conclude that largest catalyst that made these austerity measures work, was Estonian’s willingness to take on the hard measures needed to adopt these “belt-tightening” policies. For example, civil servants in Estonia took a 10% pay cut and ministers aswell saw 20% of their income cut. Pension age was raised, benefits cut, and job protection reduced, which points out that Estonia has unanimously accepted that times of lavish spending has finished, even the finance minister of Estonia has said that the people “understood they had to give up something”.

By Amogh Sahu & Frederick Jordaan at

2013 Economic Trends

2013 is set to be a crucial year for a lot of countries, with Obama starting a tough second term at loggerheads with the Republicans over the Fiscal cliff, Europe implementing a set of reforms that could spark the end of the Euro crisis and China’s new leaders hinting at political reform in a economy that could overtake America in a few years. But some more important long term trends are also starting to take effect, which could change how the world economy works.

Hu Jintao’s new reign as the leader of China has sparked talk of political reform. 

One sector where big change is taking place is in manufacturing, where the location and tools are set to transform. For the latter the trend over the last decade has been for manufacturing jobs in the West to be outsourced to China. The Chinese labour force were willing to work for a fraction of their Western counterparts salaries, boasted colossal human capital and had a very underrated infrastructure that allowed for such goods to be transported quickly and efficiently. This helped fuel China’s lightning growth which has seen it transform from a developing country to a developed country in record time. But this has also seen a middle class emerge in China that has new demands. More emphasis now needs to be placed on the service sector for the economy to keep expanding at the same pace, as China’s grip on manufacturing is no longer as tight as it once was. Wages in the sector have been rising in the country, at around 20% a year, while China’s currency that had for so long been artificially kept weak, has been allowed to appreciate in the last few years. It now faces competition from its regional neighbours, as Vietnam and Bangladesh boast low cost workers waiting to be exploited by firms. But these countries don’t possess the same supply lines and pure number of workers as China, making them less serious rivals. Instead China’s biggest rival now lies below its biggest customer. Mexico is an attractive option for firms with its competitive costs (lower than China’s), large supply of workers and close proximity to America. The nation has come a long way, improving its infrastructure and enforcing its laws to a much higher degree than it did a decade ago. Of the $19.4 billion it gained in foreign direct investment in 2011, around half was gained in the manufacturing sector, while it has become the second largest supplier of electronic goods to the USA. HSBC even predicts that Mexico will overtake China and Canada as the biggest exporters to the USA by 2018. So next time you buy a product, you might not be surprised to see it originated in El Mexico.

Mexico’s PMI – which measures manufacturing output e.g anything over 50 is an increase and anything under is a decrease – has increased impressively over the last year. 

The second big change to the manufacturing sector which could kick off this year is the much heralded 3D printing. The ability to replicate products without fault could dramatically change the manufacturing sector just like robotic machinery once did. It could displace a lot of workers, as the need for humans to graft products would no longer be needed. Instead there would only be a need for employees who could operate the 3D printers, reducing the labour force considerably. That would have the knock on effect of reducing the need for out-sourcing (already on the wane) as the cost of manufacturing products would no longer depend on the wages of the local population. Instead it would make far more sense for 3D printing factories to be established in the home markets of the Western world, so that goods could be delivered fast and have access to modern technology far easier. The “ink” needed could also be very cheap for some products, as old products could be recycled to create the base materials for the 3D printed objects. While printing unique products for different customers would be rather easy, allowing for more artistic licence without the usual added costs. Alas, 3D printing is not yet ready for mass production, while some products would indeed remain cheaper to make from scratch rather than printing copied versions. But this could be the year it kicks off, as most of the ingredients are ready for factories to start trialing 3D printing in producing goods. 2013 might be the year where replicating products was proved to be viable and yet another nail in the coffin for the 20th century manufacturing techniques.

The final economic trend for 2013 will be the battle between austerity and stimulus that has been building up since the financial crisis. Stimulus packages were the order of the day initially after the crisis to help economies lift themselves out of recession. But austerity then took over as governments looked to try and gain control over their inflated debts and deficits. Nowhere more than Europe has austerity been so devoutly defended, with Germany and the EU enforcing tough austerity measures upon the countries that received bailouts. This has had mixed success though, with Greece clearly in need of controlling its debts, but the likes of Spain actually rather in control of its finances until it started to implement poorly thought out austerity measures. At the end of the year, one of bailed out nations, Ireland will return to the bonds markets, after managing to return to a current account surplus and get its economy growing in 2011 and 2012. Ireland remain the model case for Austerity in Europe; after requiring a bailout in 2010, they have implemented tough austerity measures and repaired their economy (despite a still high budget deficit), so a return to the bond market would help prove austerity works when implemented well. But they remain the only working example right now, with most countries contracting badly from austerity measures, with Spain still not expected to exit recession this year. On the other hand, some countries have turned to stimulating their economy instead, banking that the resulting uplift in the economy will outweigh the debt added and help pay it off in the long run. For example Japan have recently announced a stimulus package equivalent to $116 billion, to try and lift the economy out of recession by spending government money on improving the country’s infrastructure; which provides jobs and also attracts businesses to the country. Critics suggest the money won’t be spent efficiently, while the stimulus package will only add to Japan’s considerable debt, already at 200% of GDP. But they aren’t the only country that have thought to spend their way out of their debts, with China and Brazil both launching stimulus packages last year to help reignite their economies after falling world demand for their exports. Maybe the best example to use is the USA, who largely ignored their considerable debt during Barack Obama’s first term (actually adding trillions of dollars onto it) but are now being forced to consider austerity. The looming fiscal cliff at the start of the year would have forced through considerable cuts in America budgets equal to 5% of their GDP, instead Obama and Congress were able to come to a short term solution to avoid such measures. But the debt ceiling must be re-negotiated soon and the long term problem of America’s rising medical costs must be dealt with sooner or later. This means America will be looking to implement austerity measures to help deal with their rising debt this year, probably with a mixture of spending cuts and tax increases if the democrats and republicans can ever agree. So if a conclusion is to be reached this year over Austerity or Stimulus in the battle to control countries debts, then America may be the deciding vote. If austerity can help America bring down its budget deficit and public debt, without tipping the economy into recession, then it might just snatch the win.

More talks like these are to be expected as America looks to battle its debts by enforcing austerity measures. 


2012 was an eventful year, containing the Olympics, the election Mr Hollande as France’s first Socialist President in decades, the election of Mr Morsi in Egypt as the Muslim Brotherhood’s first big win in an election, the re-election of Mr Obama  in the USA and the first example of a private firm venturing into space in the form of SpaceX. 2013 will have a lot to live up to, but if these trends prove correct, then it could prove just as eventful (hopefully minus an apocalypse this year).

At the centre of it all

HQ of the EU in Brussels.

The Euro crisis ceases to go away, after protests erupted last week in Spain and Greece over tough austerity measures. This followed a relatively calm period in the storm; as Germany’s constitutional court ratified the ESM bailout fund, Holland elected pro-euro parties and Mario Draghi announced that the ECB would buy unlimited bonds from weak euro economies. But despite this the EU is continuing to do badly, with an estimated decline of 0.5% of GDP across the region and unemployment averaging at 11.3% of the population.

In the middle of all this stands Belgium, at the centre of the EU. The country shares its capital city, Brussels, with the rest of the European Union and is the location to many of Europe’s governing bodies. The country understandably supports the EU strongly, with calls for deeper integration and more centralized power. But is the country setting the right example for the other periphery economies?

Mario Draghi’s promises won’t keep the peace for long. 

This year GDP is only expected to rise by a miniscule 0.1%, hardly an improvement for a country that was expecting to be in the middle of a recovery by now. The country also boasts a budget deficit of 3.4% of GDP, not as high as the likes of Spain or Britain (6.8% and 8.4% respectively) but not quite as low as the likes of Germany (0.3%) or even Italy (2.8%). Alongside this the countries debt to GDP ratio is near 100%, a statistic more representing of the unstable southern economies than the prudent northern economies. For a country that sits in the heart of the EU, it would be expected that they would have better finances than that, especially if they are calling for fiscal decisions to be made by a more centralised EU. The interest rates on the 10-year bond yields of a country are always a good way to measure how confident the international markets are with that nation, Belgium’s are at 2.58%, roughly in between the low rates of Germany and Britain (under 2%) and the high rates of Spain and Italy (above 5%). This paints the picture of an economy that is distinctly average, not in danger of being pulled into the current crisis’s of Spain and Italy, but behind the leading economies like Germany and Poland. More importantly, the volume of exports has decreased this year, with the current account swinging from a surplus into a deficit of 0.2% of GDP. This is a bad sign for an open economy that has famously relied on trade in the recent past, with rising production costs and more of an emphasis towards the service sector helping to lower the exports of the country.

A graph at The Economist shows the forecast current account for Belgium swinging into a deficit. 

But there are mitigating circumstances and Belgium as a whole is not doing too badly. When you consider that Belgium is a country reliant on trade to the rest of Europe, then small growth is to be expected when other euro economies are implementing austerity measures. The budget deficit is also only just above the agreed limit for eurozone economies and the government is clearly implementing austerity measures itself so as not to ensure it loses control of its finances. They approved a €11.3 billion package of cuts at the end of last year, rose the retirement age of its people and have already dropped the deficit from the 3.8% level it was at in 2011. The country boasts a lot of positives as well; an excellent infrastructure, strong trade links and high skilled workers. In fact, Belgium is one of the few countries to have higher economic activity than they did back in 2008 at the height of the crisis.

This graph shows that Belgium were ranked 20th in the world for infrastructure in 2011. 

The real problem lies in the future of Belgium. As long as the eurozone crisis rattles on, Belgium cannot legitimately expect to recover from its deep recession years. Were the likes of Greece to default on their debts, Belgium would be highly susceptible to a possible domino effect as markets got spooked and banks runs started occurring in the weaker economies. The country was already downgraded last year by the much feared credit agencies and the estimated growth in the next few years does not generate much enthusiasm with just 0.8% growth next year and 1.3% the following year, notwithstanding any setbacks in the global economy. The downgrade occurred largely because of the forced bailout of Dexia (a Belgium bank), where the Belgium government had to buy their division of the bank for €4 billion and help secure 60.5% of their state guarantees, this following a previous bailout of the bank back in 2008. This was a drain on the states resources and shone a light on the countries worryingly fragile banking system, where another large bank Fortis (the 20th largest business in the world according to revenues in 2007) fell apart after the financial crisis and was sold off in parts. The weakness in the banking sector is systematic of the rest of Europe, as weak banks now have to be re-capitalised by their governments, in deep contrast to their American counter parts who had to go through strict stress tests to ensure they were strong enough to compete in the market. This could be an expensive problem for Belgium to fix and set back their recovery even more. In fact, a survey carried out by Deloitte found that the percentage of CFO’s that believed the economy would recover by the end of the year fell from 60% in March to 20% in June, while 25% believed it wouldn’t recover until after 2014.

The above table found in the Wall Street Journal shows Dexia’s exposure to the fragile economies of the EU, a worrying trend in Belgium banks. 

So while other struggling euro economies are trying to build back up lost competitiveness or pay back uncontrollable debts, Belgium is waiting for these countries to pick up and consequently for trade to begin flowing again at pre-crisis levels (as three quarters of its trade is with Europe). With its fortunes so closely tied to the rest of Europe, Belgium will hope its calls for tighter integration start to pick up momentum.

The Unelected Super Mario

In November 2011, Mario Monti was invited by the Italian President to form a government after the resignation of Silvio Berlusconi; he swiftly set up a new cabinet, appointed himself the finance minister and refused any salary. Mario Monti is an incredibly intelligent individual and has performed wonders in such dire times for Italy, especially after the farce of Berlusconi’s time in power. Silvio Berlusconi was known for his scandalous private life and questionable business decisions, while his cabinet held a former calendar girl, a minister linked with the mafia and only one female with heavy responsibilities. Mario Monti was a professor of economics, a European commissioner for 10 years and before his announcement as Prime Minister he was chosen as a Senator for Life (of which there are only seven in Italy). His cabinet also holds much more respected officials including: the chairman of NATO’s military committee, the boss of Italy’s biggest retail bank, six other professors and three women in high up positions namely the Interior Minister, Justice Minister and the head of employment and welfare.

The contrasting Time covers of both Italian Prime ministers.

Mr Monti needed a high class cabinet however to face Italy’s over whelming problems, namely that it is Europe’s biggest debtor, with Italy the only country along with Greece to have a debt to GDP ratio over 100%. Many in Europe fear that a Greek default could topple Europe, but it remains a small country, the real worry is Italy. If Italy were to crash it would all but end the euro, the current EU set up does not have the funds to bail it out and Italy’s combination of size and debt would be too much to handle for a fractured Europe. There are signs that Italy will have to be careful not to fall into this trap, with bond yields (borrowing costs) high in January at around the levels that saw countries like Portugal and Ireland needing a bailout (at 7%) and currently are at 6% and rising again. Yet Italy is actually running a very good budget, with the biggest primary budget surplus in Europe (budget excluding the interest payments on old debt), a low budget deficit when compared to European neighbours (targeting 2.7% this year) and a budget plan that hopes to wipe out the deficit by next year. It is rather growth that is Italy’s weakness, they are forecast to shrink this year by around 1% and have hardly grown in the last 10 years. This is mainly down to poor competitiveness by the county in comparison to countries like Germany as they have allowed wages to race upwards making Italy unpopular for industries.

The rise of Italian debt over the last few decades. 

In such a short space of time, Mario Monti is attempting to make more changes to the Italian system than Berlusconi made during his whole time in power. He has managed to push heavy reforms through parliament while keeping acceptable approval rates with the public, who have realised that changes must occur for Italy to survive. One big step he is taking is to make Italy more competitive within its economy, this is important as monopolies have existed in markets such as the gas industry for far too long. He hopes to complement this with extensive labour reforms that could change the level of difficulty for firms to sack their employees. This sounds wrong to begin with in such harsh times, but it could actually motivate employers to hire more Italians as they would have increased flexibility in staff turnover. There are also other unforeseen problems with the current labour rules; as it restricts young workers from entering the job market with the older generation so enshrined in their jobs, and encourages firms to offer short term contacts which offer less stability to employees and less tax for the government. This first point is backed by current unemployment statistics; Italy’s total unemployment stands at just under 10% (not great but better than most others in Europe) but the country fairs less favourably with Youth unemployment (under 25 years old) where 30% of young Italians are unemployed (only Spain, Portugal, Slovakia and Greece have higher percentages). Mr Monti is also applying strict austerity on his country to try and tackle the huge debt that is weighing them down. This means making unpopular cuts in public spending to try and decrease the budget deficit while also trying to balance it out with growth policies to stop Italy from sliding into a severe recession. This has only been accepted by the Italians as they have seen what could happen if they leave their debt unattended, with Greece not too dissimilar to Italy in some statistics. Mario Monti has also made important reforms to the pension schemes in the country and has campaigned fiercely against tax evasion (rife in Italy).

While Italy’s total unemployment is relatively low, their youth unemployment is disturbingly high. 

Mr Monti has finally given Italy credibility in Europe again as well (sorely missed under Berlusconi) with his sensible policies and likeable nature. He seems to get on with most other political leaders and has recently been offering advice on how to solve the Euro’s problems, notably backing the idea of “Eurobonds”. This is refreshing to see as it challenges the status quo that Germany is the only nation allowed to organise the policies of the euro. It is an idea that seems to be catching on as the recently elected French President Francois Hollande has also challenged the authority of Angela Merkel in deciding the EU’s future. He is also keen to get Britain back involved in the EU after David Cameron refused to sign the Fiscal Compact which seemed to set them apart from its fellow EU members.  He now needs help from his neighbours, to help Italy face its problems. He has called on Germany to push through reforms on their service industry to help boost European demand and he has called on the EU to help lower the interest rates Italy have to pay on their debt as a reward for the punishing reforms currently being pushed through by his government.

Prime Minister David Cameron (L) greets Italian Prime Minister Mario Monti outside Number 10 Downing Street on January 18, 2012 in London, England. In addition to meeting Mr Cameron on his visit to the UK, Mr Monti will also conduct meetings with financiers to find solutions to tackle Italy's large government debt.

Mario Monti hopes to enjoy a good relationship with David Cameron, to try and get Britain back involved in Europe. 

There have been problems for the Italian Prime Minister however, as disagreements over his reforms, political squabbles and the impact of a weak eurozone have damaged his recovery of the Italian economy. His labour reforms have been fiercely criticised by the Trade Unions of Italy, as they argue it will just the give the big employers more power to sack Italians. Mario Monti should have reason to fear as the past two individuals who attempted labour reforms were both assassinated for their efforts. His reforms now seem to have been watered down to appease the trade unions, but there are worries they will become useless and that more weakening of Monti’s resolution to change Italy’s labour market could occur. Originally in the reforms companies would be able to fire employees for economic reasons, Mr Monti has had to back down slightly by allowing courts to reverse these situations, though he hopes to speed up the whole process. The point of the reforms are to free up the labour market and give more freedom both to employers and employees, if this watered down reform doesn’t have the same effect, then Italy would have wasted a great opportunity. Another worry with his labour reforms are that they are long term in nature, so many Italians might not have the patience to keep supporting such changes while future governments could be inclined to scrap the ideas altogether if public cries become loud enough. Public turmoil over politics is also damaging the Mario Monti’s government, as local elections showed a decline in turnout and a rise in protest parties like 5-star movement, a party headed by a comedian who rejects the current Italian set up. This doesn’t bode well for Mr Monti as faith in the government wears thin, while his backing has also taken a hit after a controversial tax on property was released by the government (disliked in a country with 70% homeownership). Then there is the ever raging Euro Crisis, as problems in Greece and Spain reverberate around Europe and cause panic in the markets, effecting Italy’s economy. If the EU was in fine order, then Italy would currently be doing a lot better, with increased demand for its exports and more money available for external investment in Italy, instead the opposite is happening as Italy’s exports are struggling and FDI in Italy is almost nonexistent. This leaves Mario Monti facing an uphill struggle to lead Italy into a recovery, with outside and inside forces both working against him.

Beppe Grillo’s 5-star movement party gained seats in the recent local elections, showing Italian distrust of the current political set up. 

The real question is what will happen when Mario Monti has to step down next Easter; the Italian political scene is a disaster with no parties able to boast a clear backing from the public. Many want him to continue as despite the harsh austerity measures he has implemented, he still has the majority of the public’s backing and no-one else can boast that right now. But Mario Monti has always stated he will not continue after next year, plus it would mean him heading a political party, which would negate the neutrality he brings to the current parliament. If he were to be kept in power in any other way it would be democratically questionable as he would remain unelected by the Italian people, a quality that too closely resembles that of a dictatorship. Yet Mr Monti has arguably been Italy’s best leader in years, and has gone about the task of fixing Italy’s problems with integrity and commitment.

Next year will probably bring back the shady Italian politics of old with underhand deals, bribes and deceit. We should value the steady and articulate leadership of Italy while we still can, it’s just a shame that it has come about from an unelected professor being handed the job.

The Euro’s trapdoor: Elections

Europe is once again in disarray this year as Spain announce they will miss their budget targets, the effects of the ECB’s one trillion euro injection ware off and a year of elections see the public strike back at current governments. This last point is arguably the most important as elections around Europe have changed the balance of the EU and caused panic in the markets.

First up is France, who recently elected Francois Hollande as their new president. He is expected to cause a shake up within the EU as he calls for growth over austerity, rebels against Germany’s hold over Europe and expects to tax the French people more rather than cut spending (going against the current trend). Mr Hollande was also clearly not the candidate the rest of Europe favoured as Angela Merkel publicly backed Nicolas Sarkozy in the election and both David Cameron and Mario Monti refused to make time to meet him when he was a candidate, showing a general worry around Europe that Hollande could push the EU off course. But then his ideas aren’t that radical; he is arguing for a Growth Compact alongside the Fiscal Compact that will probably include policies already in place, he talks of austerity going too far but still agrees with reducing France’s budget deficit to 3% of GDP and while many are making a fuss over the French-German alliance breaking up, Francois Hollande’s contrasts with Angela Merkel might keep the EU more in check than the similar minded Sarkozy did. Even so, the elections show that it is clear France have chosen to change the direction that their country is heading in; from a globalised leader of the euro to a country that is looking at creating more trade barriers and reducing the power of the EU.

Hollande will have to learn to like austerity if he is to cut the French budget deficit.

Next up is Greece, where no party could gain enough votes to create a government, leaving many worried about the future of the country. The two biggest parties: the New Democracy party (Conservative) and Pasok party (Socialist) both experienced shocking results as their share of the vote fell from around 80% to lower than 30%. The Greek people instead voted for a range of anti-austerity parties, leaving no chance for a government to be elected as parties with contrasting policies refused to join in any coalition. The only hope is that a second round of elections will see the vote concentrated more on one or two parties as another scattered approach will cause many problems. But more important than the results of the next election is the message behind it, that the Greek people are heavily against the current bail-out scheme being forced onto their country. The problem is that there is no conceivable way around it, the EU will loath to re-negotiate the bail-out measures once again after writing off half of Greece’s debt at the start of the year. A real possibility now is that Greece will leave the euro, a frightening thought as the rest of the EU is still not ready for such an event despite it being the topic of discussion for over two years now.  This election has thrown a spanner in the works of Greece’s debt reduction plan and if radical parties can get into power in the next election, then Greece could refuse to pay back its debts, a move that could have far reaching effects around the Globe.

Greek election results.

The French and Greek elections have been the biggest elections in Europe so far, but both Britain and Italy have experienced damaging results in local elections. In Britain, the Conservatives lost 404 seats and the Liberal Democrats lost 330 seats, allowing Labour to gain 823 seats in total. This was a crushing result for the Coalition government and showed the public disapproval in the government’s performance, in fact if this was a parliamentary election then Labour would have won a majority government comfortably. In Italy, voters showed their disapproval by either voting for protest parties or by not voting at all (with the turnout at just 67%, compared with the French elections which had an impressive 80% turnout). One of Italy’s biggest losers was Berlusconi’s People of Freedom party, going from 37.6% to just 11.6% of the vote, as disapproval with the former prime minister has fallen onto his party. The problem with Italy is that while Mario Monti has done a respectable job at reforming the country, he is only a short term occupant, appointed as a technocrat leader by the coalition government to help sort out the nation’s economy. When he leaves next spring, Italy will face a hard job replacing someone who has united the different factions of the government superbly as a neutral.

This is not to mention the recent breakup of the Dutch government over budget cuts, with elections to be held soon to create a new coalition. While Angela Merkel’s party lost a local election in a key German state to their socialist rivals. Overall, this year follows a trend of countries chucking out their governments since the financial/euro crisis started. The UK voted in the Conservatives/Liberal Democrats in 2010 and chucked out Labour, while last year Italy voted out Berlusconi and Spain voted in Mariano Rajoy. The austerity measures currently being employed in Europe have left the public angry at the job cuts and new taxes that are popping up, but any possible new governments won’t have much choice to deviate from this plan. Any that does will be punished by the markets and perhaps shunned by the rest of Europe.

Austerity is a tough pill to swallow, but voting out the current governments will only lead to the same result at the end of the day.

Not much to celebrate this St Patrick’s day?

St Patrick’s Day has gradually shifted from a day of celebrating the arrival of Christianity to a general celebration of the Irish culture. But times have been rough for the Republic of Ireland of late and many might not seem like celebrating this year.

Ireland has experienced a come down from the high growth period of 1995-2000 (averaging GDP growth of 10%) where they earned the nickname of the Celtic Tiger. One of the biggest reasons for this growth was an especially low corporation tax – at around 12.5% – which saw social networking giant Facebook (among others) establish its international headquarters in Dublin (to escape heavy corporation tax in America).

Ireland’s troubles were exposed brutally in the world wide financial crisis, as they were the first nation to officially move into recession. An inability to change their monetary policy and devalue their currency meant they had no protection against the recession and were hit hard.  The economy had been built on a housing bubble (similar to Spain) that promptly burst and left most of the public with huge debts they couldn’t pay. A statistic to back this up is Ireland’s household debt to GDP ratio which stands at an incredible 190%, the second largest in the world. In 2009 their economy shrank by around 7% and in 2010 it shrank by 1% (when most other countries had started recoveries), while the budget deficit for 2010 was a record high 32% of GDP. The Irish banks were heavily exposed by loans to property developers (losing an estimated €100 billion) and in 2008 the government had to issue bailouts, though an exchange for equity stakes in the banks was refused in fear of diluting shareholder value. Ireland’s government bonds took a hit as well, as investors grew nervous over Ireland’s ability to pay its debts and interest rates on the bond rose to high 9% (below only Greece at the time).  This nervousness was started off by Standard and Poor (rating agency) downgrading Ireland from its AAA credit status to a single A credit status, with it transpired afterwards that costs were worse than thought and prompted Moody (another credit agency) to downgrade Ireland to “junk status” in 2011. The country had to be bailed out by the EU and IMF to the tune of €85 billion last year in exchange for new austerity measures.

Moving forward to this year, though the worst seems behind them, Ireland still have some problems to deal with. The budget deficit for 2012 is forecasted at 8.6% of GDP, the Irish public faces a referendum over the EU’s fiscal compact (which could see Ireland lose funding if voted “no”) and face unemployment at around 15% and youth unemployment at around 30%. The government is imposing tough austerity measures to try and cut debt; by slashing public service budgets (wages have been cut by 15%), raising sales tax to 23% (joint highest in Europe) and are aiming to get their budget deficit down to 3% by 2015. They also face mass emigration as disenchanted members of the public look for better opportunities in foreign lands, where unemployment is not so high and growth so little.

But there are positives for Ireland to concentrate on; before the crisis the government was actually running a budget surplus and doesn’t have a history of mismanagement, the country’s GDP per person in 2011 was still very high at around €35,000 (higher than Germany) and are showing signs of regaining competitiveness in their exports. The Irish public genuinely seem to agree with the government that austerity measures are the right way, despite unemployment rising and wages being cut. The current account returned to a trade surplus in 2010 and Ireland seems confident of beating the EU-set measures of a budget deficit of 3% by 2015 to try and regain confidence in the market. This looks possible as Ireland already beat the EU target of getting their budget deficit down below 10% early last year. Maybe the sort of fight being seen by Ireland’s economy can give its people something to celebrate this St Patricks day, as there doesn’t seem to be much else.

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