Steve Bannon came to Italy and was greeted with a full-page interview this Sunday (3 June) in the center-left daily newspaper, La Repubblica. The journalist, Antonello Guerrera, seemed determined to find Bannon’s influence behind the unlikely union of Matteo Salvini’s Lega and Luigi Di Maio’s Five Star Movement (M5S). Bannon would have none of it. Although he admitted to having spoken with both gentlemen and having had prior contact with the M5S, he insisted that the two groups came together because sharing the government between them was ‘the logical conclusion’. The two parties’ leaders were ‘heroes’ for having ‘overcome the concepts of left and right’. That was the only way to meet the demands of an electorate, the majority of which voted ‘against the establishment’. ‘Italians should be proud.’ Now Rome is ‘the center of world politics’. The question now is whether the lessons from Italy’s experience are at all in line with what Bannon expects.
The turmoil that struck Italian sovereign debt and bank equity markets on Tuesday, 29 June, is a stark reminder that the potential for another crisis is real, even if not imminent. Important parts of the firewall that separates banks from sovereigns remain incomplete – and central bankers remain vulnerable to political influence as a consequence. Two recent books help illustrate why. One, by former Cypriot Central Bank Governor and Leicester University Professor Panicos Demetriades, reveals the limits of central bank independence. The other, by University of Denver Professor Rachel Epstein, explores the interaction between banks and markets.
To understand what impact the Trump Administration will have on European economic performance you have to start by re-examining the lessons of the past. Almost 50 years ago, Richard Cooper published a ground-breaking book in the United States called: The Economics of Interdependence. He conceived this book during the early 1960s while he was working as an economic policymaker in the Kennedy and Johnson Administrations, and he developed the argument as part of a high-level study group within the Council on Foreign Relations. These details are important because the message Cooper had to communicate was controversial, particularly coming from a member of the foreign policy establishment. No country, he argued, not even the United States, can ignore how other countries react to their economic policies. The problem is not good diplomacy (or good manners). It is structural. If policymakers ignore how other countries react to what they do, then they will never achieve their objectives – because the reactions of others can do much to offset any benefits a discrete policy action may deliver. Indeed, a country will be worse off going it alone than working with others. Compromise and cooperation are always better than having countries set their economic policies at cross-purposes.
The Belgian economist André Sapir used a background paper for the September 2005 informal summit of the European Union’s economic and finance ministers to make a provocative claim about the European social model: Europe’s heads of state and government do not need to choose between equity and efficiency or between a welfare state and a market economy; with the right reforms to welfare programs and market institutions, it is possible to have both equity and efficiency at the same time. The British held the rotating presidency of the Council of the European Union and were quick to take up Sapir’s challenge. The quest to achieve both equity and efficiency moved to the heart of efforts to relaunch the Lisbon Strategy and to re-energize the European project. Unfortunately, these efforts were soon overtaken by events.
The Italian government passed a series of decrees yesterday to allow Intesa San Paolo to buy the healthy assets of two small banks from the Veneto region – Banca popolare di Vicenza and Veneto Banca. The state will move the distressed assets into a ‘bad bank’ for orderly liquidation. This action closes a chapter on the Italian banking crisis that started in late 2015 when regulators made it clear that the two small Veneto banks needed more capital. Over the intervening period, investors threw good money after bad as the banks continued to haemorrhage deposits and mount up non-performing loans. The government did not want to step in because it did not want to impose losses on large depositors or junior bond holders. Ultimately, though, the situation for the two institutions was unsustainable. Now we know what the solution looks like. The question is what we learned from the process. The short answer is that Europe’s banking union is still dangerously incomplete.
Oxford University Press has published two new books on the political economy of the euro area that should be required reading. One, by C. Randall Henning, explains why the International Monetary Fund has become a central actor in the stabilization of the euro area; another, by Waltraud Schelkle, sheds new light on what the single currency has to offer both in its current form and looking to the future. My reviews of both books are below.
Economic governance is in the eye of the beholder. The French want discretion, flexibility, and effective crisis management; the Germans want rules, discipline, and effective crisis avoidance. The euro as a single currency reflects both tendencies. There are aspects of Europe’s macroeconomic framework that are flexible and responsive (like the European Central Bank) and aspects that are more rigid and formulaic (like the ‘six pack’ and ‘two pack’ of policy coordination procedures that strengthen the ‘Stability and Growth Pact’). The challenge for Europeans is to find a sustainable balance. Too much of either tendency is not only unacceptable to one side or the other in the Franco-German partnership, it is also unlikely to work in stabilizing either the euro as a single currency or the European Union as a political project.