Who Are The Ones Who Fail, Leaders Or Voters?

European UnionEuropean Union

Two founding member countries of the European Union are really in a bad way: France and Italy. Both are threatening to turn this giant with feet of clay upside down, when it still doesn’t know how to deal with Brexit or the unknown elements which Trump has in store in “his” new world order.

In France, the risk is called Marine Le Pen; in Italy, the populism of Pepe Grillo, both fierce enemies of the euro and the EU. Behind all this, the same or very similar discontent which has taken Trump all the way to the White House in the US and fuelled the Brexit victory in the UK.

Those in charge have shown themselves incapable of dealing with the real problems, national or within the EU, while the population shows its disenchantment by playing a dangerous Russian roulette with their vote.

Given all that, does the voter who chooses the most disastrous  propositions not share part of this responsability?

In Italy, the risk is that Renzi has threatened to resign if he doesn’t win, handing the country over to the anti-European populism of Pepe Grillo. And the voters are rebellious and feel like saying “go home Mr Renzi.” This would open up another front of European political instability, just when Italy is in a very weak economic situation and needs help.

As Roger Bootle, The Telegraph explains, 20% of the Italian banking system’s assets are not profitable, or in other words, debtors are not paying accrued interests. Instead of “non-performing loans” Italy calls this “le sofference” which is more literary. But it is what it is: 360 billion euros of doubtful return. Furthermore, there is the ambiguity of how they are going to deal with the problem. Either by injecting public funds, as the government wants, or according to “bail-in” rules, with the risk of a systemic landslide moving in the direction of the rest of the continent.

It is perhaps for this reason that Italy has not managed to recover GDP levels prior to 2008 (remember it didn’t have a real estate bubble like Spain). It is as far away as 8%. For that reason Italian debt is still at 130% of GDP, despite Renzi having achieved a primary superavit of 1.4%. But interest payments account for 4% of GDP. Golden rule for public debt: to reduce this as a percentage of GDP, this has to grow more than the interest payments…

Does the euro have something to do with this? Ever since the birth of the majestic currency in 1999, Italy has grown 6%, namely 17 years of stagnation. Compare that with Germany or France’s 25%, or even better, with the UK’s 40%. Italy is sinking, and with deflation as well, which adds more chains to its huge debt pile.

But supposing Matteo Renzi wins the referendum…and let’s go over to France. A new right-wing leader, Fillon, has emerged there. A liberal marketeer. Liberalism has always failed in France, if not at the polls then later when they are in power. So it is difficult to imagine an out and out liberal winning the elections. And if he does win, it’s easy to imagine that he will lose his recurrent confrontations with the trade unions. It’s what has always happened. Remember the successive resignations of prime ministers, like  Juppé, when they tried to make the labour market more flexible. So it’s going to be an interesting duel between Le Pen, linked to Trump, who is a populist and keen to do away with the EU and globalisation, and a French liberal. France is a country with a deep respect for Colbert and Colbertism, where every last citizen feels intimately French without having to swear allegiance.

However, it has to be admitted that France urgently needs reforms with a liberal bias. It has the highest fiscal pressure in the EU at 56%.

It will be difficult for it to sustain Germany’s economic pace, its partner in the leadership of Europe, with a 13 percentage points difference in the ratio of public spending to GDP.

Since the launch of the euro the influence of the institutions in Europe has changed. The Commission is already no more than the “errand boy” of the strong countries, of which in reality there is only one: Germany. Decisions are negotiated between nations at the European Summits, with the only restriction being that Germany and France have an unspoken agreement under the terms of which, on fundamental issues, they have a united vote.

All this would not be so relevant and worrying if there was a convincing project for existing together and solving the problems, with each country firmly supporting the belief that the chosen path is the right one. But political capital has been squandered, and in the meantime the number of real enemies of the people has been increasing in every country, with different disguises, but with potentially devastating effects.


About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://http://www.miguelnavascues.com/