What Monti should say

15.01.12 Publication:

The indiscipline of member states that led to the euro crisis, wrote a wise man last June, occurred thanks to “an unhealthy politeness towards each other, and excessive deference to large member states”. That wise man was Professor Mario Monti, writing a blog for the Financial Times. Now that he is Presidente Monti, and now that the euro crisis is intensifying again, it is time for him to take his own excellent advice.

We should hope that, in his meetings with Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, he has already been frank and undeferential. But in case not, this is what he should be saying.

“My dear colleagues, as you well know I like to say that I am the most German of all Italian economists. Well, now I am going to be a straight-talking American, too. Under your leadership, the eurozone is still failing to face up to reality. Yes, we Italians were very very slow to face up to our own reality but we are now working hard to do so. It is your turn to do the same.

I will return to the Italian reality in a moment, for our work has, I accept, barely begun. But if the eurozone carries on the way it is at present, our work will be destroyed in any case, as our banks and the currency will collapse. There are two realities that you have so far refused to accept and to deal with.

The first is that Greece is still casting a black shadow over all other eurozone members. Why? Because everyone in possession of a pocket calculator, let alone a computer, can work out that it is not going to be able to service its debts, even if private creditors agree to a huge reduction in the value of their loans. Talks about that reduction have now broken down, but even if they do ultimately succeed, Greece will still merely reduce its public debts to 120% of GDP by the end of this decade, on quite optimistic assumptions.

Italy´s public finances have been on the brink of a crisis with its borrowing costs rising above 7%. We are much weaker, in economic terms, than we have been telling ourselves for the past decade, but we are still a lot stronger than Greece, so if we are near a crisis with our debt at 120% of GDP, how will Greece really survive with still higher borrowing costs and with a much weaker economy? This just means there will be a new Greek crisis every few months, the contagion for which will damage all of us.

We all know that Greece should not have been allowed to join the euro in the first place, and the truth is that Italy should not have been allowed to do so either, for our debts were just far too high. But that is history. The present reality is that Greece now needs to leave the euro, for otherwise its insolvency will continue to poison us all. It should do so with as much financial help as we and the IMF can offer, but the important point is that it should do so, soon.

When that happens, other highly indebted countries, Italy chief among them, will be badly hit by speculation in the markets that we could be next to default and leave. The main work to prove that this is not true is ours: we in Italy need to do more to show we have a credible long-term plan to reduce our public debts to the Maastricht Treaty level of 60% of GDP, probably over 10-15 years, while also introducing the measures to make our economy grow again, by an average annual rate of at least 2%.

We are working on that as you know, and my government is about to present the next phase of our reforms. But the second reality is that we need your help, both to survive long enough for those reforms to have their effect, and even more so to survive the inevitable and desirable Greek exit from the euro.

Publicly, you have declared that the fiscal compact we all (except Britain) agreed to on December 9th is the solution that the euro needs. But let´s face reality, let´s not be too polite and deferential: we all know that this is not true. It is not true because even with a treaty, there is little reason for markets to believe our promises to run budget surpluses and (in Italy´s case) to halve its public debts as a share of GDP. These promises are necessary and important, but they are not sufficient and they are not credible.

They are not credible because of Greece, as I have already said, but also because the path from sin to virtue is going to be too long. Politics and unforeseen events are bound to intervene, casting doubt on our promises. And as the European Central Bank has pointed out, the markets can already see us all trying to weaken the provisions of the treaty, to make it more acceptable for us to miss our deficit and debt targets. The markets know that Germany and France destroyed the Stability and Growth Pact in 2003, so it is quite fair for them to distrust your, and our, promises once again.

No, my dear colleagues, this fiscal compact is not enough, and nor are my domestic austerity and liberalisation plans going to be enough to distinguish Italy securely from Greece when that country defaults. The only way to solve this problem, the only way to stop the inevitable Greek exit from being a disaster, is for you both, which chiefly means Germany, to accept collective responsibility for eurozone debts, by issuing jointly guaranteed Eurobonds.

These Eurobonds can be time-limited, and must be made conditional on both the fiscal compact and our domestic liberalisation plans. But without them, the euro is simply not going to survive. I know that this will mean that everyone´s credit rating will be downgraded, just like France´s has been, and that there will be a big argument in German politics. I am sorry to be unpolite, but as the Americans would say: get real. Wake up and smell the coffee. And you know that we Italians make the best coffee.”