Howard Wheeldon writes: Mario Monti was not called judge, jury and executioner rolled into one without very good reason. Europe’s most technocratic and yet arguably most qualified leader when it comes to understanding real economics may not have been carried into power on the back of an electoral vote but when it comes to banging heads together on Europe government deficits and debt there is probably no one person better.
As if timed to absolute perfection in Berlin yesterday and just ahead of a scheduled meeting with German Chancellor Angela Merkel the new Italian leader let it be known in a published interview a belief that austerity without parallel efforts by the European Union to create new growth could well blow the whole system of European government apart. Such concerns are justified echo my own view that if the downward pressures being placed on those led into this now widening European sovereign debt crack through the false promises of others are pushed too far what follows could well be the prospect of political insurrection. In his interview with ‘Die Welt’ Mr. Monti said that the pain Italians were now readying themselves to suffer would not pull the country out of its severe debt problem. In saying this he was not suggesting that his first package of austerity measures was futile. What he was expressing though was fear that economic restraint without parallel effort to create new jobs and stimulate demand will lead not only to destabilisation of the EU but potentially its complete destruction. True, ‘structural’ debt and deficit issues do require radical ‘structural’ measures to break the problem down. Austerity efforts are a part of that process but Mr. Monti clearly shares my own view that what has been developed over twelve years can hardly be broken down in just two. The warning is clear; don’t throw the baby out with the bathwater.
As growth in the various EU member states declines (note Germany yesterday) the inevitable consequence is that Europe’s jobless totals rise. The danger is that in a collective as opposed to collegiate style process what follows is a self fulfilling prophecy of typical Eurosceptics. In Italy it has to be said that while there is full recognition that during the Berlusconi years the nation lived in a dream on the back of false promise there is an uncomfortable anger at both German and French approach to the European sovereign debt issue.
The underlying concern though may be summarised as suggesting that the peoples of all those countries embroiled in packages of austerity are now starting to turn against the EU albeit slowly. It is the fear of implications that too much austerity might have on the EU that Mr. Monti was attempting to express yesterday. To address his concerns Mr. Monti was not asking for much save a better understanding and appreciation by Germany of Italian problems, a more positive long term approach to resolving the problem and lastly, that the EU and ECB look to taking parallel measures that could begin to stimulate growth including a further reduction in rates. How timely then that later today we will see the results of the first 2012 meeting of the European Central Bank and whether ECB President Mario Draghi was minded to listen by recommending a further reduce Eurozone interest rates.
Back at the ranch as various countries seek to replace maturing debt apart from various government packages aimed at addressing part of the problem or slowing down individual deficit growth we appear to have moved little further over the past three months than in the previous three. Over Eur1.2 trillion of debt will mature this year in Eurozone area and will need to be replaced. One third of this debt will be Italian with France, Germany and Spain making up the bulk of the rest. Mario Monti has so far held Italy together and the Spanish government has announced serious deficit cutting measure too. Portugal survives by the skin of its teeth and Ireland continues to make progress. Will Greece still be in the Euro a year from now? Probably not! Will anything else have changed by then? My answer to that is that if it has not we are all in very serious trouble.
Howard Wheeldon is the Senior Strategist at BGC Partners