Stagnation

Italy has a new government, but only after a great deal of wrangling. The principal reason for the impasse is that, like the Brexit vote in 2016,  frustration with the European Union was an important motivation for the Italians’ decision to vote in large numbers for two eurosceptic parties.

The situations in the two countries at the moment are nonetheless very different. We are on the way out. True, many Brexit supporters are finding themselves increasingly frustrated by the lack of progress in the Brexit negotiations but there are good grounds for believing that we will leave – eventually., somehow.

Italy, by contrast, is still in the EU and there is no immediate likelihood of “Italexit”. Many inhabitants of this founder member of the European Union are distinctly unenthusiastic at the way EU membership has affected their country, but this doesn’t mean they want to leave altogether..

What both countries have in common is that they have come up against the dead hand of inertia. Essentially, big, bloated states and bureaucracies do not make decisions quickly. Stagnation is the inevitable result. Those of us who can remember the latter years of the Soviet Union will recall that by the time of Mikhail Gorbachev, it had lapsed into stagnation – unable to respond to events. The EU is in a similar position. No senior figure since Jacques Delors seems to have any vision for the EU’s future direction. The enlargement process, after the celebrations of 2004, seems to have ground to a halt.

However, just like the Soviet Union, the EU does not like anyone trying to take it in a direction in which it does not want to go. This piece by Norman Lamont  claims that the EU is very uncomfortable with democracy when it produces a result it doesn’t like. Unfortunately for the Italians, the stagnation into which the EU has descended is going to make it difficult to sort out their country’s moribund economy. A well-informed website claimed that it was actually Berlin which forced the Italian President to reject the nomination of a Eurosceptic finance minister by the putative new government, forcing a climbdown and nearly precipitating new elections, the result of which would most likely have been a parliament containing even more Euro-critical MPs.

For us in the UK, this tendency towards stagnation has made it very hard for us to achieve a successful Brexit.  Last week, Michel Barnier delivered a speech expressing his frustration at the slow progress of Brexit talks. In one sense, he has some justification – our side has been going round in circles ever since Article 50 was invoked. To leave the EU seamlessly requires a lot of research and an appreciation of the nature of the beast. It could be argued that our side has failed almost totally on both counts.

And the struggles the EU is going through, including the Italian crisis, are more than sufficient vindication of our decision.  In a fast-moving world, the EU’s inbuilt bias to inertia makes it ill-equipped to respond to change. We could do much better as a sovereign state – the big problem is making our escape. A rocket needs a huge amount of power to escape the gravitational pull of the Earth and fly off into space. Our negotiators will need to try a lot harder if we are to escape from the gravitational power of the EU.

 

An Italian businessman is thinking of moving his business here!

(With thanks to CIB Committee member, Rev Philip Foster, who spotted this letter in the 31st October Daily Telegraph)

Sir

As an Italian businessman, I am seriously considering moving my business to the UK after Brexit.

The EU has proved to be a disaster for Italy, with youth unemployment at 45 per cent, a stifling taxation system, plummeting property values, and (according to official statistics) national unemployment at more than 12 per cent.

Many in Italy look to Brexit with the hope that it will be the beginning of a new era, in which democracy wins over bureaucracy and arrogance.

Viscardo Paganelli
Siena, Tuscany, Italy

Photo by Davide “Dodo” Oliva

The joys of life outside the Eurozone!

This week has seen the release of economic data from both the UK and the Eurozone and the stories they tell could not be greater. UK Gross Domestic Product – the total value of goods and services produced by a country – grew at an annualised rate of 3.2% in the second quarter of 2014, slightly higher than the original 3.1% estimate. Across the water, the economy in the 18-nation single currency bloc did not grow at all. Of course, this is an aggregate figure for 18 different countries some of which managed to achieve modest growth – Portugal and Spain, for instance, both grew at an annualised rate of nearly 2½% with the Netherlands not far behind at 2%.

The biggest shock was the contraction of the German economy, which shrank by 0.2% in the second quarter. France’s economy failed to grow at all, while Italy entered a “triple dip” recession, recording two consecutive quarters of GDP contraction. Greece, of course, has not had a triple-dip or even a double-dip recession. It has yet to exit a downturn which began in 2008 and which has seen its economy contract by over 25% during this period.

These figures come on top of monetary data showing that deflation affected five Eurozone nations in July – Spain, Portugal, Slovakia, Greece and Cyprus. Prices have been falling continuously for 18 months in Greece, which may sound good news for hard-pressed shoppers but is not so good for manufacturers and retailers, as consumers delay purchasing big-ticket items in the hope that they will become cheaper. Deflation is also bad news for heavily-indebted governments as the reduction in tax revenue it makes it harder to pay off the money they have borrowed. Ambrose Evans-Pritchard, the Daily Telegraph’s International Business Editor, recently argued that in Italy, where inflation is nudging close to zero, the government may have considerable difficulties in ever paying off its debts unless it returns to the Lira.

With the recently-imposed sanctions on Russia still to bite, the picture could get even worse in the coming months. However, Mr Putin cannot really be blamed for the Eurozone’s woes. The issues go back to the very start of the single currency. Like the EU itself, it was a political project disguised as an economic project. The political objectives were simple enough – to further European integration. However, the economic objective – a convergence of the economies of the participating nations – hasn’t happened. There were design faults with the Euro right from the start and while many of these are of a complex and technical nature, the bottom line is that the classic approach to an economic downturn in countries like Italy – currency devaluation – is now out of bounds. This is no surprise given the dominance of Germany, where memories of the 1923 hyper-inflation still linger. The Bundesbank has always supported a strong currency and even now the German members of the board of the European Central Bank (ECB) show little sign of sympathy towards the struggling economies of the Eurozone periphery.

Mario Draghi, the ECB governor, is not short of advice on how to deal with this unfortunate situation, with many economists predicting he will eventually follow the lead of the central banks in the UK, the USA and Japan launch some form of Quantitative Easing or asset purchase programme. This would face strong opposition from Germany, even though the downturn of their economy has caused some German economists to soften their stance in recent months.

Meanwhile we in the UK can observe these problems from a distance. We’re not by any means totally detached, thanks our considerable trade with the EU, but at least we have control of our own currency. This has unquestionably been a factor in the UK being able to recover from the downturn quicker than the Eurozone. What is remarkable is that our relative success has not caused any serious debate across the single currency area as to whether these countries too might be better off outside of the Euro straightjacket.

However, this is only part of the story. It is obvious that we have benefitted by keeping the pound and not joining the single currency. It is equally obvious, and not just to observers fro this country, that we would have benefitted even more if we were subject to even less interference in our country’s affairs. Given the obvious advantage of our opt-out from the Euro, it is hard to imagine the other member states agreeing to David Cameron unilaterally repatriating powers to the UK as this would only increase our competitive edge. If we therefore wish further to improve our advantage, we must withdraw from the EU completely. Who knows? In so doing, our success may encourage other countries to follow our example and bring this sorry, failing institution to an end.

Photo by Alex Guibord