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Italian debt: Europe is making its own subprime crisis
05/11/2018
The Italian crisis demonstrates that the European institutions have learned nothing from the fall of the Lehman Brothers. And to the indifference of all, in the euro area a mechanism similar to that of the sub-primes is now be developed.


The American financial crisis was technically a result of a combination of two phenomenon: mark-to-market accounting and the primacy given by bank regulations to asset backed securities (ABS). In the 2000's banks increased their ABS positions considerably. When the crisis started the requirement for mark-to-market accounting led to banks incurring unrealised losses on their regulatory capital, whilst most of the assets no longer had any buyers.
Similarly, in the euro area, the fetishism for market value and the primacy given by the regulations to government bonds is still leading to a systemic risk that threatens the entire banking sector. In one case as in another, the collapse in the value of reputedly "safe" assets is destroying the banks' own funds, which have no other choice but to reduce their credit portfolio, which aggravates the crisis and mechanically increases debt levels.
The difference between the USA and the euro area, is that the former have a real central bank, which theoretically has an unlimited credit facility, playing the role of lender of last resort when confidence collapses. However, the ECB is not a central bank (Montherlant said, "it's when the thing itself is missing that you have to supply the word") but an institution that manages a fixed-exchange-rate system according criteria of fiscal convergence. Nothing could be further from the role of a central bank as identified, with admirable clarity and excellence, from the beginning of the 19th century by economists and central bankers, as varied as Bagehot, Warburg, Moreau, Rueff and so on.
Hence the Commission remains attached to a theological vision of the rules which, to a certain extent, orchestrate prior insolvency as they set objective limits on speculation. We are making the same mistake as Churchill did in 1922, who wanted - contrary to all common sense - the Pound Sterling to return to pre-war gold parity. This was economic and financial illiteracy - and from a political point of view a mistake for future generations.
Trained in classical economics, illustrating a certain disdain for historical reality, the elites of Europe are still swayed by the ideal of a neutral currency. But monetary history shows us that currency is not just a simple unit of account superposed on an economic system that might function without it. Currency, to quote Simiand, is a "social reality", it influences economic development, whose negative impact it also suffers. When monetary circulation increases, young workers, entrepreneurs benefit from the recovery. However, those who live with fixed incomes or who use subcontractors abroad, like big businesses, find themselves in a difficult situation. Conversely, when money becomes scarce, the latter find themselves at an advantage. Hence, deflation is a levy on certain segments of society, as is inflation, and it is as difficult to absorb as illustrated by Japan. It is the role of the political authorities to arbitrate between these interests and to seek the path most in line with the collective interest.
And so the euro reflects political, industrial, social and philosophical choices. Germany, to whom the French elites strangely gave the keys of the monetary policy, makes no mystery of this. The difference in the way that Italy is being treated, whose budgetary forecasts are not especially alarming, from that of Ireland, which was secretly saved from bankruptcy in total violation of the European "rules", is a constant illustration of this. Ireland was a model of neo-liberal success, because of its fiscal policies and its role as a "hub" for major American companies; we could not let it down. Italy however has always been against the austerity policies implemented by Berlin, which penalise its domestic market and its industrial sector. Despite a rigorous management of government finances (which should have earned it the Eurogroup's praise), it has to be punished.
Before the euro, exchange rates were the natural variable in trade balances. To knowingly use monetary depreciation to dissimulate fiscal profligacy is surely deplorable. But refusing to see the incredible contraction in the economy caused by the crisis and pro-cyclical austerity policies, is a denial of reality. Those who today champion the policies decided by Berlin are taking on a grave responsibility.


Emmanuel Sales
Chairman, Financière de la Cité