Claiming their pound of flesh

by John Rapley

Approval ratings in the basement couldn't do it. Nor could lurid sex scandals, outraging foreign allies with crude and offensive statements about their leaders, or being chased by magistrates throughout the country for suspected criminal offences. Not even rebellions within his own governing coalition could unseat Italian Prime Minister Silvio Berlusconi. The man was all but untouchable.

That is, until the moneylenders came to claim their pound of flesh. When Mr Berlusconi could not satisfy bond markets that he had a plan to restore Italy's long-term solvency, investors stopped buying bonds. That's all it took. Italian bond yields surged, the government was staring at a fiscal crisis, parliament rebelled. Within a couple of days, Mr Berlusconi was history.

Imagine having the power to topple a government by just sticking your hands in your pockets. In a busy week, Europe's moneylenders have used that tactic to dismiss two governments - first Greece, now Italy. Now the speculation turns to who's next on their watch list.

Not surprisingly, when Mr Berlusconi announced his planned resignation, investors' loss of trust in Italy's outgoing buffoon-in-chief was signalled when stock and bond markets rallied not only in Milan, but across the world. Nonetheless, the euphoria was short-lived. Italy's problems, which are deep-rooted and structural, look intractable at the moment.

It may seem galling that a small class of global investors and fund managers are dictating policy to democratically elected governments. When the Greek prime minister decided to submit his country's austerity programme to a referendum - a sensible idea if you're trying to build support - he was promptly informed the market wouldn't tolerate it. Surely, this is a time for rallying public support, not ignoring it?

The odd politician might say it's all a sinister plot, a conspiracy by a small group of shadowy financiers to gain control of the world. If so, they would be clutching at a scapegoat to cover up their own errors. For too long, politicians in democratically elected states have used credit to boost their popularity with voters. Who would say no to free health care, generous pensions, government jobs and new roads?

But these things cost money. To get more, you have to pay more. Politicians, only too happy to look like miracle-workers, were easily lured into borrowing the money to avoid raising taxes. In effect, they were taking advances on the country's future earnings to cover current expenditure.

If you borrow to build up your assets and increase your productivity, you actually create new future earnings. That's the idea behind using credit to build roads or improve education. But when you borrow to fight losing wars or cover pension shortfalls, or to give friends jobs, you're just postponing the day of reckoning. We all know how this has worked in Jamaica. And now, many Western countries, like us, are discovering that you can run from the consequences of your actions for only so long.

Glory days gone

In the long term, European countries have to face up to the sad fact that their glory days are behind them. Yes, they had colonial empires and world-leading economies and navies that sailed round the globe. But their populations are now stagnating or, in Italy's case, declining, and they have grown rather complacent in the face of dwindling economic prospects.

But if that realism has yet to emerge, worse is the short-term scenario. Europe needs some kind of coordinated intervention to stave off the collapse of the euro project. It probably requires the European Central Bank to buy bonds aggressively to stave off contagion, and the Germans and French to backstop the project with a major financial commitment. Only in stability can orderly restructuring take place.

However, the Germans won't stand for it. The danger is that their own refusal to take the hands from their pockets may see the European economy burn down around them. The rest of us can just sit back, watch what will be an interesting show, and prepare to deal with the consequences.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.