Another miscalculation of these technocrats was that they failed to build a mechanism for enforcing the agreed limits on government deficits and borrowings. As bond investors “overlooked” these matters, they sought the extra yields on offer in southern Europe and technocrats and politicians across Europe ignored countries that were flouting the rules and even falsifying accounts, as Greece did.
The other great flaw was relaxing bank controls and creating a European Central Bank (ECB) that was obsessed with inflation but distanced itself from any responsibility for Europe’s financial system.
While today’s euro crisis was, in essence, born of technocratic arrogance and complacence, it can’t be undone without trauma.
Ground control to space PIIGS… The political challenge that technocrats in Italy and Greece face is how to enforce on struggling populations the austerity and reform demanded by bond investors, other European (that is, foreign) governments and distrusted European and global bodies such as the EU and IMF. In short, while the technocrat leaders might have public support for now, their solutions have none.
Governments have vast powers, from financial regulation to the ability to conscript people. Democracy rests on a social contract whereby citizens abide by the laws of a government that receives its mandate through popular elections and which is entrusted to resolve the clash of interests that are inherent in society.
Back in Italy, Monti must please bond investors enough to replenish at affordable rates an estimated €200 million in maturing debt by April. He has outlined how he intends to do this. During his first speech on November 17, he spoke of plans to sell state assets, modify the labour market, cut spending, reinstate a property tax, crack down on tax evasion and reform the public pension system. But which spending will be chopped? What tax increases for the poor and middle-income earners? Which rates will apply to those on high incomes? How will labour laws change in the face of union opposition – to favour big business? How much unemployment will he tolerate to reduce spending? These are issues in which voters generally like to have a say. But now the battle of interests will be settled by a cabinet of technocrats, who surely have their own vested interests.
It remains to be seen whether Monti possesses the political skills to sell more hardship to Italy’s floundering middle class, the poor and the jobless, as US President Franklin Roosevelt did in the 1930s. Even more to the point, is he good at arm twisting or standing up to the bullying that is the more sinister side of politics? It won’t help Monti politically that he was once an adviser to Goldman Sachs.
In Greece, there are even bigger issues to settle. Will Papademos drive through the commitments needed by this month to receive the next bailout injection? Would he dare allow Greece to default on its debt and leave the euro? Does he favour bondholders and perhaps the European financial system over the welfare of Greeks? How much is he prepared to bust up street protests?
And politicians are still lurking behind the technocrats. Italy’s functionaries still need to get their measures through parliament where Berlusconi controls the largest party. Berlusconi says he’ll support Monti until he pushes through the steps needed for Italy’s recovery. After that, the media baron, who has already said that Monti’s government has no mandate, can do as he sees fit. Greece’s cabinet contains the two major parties, the Papandreou-led PASOK and New Democracy, and the far right party LAOS. At least elections in February will allow voters a say on their country’s future and leader.
It must be said that many politicians, especially Chancellor Angela Merkel of Germany, are still placed to make big decisions on Europe. Merkel has proposed closer political union and stricter laws on government deficits and debt. She still baulks at allowing the ECB to take the step widely considered needed to calm financial markets, namely buying unlimited amounts of government debt. Merkel knows this solution is unpopular in Germany, where memories of the hyperinflation of the early 1920s refuse to fade, because it could trigger inflation. But at least she is democratically elected and has the legitimacy to take bold decisions and hopefully has the talent to sell them.
Bond investors may think they have wished away political problems by imposing technocrats in power. But they haven’t. Only competent democratically elected politicians can do that. Perhaps it’s fitting, though, that technocrats will have to grapple with the politics of solving the woes created by their flawed currency , the euro.
Michael Collins is an investment Commentator at Fidelity Worldwide Investment
