NAPLES

I have just spent an enjoyable day and a half in Naples, capital of the Italian south

It is a beautifully situated city, near Pompeii and the Amalfi coast, and endowed with some of the most remarkable churches in the world.

In one of these I discovered the tomb of an Irishman I had never heard of before, Luke Concannon born in Kilbegnet in Co Roscommon in 1747, and a Dominican priest, who was the first ever Catholic bishop of New York. He died in Naples in 1810, presumably on his way back to New York after a visit to Rome.  

I was struck by how clean and well kept Naples was, contrary to its reputation, and by the number of young people and small children on the crowded streets of the old city.

THE ITALIAN ECONOMY

Italy is facing many economic problems at the moment and I saw signs calling for demonstrations against the policies of the Monti Government.

Economic growth has been lagging in Italy since the 1990’s, and Italy has been hit particularly hard by Chinese competition, particularly in fashion goods. Meanwhile pay has increased far faster than productivity.

 Italy had the same balance of payments situation as Germany in 2000, whereas in 2010 Germany has a large surplus and Italy a large deficit.

THE IMPACT OF CHINA ON THE EURO ZONE HAS BEEN DIFFERENT IN ITALY THAN IT HAS  BEEN IN GERMANY

This is because Germany has been able to export engineering goods to the expanding Chinese market, while Italy has lost market share to China in its speciality, fashion goods.

 In a way, the opening up of China has created unanticipated new imbalances in the euro zone that have arisen since the currency was launched. Some of the German commentary on the euro crisis has ignored this fact.

UNLIKE IRELAND, ITALY ALMOST HAS A PRIMARY SURPLUS

Italy has a big Government debt, but most of this debt dates back to the 1990s, when services expanded while revenues were contracting. Today, Italy almost has a primary surplus on its Government accounts, in other words, it is collecting as much in tax, as it is spending on all Government services apart from interest on past debt. In this regard, it is in a much better situation that the rest of the euro zone.

In contrast, Ireland has a smaller government debt as a proportion of GDP, but has a substantial primary deficit....Ireland’s day to day spending on all services, apart from debt interest, still exceeds its day to day revenue by one of the largest margins in Europe.

Italians have a much lower level of private debt, 130% of GDP, as against 350% in Ireland, and 250% in Spain, Sweden and the Netherlands. There was no property bubble in Italy, in sharp contrast to Spain, something that needs to be explained.

Italy’s problem is that its medium term growth potential is less than that of either Ireland or Spain . This is partly because Italy has an older population, and partly because Ireland has a more modern industrial economy. 

Italy has a large black economy (15% of GDP), and it takes ages to enforce a contract or set up a business in Italy. A judicial process that would take 52 days in the Netherlands, 49 days in the US, or 183 days in Spain, would take 630 days in Italy!

ITALIAN BOYS LOSE OUT

Italy’s educational system is open to criticism.

A large number of students, particularly boys, drop out of school with no qualification at all, and its universities fail to prepare students for the jobs that actually exist. This is strange for a country, so many of whose prominent politicians are university professors! 

Only 15% of men, and 24% of women, in the 30 to 34 age group have a university education. 

As in other countries, the educational system is failing boys more than it is failing girls. Similarly, in Ireland, the unemployment rate among boys is higher than it is for girls.  

THE EUROPEAN UNION NEEDS TO BECOME MORE DEMOCRATIC, IF THE PEOPLE ARE TO GIVE SUSTAINED BACKING TO GREATER INTEGRATION.

I was at the second and third days of the European People’s Party Congress in Bucharest, Romania last week.

It was a huge, and well organised, event which took place the massive building of the Romanian Parliament. 

I spoke at a meeting, on the fringe of the Congress, on the euro crisis.

I said that the move to centralise control of government spending, and of structural reforms,  was necessary to get the euro crisis under control.

But I argued that it would not be politically viable in the longer run, unless it was accompanied by a visible, and dramatic, improvement in EU wide democracy.  

I said that decisions about spreading the tax burden, or opening markets to competition, involved taking resources and opportunities from some people, and giving them to others. Such decisions needed always to be, and to be seen to be, politically and democratically legitimated.

I argued that elections to the European Parliament were not sufficient legitimation for decisions that would be taken for all of Europe and for individual countries by the Commission, in a bargaining session behind closed doors in the Council of Ministers or in negotiations between civil servants.

I said that a European Parliament election did not create sufficient legitimation for the types of  decision that were  now to be taken at EU level. As presently arranged, European Parliament elections did not give citizens the sense that they could vote in, or vote out, the people who made decisions at EU level, in the same way as they could at national or local level.

The European Parliament election was really 27 different national elections, not a truly European one. It was not like a US Presidential election, where every American had to make the same choice, whatever state they live in.

In the absence of such a direct choice, people question the democratic legitimacy of EU level decisions, in a way that they do not question national or local decisions.

I suggested a way to solve the problem.

At the moment the President of the Commission is selected by 27 heads of government behind closed doors, and then voted on, in a one candidate vote by the European Parliament.

I proposed that he or she should be directly elected by the people of the EU in an open, contested,  multi candidate election, and every adult European having a vote.

Single candidate elections may have been enough for some people in the Soviet Union, but they are not the way to run the EU in the  21^st century!

A POSSIBLE KINGDOM OF SCOTLAND, A REPUBLIC OF FLANDERS, AND A REPUBLIC OF CATALONIA— WHAT CHANCE WOULD THEY HAVE OF STAYING IN THE EUROPEAN UNION?

On the same day that the UK Prime Minister, David Cameron signed an agreement with the Scottish  First Minister Alec Salmond  on the terms of a referendum on Scottish  independence, in which they will be on opposite sides, a party that favours the breakup of the Belgian Kingdom won a resounding victory in local election in Flanders.

Meanwhile, in Spain, a party in power in Barcelona that favours Catalonia ultimately becoming completely independent, has called a general election.  It is unhappy that the beleaguered  Government in Madrid, that has plenty of other problems on its plate, will not give Catalonia  the  right to raise and spend its own taxes.

If the pro independence party wins the Catalan General Election, it will press for measures eventually leading, either to complete Catalan independence, or to a total clash with the  Government in Madrid. Spain’s central Government takes a firm line against all secessionism anywhere, because it could  create precedent that might lead to the decomposition of the entire country.

In Belgium, the biggest city in the country, Antwerp, will have a new Mayor, Bart de Wever, who is the leader of a party which favours the establishment, by peaceful means, of a Republic of Flanders, splitting the Kingdom of Belgium.

He obtained almost 38% of the vote in Antwerp, and another pro independence party, the Vlaams Bloc, got a further 10%. Mr de Wever’s party obtained strong support in other parts of Flanders, especially in the east, but not as much as it got in Belgium’s biggest city.

This raises really difficult issues for the European Union.

If an area were to secede from an existing EU member, that area would thereby cease to be a member of the EU.

It would have to apply anew to become an EU member state, as if it had never been a member of the EU, and was applying for the first time.

A state can only be admitted to the EU, only if ALL existing members agree. The more countries there are in the EU, the harder it becomes to achieve unanimity of all states. Turkey’s case illustrates the problem well, so does General de Gaulle’s veto of UK membership of the Common Market in the 1960’s.

Some countries have a rooted objection, on principle, to any splitting of existing countries, often because they do not want to set a precedent that might encourage the secession of parts of their own countries.

For instance, on the basis of this principle, a number of EU countries -Spain, Romania, Slovakia and Greece- have refused to recognise the secession of Kosovo from Serbia, and refuse to have anything to do with the new state of Kosovo.

Let us suppose that either  Scotland, Catalonia, or Flanders succeed in becoming independent, and want to stay in the EU, they will have to apply to join, and will not be readmitted  to the EU unless Spain, Romania, Slovakia, and Greece all agree, and overcome their current objections of principle, to secessions.

Meanwhile, as if things were not complicated enough, the Conservative component of the UK Government is contemplating a renegotiation of the terms of UK membership of the EU, and then holding a referendum on the  result.

This raises the obvious  question, now that the Conservative UK Prime Minister has accepted in principle the right of Scotland to make  an independent sovereign decision,of what would happen if , in the referendum, Scotland  favoured staying in the EU, while the rest of the UK voted to leave, or vice versa?

Europe is facing an economic crisis. This crisis is causing stress in the vicinity of long buried fault lines. The blame game is in full swing. But none of this stress, and none of this blame, solves the economic crisis for families throughout Europe.

The European Union’s political system makes some decisions by majority vote, but, because it is a union of sovereign states, it has to make many decisions by unanimous agreement. This is already causing a lot of problems in dealing sufficiently speedily with the economic, banking, and fiscal crises that now afflict us.

However difficult this may be to accept in Scotland, Flanders or Catalonia, it might be wiser to agree to sort out the economic crisis first, and deal with issues of separation, and or of rearranging national boundaries, later.

 But that is not an easy proposition to sell to an impatient and proud public opinion, as John Redmond, who faced the same dilemma in Ireland in 1914, could tell us, if he were alive.

LIVELY DEBATE IN KOREA ON HOW TO FIX THE PROBLEMS OF THE EURO

I was invited to speak this week at the World Knowledge Forum in Seoul 

I shared a platform with  four other former European Prime Ministers or Heads of State, Wim Kok of the Netherlands, Jose Maria Aznar of Spain, Christian Wulff of Germany and Esko Aho of Finland.

 We discussed  how the problems of the euro can be resolved, a topic of  passionate interest to Koreans, who rely heavily on  Europe as a market for their exports.

Jose Maria Aznar said that the future of the EU and the future of the euro are interlinked. If the euro failed, so too would the EU itself. He is right. If the euro broke up there would be trade wars and competitive devaluations within the EU, which would destroy 60 years work.

I argued that five things were needed for the euro to survive , and confidence to be restored

a substantial further write off of Greece’s debt

an effective firewall against contagion

a new robust system to govern economic policy in the eurozone

a downsizing and recapitalization of  Europe’s banking system,  within a banking union with mutual deposit guarantees

policies to increase growth through targeted investment

I said I believed we were making substantial progress on the first four, but none yet on growth.

The Forum heard from many distinguished economists, who also offered their prescriptions for the euro. 

Paul Krugman said the ECB should act as a lender of last resort, and explicitly say that it would accept a higher inflation rate. It is interesting to note that inflation has been lower in Germany under  the ECB and the euro, that it  was when the Bundesbank was in charge of the deutschmark  prior to the launch of the euro. I think he is right on this point.

Nouriel Roubini said the euro should be devalued to parity with the dollar.  This would give countries like Greece, Italy and Spain a chance to regain lost competitiveness. It is worth noting that when the euro was first launched it had a lower value than the dollar. While structural reforms and austerity could eventually deliver a similar improvement in competitiveness, he felt it would take far too long. I would argue that the experience of Latvia, Estonia and Lithuania would suggest the contrary. They cut dramatically, without devaluing, and have returned to rapid growth.

Martin Wolf said that the problem in both the EU and the US was that monetary easing by the central banks was not leading to more credit being issued. The money was out there, but it was not being passed around, because of a loss of confidence. He is right. The EU needs to act quickly to give people the confidence to start lending to one another again, even if  some loose ends remained. But that is difficult when every country has a different agenda, and there is no common European public opinion, and no venue, like an EU Presidential election, in which to create one.

Dominique Strauss Kahn said that there was a good agenda agreed of the things that needed to be done. The problem was the ability of the 27 Governments of the EU, and of the EU institutions, to do the these things quickly enough. 

He said the crisis had brought windfall gains, in the form of artificially low borrowing costs, to some counties, and that these countries should pass these gains over to countries that were having to pay artificially high rates.   He explained that the crisis of confidence had meant that  that there had been a flight of money into safe assets like German Government bonds. This meant that Germany and a few other “safe” countries were borrowing at unnecessarily low rates of interest. He suggested that this windfall gain should be transferred as an interest subsidy to other euro zone countries that were borrowing at unduly high rates of interest.

He felt that this would be politically easier to bring about than would any mutualisation of debts already incurred or Eurobonds, because  it could be withdrawn if circumstances changed.