Nouriel Roubini's Global EconoMonitor

Italy’s Tremonti’s Temper Tantrums on EMU in Davos…a Sad Embarrassing Episode for Italy…

On Friday I was in Davos in a panel on the “Ups and Downs of EMU” (European Monetary Union) where ECB head Trichet, Italian Economy Minister Tremonti, a few other EU officials and myself were supposed to discuss the following questions: Will EMU collapse in the future? Which country will exit first? What will be the consequences of a break-up of EMU? How to avoid that? And what are the prospects for the Growth and Stability Pact?  Unlike the other panelists that ignored the topic and spoke instead about all the good things allegedly associated with EMU, I took the questions seriously by considering some of the problems and risks faced by EMU and the risks of a break-up, especially for the case of Italy. 

My remarks caused a stir with Minister Tremonti who interrupted me in the middle of my remarks, went into a temper tantrum and shouted – to the consternation of all participants – to me: “Go Back to Turkey!!”. I happen to have been born in Istanbul; but more than offensive to myself his pathetic burst of uncivilized anger was an insult to the decent Turks who are currently trying to negotiate an agreement to enter into the EU. Before I give a full account of this incident that altogether embarrassed the irascible minister who made a fool of himself in front of a crowd of Davos participants, let me report almost verbatim my constructive remarks on EMU that triggered the pathetic and embarassing outburst of the minister.

“I have been introduced in this panel as presenting the “transatlantic” perspective on EMU. Actually, as I spent twenty years of my life in Italy and as I was born in Istanbul Turkey that will hopefully be one part a member of the EU my perspective is internationalist rather than transatlantic.

Also, I must clarify that, unlike some transatlantic observers that were always skeptical of EMU – perhaps because of their concerns about the rising economic, political and geostrategic power of a united Europe – I was an early and strong supporter of the idea of a European Monetary Union. My current concerns are that, while EMU has lead to a process of convergence of nominal variables (inflation, interest rates, etc.). it has also been associated with a process of increased divergence in economic performance, especially regarding economic growth rates. This economic performance divergence is a serious problem for some EMU countries (Italy, Portugal, Greece) and it may eventually lead to a collapse of EMU. I am not supportive of such a collapse but, unless appropriate macro and structural economic policies are undertaken, the risk of a break-up becomes serious.

Before the creation of EMU there was a wide debate on whether the Eurozone was an optimal currency area. The Euro-skeptics made the following points:

  1. Monetary unions have to be associated with a full political union as one needs political legitimacy for monetary policies oriented towards price stability and disciplined fiscal policy.
  2. There has to be a high degree of business cycle synchronization; local/national specific shocks to output or growth need to be limited.
  3. There has to be a high degree of labor market flexibility – both in terms of real wages and labor mobility – to deal with real shocks.
  4. The EU lacks the fiscal federalisms of the US where regional shocks to output/GDP have less effects on incomes/GDP because of the effects of federal tax, transfers and government spending.
  5. There is the need for more economic flexibility and structural reforms to substitute for the lack of independent macro policies.

The EMU-skeptics concerns were dismissed by supporters of EMU based on the following arguments:

  1. Trade integration within the Eurozone had already lead to greater output/growth synchronization and EMU would lead to further trade integration and real synchronization.
  2. Because of structural rigidities,  monetary policy is ineffective in affecting output and growth both in the long run and the short run; i.e. the Philips curve is vertical both in the short and long run.
  3. Lack of independent monetary, fiscal and exchange rate policy would lead to faster structural reforms that would lead to greater real convergence.

The reality has turned out to be somewhat different as structural reforms have occurred in most member countries but at a pace that is less than optimal, way too slow. Also, the lack of macro policy flexibility has made reforms politically harder. Indeed the costs of reforms in terms of sacrifices are all in the short run while the benefits in the long run; and reform may have adverse demand effects in the short run as they may lead to precautionary savings. Thus, macro stimulus is necessary to facilitate politically difficult structural reforms. The lack of these macro policy tools has thus been an hindrance to reforms in some of the Eurozone countries.

The problem with EMU is that the growth performance of the Eurozone has been dismal in the last few years. The average growth rate in 2001-2005 has been about 1%. Is this slow growth all structural? The answer is no as structural rigidities and slower population growth imply that Eurozone potential growth is probably closer to 2% than the 3.5 of the US. So, the gap between the potential 2% and the actual 1% must be due to macro policies. The US reacted to the 2001 recession by slashing short rates from  6.5% to 1%, turning a large 2.5% of GDP fiscal surplus in to a 3.5% deficit and by letting the US dollar to sharply fall between 2002 and 2004. While US easing may have been excessive and reckless in the case of fiscal policy, the reaction of the Eurozone was too timid; the ECB – excessively concerned about inflation reduced rate much more slowly and less – down to 2% – than the Fed. Fiscal policy changed only marginally and the Euro sharply appreciated until early 2005. So, tight macro policies contributed to the shallow recovery of the Eurozone from the 2001 recession.

More ominously for EMU, there is a growing divergence of economic performance and growth rates within the Eurozone. The ECB argues – based on its research -that there is not growth divergence as:

  1. The standard deviation of the growth rates within the Eurozone has not increased after EMU was formed.
  2. The dispersion of growth rates within EMU is similar to that of the 50 states within the US.

These statistics are misleading for several reasons:

  1. The average Eurozone growth  rate has fallen since 2001; therefore the dispersion (standard deviation) of growth rates around this lower mean will be lower.  One should look at the coefficient of variation (the standard deviation divided by the mean growth rate) to get a correct measure of dispersion. And the latter measure show increased divergence.
  2. The standard deviation between 1999 and 2005 is stable because the 3 largest Eurozone economies (Germany, Italy, France) have underperformed and moved together. So, low dispersion is driven by a mediocre growth of the largest economies; the divergence between these laggards and the rest of the Eurozone has increased.
  3. US states are very different from EU nations in two crucial dimensions; first, if there is a regional recession in Texas, folks pack and move to states with higher growth and employment, i.e. there is larger labor mobility in the US than in the Eurozone. Second, fiscal federalism (the automatic and policy induced change in taxes, spending and transfers) implies that a dollar fall in output in a US state in a regional recession leads only to a 60 cents reduction in actual income. So in the US state GNPs diverge much less than GDPs. This is not the case in Europe where EU wide spending and taxed are minimal.

In summary, there is serious growth divergence in the Eurozone area. This performance divergence is leading to serious tensions in fiscal and monetary policy. Given the growth slowdown and the political difficulties of fiscal adjustment when growth is mediocre, larger fiscal deficit
are emerging in many laggard countries. These persistent violations of the GSP are a medium term threat to EM and to the ECB no bailout rule. Also, economic divergence and the tensions it is creating is leading to political pressures on the ECB to do more to stimulate growth, as the reaction of EU finance ministers to the ECB December 2005 decision to hike rates by 25bps shows.

This growth divergence is becoming a serious threat to EMU. As an increasing number of European observers are suggesting, different countries are coping differently to these challenges. Daniel Gros has shown that Germany has reacted with corporate restructuring, cutting labor costs and “competitive deflation”. I would argue that Italy has done little and is experiencing “stagdeflation”, a combination of stagnation and deflation. Indeed, as shown by Daniel Gros Italian labor costs have increased by 20% relative to those of Germany since EMU while Italy’s trade market shares have fallen by 20% relative to Germany. Similar competitiveness problems are faced by Greece, Portugal and Spain.

Gros correctly also points out that the divergence in GDP growth rates has been lessened by the housing bubbles in countries like Italy, France, Spain, Portugal and Greece as low short rates and low long rates (driven by a global bond market conundrum) have caused unsustainable asset bubbles. The current loss of competitiveness of Spain is hidden by the housing bubble but, once this bubble burst, these problems will seriously emerge.

And unfortunately, the lack of serious economic reforms in Italy implies that there is a growing risk that Italy may end up like Argentina. This is not a foregone conclusion but, if Italy does not reform, an exit from EMU within 5 years is not totally unlikely. Indeed, like Argentina, Italy faces a growing competitiveness loss given an increasingly overvalued currency and the risk of falling exports and growing current account deficit. The growth slowdown will make the public deficit and debt worse and potentially unsustainable over time. And if a devaluation cannot be used to reduce real wages, the real exchange rate overvaluation will be undone via a slow and painful process of wage and price deflation. But such deflation will keep real rates high and exacerbate the growth and fiscal crisis. Without necessary reforms, eventually this vicious circle of stagdeflation would force Italy to exit EMU, return to the Lira and default on its Euro debts. Some argue that Italy or other EMU laggards would not exit EMU because a  sharp devaluation of the new Lira  – needed to regain the lost competitiveness – would make the real value Euro debt much higher and unsustainable for the  government, the private sector and households. But look at what happened to Argentina: it devalued and given the balance sheet effects of the depreciation on their US debts it was forced to pesify its dollar debts. Similarly, Italy would be forced to liralize its Euro debts. If Italy were to exit EMU this effective default on domestic and external – public and private – Euro debt obligation would become unavoidable. And a sovereign nation is able to follow such policies – EMU exit, return to national currency and effective default on Euro debt – regardless of any legal or formal constraints that the EMU treaty imposes in terms of no exit clauses. This is not science fiction as Argentina was forced to do the same.

What would be the systemic effect of such Italian exit from EMU? They would be extremely severe on EU capital markets as Italy would default on some of its external debt – the part of its Euro debts held by non-residents. The contagion effects to other EU capital markets and banks would be severe.  And the no bailout rule of the ECB would become effectively threatened as the ECB would be forced to monetize both liquidity and solvency induced runs to avoid a systemic effect on EU financial markets.

In conclusion, my view is that EMU can work and has worked for the Eurozone countries that have reformed and are reforming.  But, unless Italy and other Eurozone laggards change their policies to pursue serious economic reforms that restore competitiveness and growth, they will eventually be forced to exit EMU. This would be a disaster but a disaster that may become unavoidable unless policies change. And I am currently pessimistic about the chances that such changes may occur given the policy makers and policies currently in place in countries like Italy.”


This was the end of my formal remarks at the Davos panel on EMU. But, as I told at the beginning of this blog Minister Tremonti rudely interrupted me while I was presenting my Italy-Argentina comparison shouting: “Thank you for your consideration! Go back to Turkey!!!” I politely replied that I was an independent academic thinker being paid to present sensible analyses and arguments. And I also pointed out that Prime Minister Berlusconi, the boss of Mr. Tremonti, had declared  in public that the “Euro has been a disaster for Italy”. At which the minister rudely interrupted me again shouting: “You are independent of logic”. At that point I decided to ignore him and finished my remarks.  The only additional observation I can make now is that the minister did not just personally and rudely insulted me; he also insulted Turkey and the Turks, a civilized country that is following much more radical fiscal policies and economic reforms than Italy in order to join the EU. Moreover, such a public temper tantrum  by the deputy prime minister of Italy – something apparently common to him as the italian press has reported – is a major embarrassment for Italy; Italy deserves better in terms of who should lead its economy and represent him in international public forums. As many members in the audience expressed their solidarity to me and their scorn of the minister tantrum after the end of the panel, this sad episode is a reflection of the sadder state of economic policy in Italy. And the Italian press, starting with the respected Corriere della Sera, has now reported this sad incident and scorned the minister for publicly embarassing Italy in a major international forum. Hopefully, since Italy and Italians deserve better rulers than this buffoon that made a fool of himself in public and embarrassed his own entire country, in April they will vote  into the dustbin of history this mediocre individual and his entire administration. Certainly with pathetic rulers such himself Italy would be certainly bound to face economic disaster and eventually be forced to ignominiously exit EMU. Italy and Italians deserve better.


44 Responses to “Italy’s Tremonti’s Temper Tantrums on EMU in Davos…a Sad Embarrassing Episode for Italy…”

ripleyJanuary 28th, 2006 at 10:50 am

Your analysis is similar to what Jim Grant wrote a few months ago — the Euro is inherently unstable because it doesn’t have a real government behind it, and the whole system could be shaken to its foundations if one weak country [like Italy] decided that it had to leave.  Also, the Italian minister’s outburst reminded me of Jeff Skilling’s use of an obscenity in reaction to a legitimate question in a conference call. In retrospect, that was a tipoff about Enron 

GuestJanuary 28th, 2006 at 11:08 am

The entire Berlusconi goverment represents a sequence of rude outbursts in the timeline of Italian political history. Things will be set aright in April. Sometimes the mafiosi fanfaroni get into power.

JoshuaJanuary 28th, 2006 at 11:30 am

A favourite taunt of Jew-haters is that Jews should “go back” to wherever. I’ve heard of Jews being told to go back to Russia, Poland and Israel. I must admit though that the “Go back to Turkey!” version is a new one on me. I suppose he didn’t realise that Professor Roubini is Jewish, and thus Tremonti was “merely” displaying his vicious anti-Turkish prejudices.  He is a disgrace to an Italy that has, for the most part, learned such a great deal from its disastrous embrace of fascism in the 1920s and 1930s. That he should have made this comment on World Holocaust Memorial Day damns him doubly.  Tremonti should return to the gutter. He should resign.

Roberto BalistrieriJanuary 28th, 2006 at 12:24 pm

I doubt that Giulio Tremonti had no idea that Nouriel Roubini is of Jewish descendents and even if so, I do not really think he was attacking its JEWISHNESS, but rather he just proved to be what most of us Italians unfortunately are: Temperamental people that sometimes should think twice or better like one of our most famous comedian actor (TOTO’) used to say “before opening the mouth, every person should count until 10”  I wanted to open this comment expressing my disbelief and shock for what happened, but please do not take into the discussion arena anti-Semitism because it is not appropriate.  And this suggestion comes from one that has strong liking for Israel, for Jewish people and for their culture and MUSIC. And I CAN ASSURE you that the World Holocaust Memorial Day has been felt in the country with a vivid and intense participation!!!  Giulio Tremonti is very a buddy buddy with to our LEGA NORD (The Northern League) politicians the most xenophobic and Populist Party in the Government coalition, that is absolutely against the admission of Turkey in the EU  Nouriel Roubini, I am sorry for what happened in Davos. I am deeply ashamed today to be Italian. This has been the icing on the cake. My sincere apologies to you, Turkey and to all MY marvelous Turkish friends in Istanbul (many of them I have)   One small consideration…even if we change our government and we elect a Center-Left coalition, I doubt that things will change in better! Nobody here has the guts to radically carry on reforms…because they simply cannot, otherwise their government would fall apart!  Somebody says that in this country ONLY a dictatorship would make things work OK….  Roberto from Milano, Italy  

AnonymousJanuary 28th, 2006 at 2:53 pm

While I agree with Mr. Roubini that Minister Tremonti’s comments were unbecoming to a man of his stature, I would also like to remind Mr. Rabini that this is a paid site dedicated to useful non-partisan macro economic analysis. It is not a forum for gossip, much less political/personal vendetta. Mr. Rabini’s concluding remarks scar an otherwise convincing piece of analysis. Instead waving the Turkish flag so vigorously,crying anti-semitism or providing an impromptu prognosis of Italian politics, he would be better served by refusing to stoop to the Economy Minister’s level of childish performance. Sometimes it is better not to take the bait.  

JoshuaJanuary 28th, 2006 at 3:59 pm

“I doubt that Giulio Tremonti had no idea that Nouriel Roubini is of Jewish descendents and even if so, I do not really think he was attacking its JEWISHNESS,”  You misunderstood me totally. My point was that the Jewish aspect was totally irrelevant. What is pertinent is that on the very day the whole world, and most especially Europe, is meant to step back and realise where racism leads, a senior Italian politician at an important international gathering made a deliberate and highly insulting racist remark.  “Nouriel Roubini, I am sorry for what happened in Davos. I am deeply ashamed today to be Italian.”  To blame an entire people for the actions of a few is the very essence of racism. You are no more to blame for his comments than I am, and you have certainly no need to feel ashamed.

JoshuaJanuary 28th, 2006 at 4:10 pm

“Instead waving the Turkish flag so vigorously,crying anti-semitism or providing an impromptu prognosis of Italian politics, he would be better served by refusing to stoop to the Economy Minister’s level of childish performance”  No-one one here has “cried” anti-Semitism, not me and certainly not Professor Roubini, although I have no doubt at all what you are crying.  As you have an obvious personal beef with Professor Roubini, you would be respected far more if you acted like a man and approached him personally rather than scrawl anonymous comments on his free blog.

JoshuaJanuary 28th, 2006 at 4:19 pm

“And this suggestion comes from one that has strong liking for Israel, for Jewish people and for their culture and MUSIC. And I CAN ASSURE you that the World Holocaust Memorial Day has been felt in the country with a vivid and intense participation!!!”  Incidentally, Jews were probably more safe in Italy than anywhere else in Europe during the Holocaust. There was virtually no anti-Jewish animosity, and a large number of Italian policemen risked their own lives to help many Jews escape. Indeed, many French Jews managed to escape the murderous clutches of the Vichy regime with the enormous help of those policemen.  

AnonymousJanuary 28th, 2006 at 5:10 pm

The most unfortunate aspect of these series of commentaries is that for the most part, they speak to everything other than Nouriel Roubini’s talk. It is unfortunate that they have devolved from an analysis of the EMU to heated diatribes on Berlusconi, the Holocaust and Turkish nationalism. Mr. Roubini, I doubt this what you intended when you first put forward your remarks on the EMU. It is the kind of posting that incites people like Joshua (who implies that by being “Joshua” as opposed to say “David” or “Jim” or “Jack” he is not anonomyous). I don’t like Berlusconi but I do not want to pay for a site (and yes I am a paying member) for something other than what it advertises. Mr Roubini, in the future it would be wonderful if you excercised restraint and spared us the kind of impassioned mumbo jumbo of commentary that your commentary has generated.

Felix SalmonJanuary 28th, 2006 at 8:04 pm

Nouriel, I found your Italy-Argentina comparison to be very interesting and – yes – also very provocative. Obviously, the minister’s outburst is an embarrassment to his country. Any finance minister, especially one from a double-A country, is likely to react badly to talk of unavoidable sovereign default. One would only hope that any finance minister, especially one from a double-A country, would do so in a much more constructive manner.  As for your anonymous commenter, it’s normally safe to assume that all anonymous comments can be ignored. Especially when he has his facts wrong: you might operate a pay site, but this blog is free to the world. As such, his status as a subscriber is not relevant to what you put on these pages.

GiovanniJanuary 29th, 2006 at 1:45 am

As an Italian I think both the Berlusconi’s coalition and the Center-Left are the same. I do not think the next election will change the italian situation very much. Indeed I think we could benefit from a dafault a ala Argentina. Only this way the people can sweep away the rotten recycled politicians.  Regarding Tremonti, what to say.. It is typical for him to have such a nasty attitude

AnonymousJanuary 29th, 2006 at 5:05 pm

Mr. Roubini, sorry you had the inconvenience. What you’ve remarked is no more than what many others have remarked. That includes The Economist magazine, which has about 1 million readers. I find it hard not to like Italians and Italy, as a tourist. But there are assholes in many governments including, especially, the US government at present. I guess Italy has got its share too.

vanbos.netJanuary 30th, 2006 at 1:07 am

Looking thru the article I noticed no retort for the EU detractor’s comments on;  “There has to be a high degree of labor market flexibility – both in terms of real wages and labor mobility – to deal with real shocks.”  -should it be assumed that on the other side this is a given and really isn’t a point of contention. My thinking is that there must be an equalization of wages/standards of living between EU countries. Wouldn’t this lead to some discontent among the population and a lower standard of living in countries like Germany? Or is it some, for lack of a better term, a “master plan” to hedge against China?    Going into 2006 I am concerned about the stability of the Euro. Any speculations on how long it would take if Italy wanted to get out? 

GuestJanuary 30th, 2006 at 3:21 am

Maybe we should cut Mr. Termonti some slack. He is obviously high-strung and his nerves were jangled…perhaps because of the strain of the Fazio Affair as well as the slog through the fascist viper-invested majority to get the Finanziaria budget legislation passed. After the herculean job of pushing through legislation to meet Stability Pact guidelines, I’m sure the last thing he wanted to hear was Italy compared to Argentina. Doesn’t justify the ad hominem outburst, just suggesting why he lost his cool.   

AntoninoJanuary 30th, 2006 at 6:32 am

(…non faccia a caso a quest´idiota) Don´t pay attention to Tremonti: he is an idiot. I don´t share your view on the coming election, it is true that the incumbent government has chosen its men more for political reasons than for their qualities, but unfortunately that seems to be the trend also in the left-wing coalition. It seems like that we italians cannot do more than cross the fingers… P.s. Mr. “Guest” in the second comment, I would invite you to use some other adjective rather than the word “mafiosi” to express your disappointment, in the future. I am Sicilian, and I think that this word, that is definitely linked to my island, is overused and often misused.  That puts you on the same level of superficiality of Tremonti when he points on Roubini´s origins…

GuestJanuary 30th, 2006 at 11:56 am

By the end of 2006 it is the Dollar which will be in pieces, not the Euro!  Your comparison between Italy and Argentina is interesting but if you really want to find a country heading full speed towards the Argentinian crisis model, just have a look at what’s going on with the US. Argentina used to be among the richest country in the world after WWI and WWII. Then it just wasted its wealth in inefficient and useless policies, while its elites became more and more corrupted and disconnected from their country’s national interest. The USA is curently pursuing a very similar course. The looming crisis for the dollar which will most probably occur in coming months, triggered by the Iran crisis, may just end up as the Argentinian currency crisis. The only reason why it has not yet happened is not anymore the trust into the dollar, but the fear to loose too much. When a system reaches that point, a very small schock is sufficient to trigger a major crisis. So rather than looking at the Euro which is the new kid on the block and is there to stay (just because the world now desesperately needs an alternative to the dollar, and first of all the Europeans), you could dedicate some time into wondering whether the dollar crisis will start in March or a few month later. Because this is now the time frame : months, no more years.  

OldVetJanuary 30th, 2006 at 3:35 pm

Guest, above, may have it right. The fall of the dollar, rather than disequilibrium in the Euro, is the expected event. When, who knows, but the big shots are hedging the dollar especially against Asian currencies, right now.  If Italy were to exit the Euro, the Euro might be more stable. Italy could go back to a continuous devaluation, which seemed to work well enough. Any financial consortium should anticipate exits, and well as new entrants.

Dave LJanuary 30th, 2006 at 5:55 pm

Hmmm… I don’t think you’d have any argument from Professor Roubini on the validity of the US/Argentina comparison. But that doesn’t invalidate his analysis of Italy’s failure to reform.

Steve WaldmanJanuary 31st, 2006 at 12:52 am

The difference between the US and Argentina/Italy is that the US has the option of printing its way out of a crisis, because its debts are in its own currency, whereas Italy does not and Argentina did not have that option without a clear default. A devaluation of the US dollar is not a default, and lenders in dollars knowingly take on currency risk. Functionally it may largely amount to the same thing, big losses for international lenders, but USD has devalued dramatically in the past without a widespread loss of confidence or protracted high interest rates. The United States’ ability to borrow so easily in the currency it prints may amount to exhorbitant privilege, but it does make the US situation different than that of Argentina several years ago or Italy today.  (The term “printing” is provocative. The US would never announce that it is printing dollars to pay debt. But when foreign creditors lose their appetite for US assets, US interest rates will rise, the US economy will sputter, and the Federal Reserve will intervene aggressively to lower short rates and signal their intention to keep short rates low for a long time. The mechanism by which central banks keep interest rates low is by creating currency, but don’t expect to see that highlighted in any FOMC statement. “Injecting liquidity into the system” is a nicer way to put things.)

lmrJanuary 31st, 2006 at 1:32 am

Nouriel, still Davos but not Italy …I’ve seen your paper on the future of the IMF, but the other panellists don’t seem to have made their papers available. I was just wondering whether you got the impression that there appeared to be any consensus forming around reform of a)IMF voting and b)IMF exchange rate surveillance. And if so, around which proposals? By the way, I tried to post this against one of your older blogs but the keyword wasn’t displaying. Has that deliberately been taken out of action or is it a “system feature:”

Alessandro AlippiJanuary 31st, 2006 at 5:44 am

I am sorry for the behaviour of our minister. I agree with professor Roubini, and as an italian, I want to shout: we must discuss this argument and to explain it, as clearly as possible, to the public, in order to let the correct political economy to be implemented.  Alessandro Alippi

GuestJanuary 31st, 2006 at 9:13 am

The real problem is not the fact Italy is dealing with a ridiculous govt, it happens now and then, but that this govt got and really could get again popular support at the elections. So, we must confess the BIG problem is the people electing this kind of stuff as a govt. Which sounds to me as a much tougher matter than the stupidity and/or criminal intentions of some individual.  

Mario SeminerioJanuary 31st, 2006 at 9:44 am

Dear professor,  can you currently see a significant widening in the 10 year Bund-Btp spread? According to your opinion, do you think markets are pricing in the risk of a breakdown of Emu in the next few years?  Italy has a very serious problem of competitivity erosion, and we need structural reforms to manage our labor market rigidities. We needed a stronger pension reform, we need to change our labor bargaining structure. Put shortly, we need to remove all the rigidities in our social structure. Unfortunately, this government wasn’t able to do that, and the likely next one, dominated by left and far-left, union-friendly demagogues is very unlikely to succeed as well. But I’m optimistic, because Italy can do its best in times of deep troubles. But I think that Italy is not Argentina, and I know that, in terms of analysis, you can do much better than that.  Some remarks about the comments here above: many commenters are just behaving like football supporters, a very known italian feature when you try to seriously talk about and analyze problems. Be aware, again, not to be misled by them.

SamJanuary 31st, 2006 at 10:49 am

Giovanni wrote: — I think we could benefit from a dafault à la Argentina. Only this way the people can sweep away the rotten recycled politicians.– Yeah… like cutting off one’s own head is an effective solution for eliminating hair parasites.

SamJanuary 31st, 2006 at 10:51 am

Giovanni wrote: ‘‘ I think we could benefit from a dafault à la Argentina. Only this way the people can sweep away the rotten recycled politicians. ,, Yeah… like cutting off one’s own head is an effective solution for eliminating hair parasites.

GuestJanuary 31st, 2006 at 2:14 pm

I think YOU are a buffoon.  This only proves how slaves of international merchant banks, IMF and World Bank, who have actually ruined Argentina, don’t have the minimum respect for ELECTED REPRESENTATIVES in a democracy. They don’t care a jot about it. What I can’t understand is how people’s representatives can attend such vulture meetings as Davos I’m sure that the Goldman-Sachs guys you would like Italy to be ruled by will sell off Italy to the same same people you serve. I hope it will do you good.

GuestJanuary 31st, 2006 at 2:14 pm

I think YOU are a buffoon.  This only proves how slaves of international merchant banks, IMF and World Bank, who have actually ruined Argentina, don’t have the minimum respect for ELECTED REPRESENTATIVES in a democracy. They don’t care a jot about it. What I can’t understand is how people’s representatives can attend such vulture meetings as Davos I’m sure that the Goldman-Sachs guys you would like Italy to be ruled by will sell off Italy to the same same people you serve. I hope it will do you good.

AnonymousJanuary 31st, 2006 at 2:19 pm

Dear professor,  as many other economists and politicians you forgot a figure of the Italian economic scenario: half of the Italian public debt is owned by Italian citizens, Italian banks and Italian government bodies.  In economic terms a sovereign state that has debts with itself is an absurdity and this debt can be cancelled with a law.  The other part, the one owned by Italian citizens, are tax not collected in fifty years of misgovernment, tax not payed and saved in state bond by tax evaders.   So, before the tempest come, a sovereign state has many tools (and law enforcement bodies) to force people to pay taxes, the new ones and the old ones.

GuestJanuary 31st, 2006 at 2:50 pm

Frankly a very shallow, poor dissertation.   While Mr. Tremonti reaction, if correctly reported, was undue, I may understand his disppointemnt with such a speech.

AnonymousJanuary 31st, 2006 at 4:29 pm

The last part of your comment is like a jury killing a killer…not very different… apart from that I would like to stress 2 point with regard to Italy…seen from inside Italy… 1st…a static one… I would like to remind that italian public and private wealth is hovering arount 10,000b€…that public debt is around 1,500b€ and private debt is around 500b€…if it was a company I would probably say “not bad”…morover the external balance is almost on par giveng zero present and future energy/commodity resources…just “like” Argentina; 2nd…a dinamic one… In the last 10 years italian industry has changed in such a way that is almost impossible to say the contrary…and this is true either for the small industry (just visit whatever industrial district you like and you’ll see that all the company that were living on devaluation are gone and only the best have survived and are prospering) and the big industry (compare the public and private share of industry 10years ago and now as well as the way the big private industry behaves today (fiat))….and btw with regard with the productivity issue…just a small question…what happens when you slash jobs (and capital) in (once) high value-added (traditional) sectors like the one covered by Italy (and now also by China) just to relocate them to low productive services ones….

GBeckerFebruary 1st, 2006 at 4:00 pm

Mr. Roubini,  Can you not manage to get through Davos without raising a hissy fit? We all understand that Minister Tremonti’s behavior can be out of line, but that doesn’t mean that you should stoop to his level. Your last paragraph makes you seem less like a dignified economist than like a school boy ready to go out to the playground to have a scrap with the local rival. Do get a hold of yourself.

CharlesFebruary 2nd, 2006 at 2:43 am

I totally agree with Dr. Roubini’s point about Italy and the other laggards in the Euro zone. The housing bubble in Spain in particularly will burst probably faster than in any other country. Dr. Roubini’s can and should use his personal blog to do whatever he wants. The guy complaining about the content should relax and shut up. Nobody is forcing him to read it.  

stefano fassinaFebruary 2nd, 2006 at 6:32 am

As usual prof. Roubini’s analysis was very interisting. It’s very unfortunate that Italy was represented by a Minister only able to reply racist comments, involuntairly confirming prof Roubini’s remark about the ineptitude of the current italian govt.  The analysis was interesting in many respects and should have been taken seriously by all EU policy makers (not only italian ones). Perspectives are very risky because political and institutional changes needed at EU level are not around the corner. and the economy cannot wait for politics forever. Most EU political, economic and media leadership do not seem able to lead public opinion in their respective countries. In many cases, delusional nationalist shortcuts are preferred, as indicated by: i) the modest revisions to the SGP independently of reforms to Euro-area governance for enacting macroeconomic policies; ii) the arguments in France and NL around the constitutional treaty; and iii) the fight on the miserable 2007-2013 EU budget.  Hopefully, political leadership is changing. The SPD-CDU government gave a strong signal in December on the EU budget. A center-left coalition in Italy could provide a relevant contribution to reforms at EU (and national) level. political coalitions are not the same, as Italian performance between 1996-2001 indicates. 

PierGiorgioFebruary 2nd, 2006 at 9:35 am

If Italy’s malaise (the lowest growth rate in the world since mid-2003) is largely due to a loss of competitiveness (see the collapse of Italy’s global export shares), then we must consider the two sides of competitiveness: the high price-wage levels and the disappointing productivity trends.   These two sides of the competitiveness conundrum have one point in common: the problem is largely generated by a lack of competitive pressures (as pointed out among others by Mario Monti and Giavazzi).  Now, economic policies are inevitably linked to politics. Are the left and the right the same thing? I don’t think so.   The left has privatized, liberalised, opened to trade (promoting the WTO), set up independent authorities to supervise and promote free competition, promoted a closer integration of Italy in Europe.   The right has privatized much less (Berlusconi is attacking D’Alema in these days for having transformed his Office “into a merchant bank”, implying he has privatized too much), has not liberalised product markets, has mildly liberalised labour markets (legge Biagi) but much less than the left (legge Treu), and is now advocating protectionnism against China’s competitive pressure (Tremonti wants to half-close Italian harbours to imports). It has passed laws to reign in the autonomy of Anti-trust and other Authorities, and has put in charge of them non-economists and political personnel (such as the butcher-politician Guazzaloca), while dramatically reducing their budgets.    Therefore I think that whoever likes free markets and competition (and fiscal stability, but that’s another story) should hope for a victory of the left, whereas whoever believes in protectionism and autarchy should hope for a victory of the right. Tremonti hates economists (as shown also by the insults to Tito Boeri in TV a few weeks ago), the European Union and the WTO precisely because they all promote competition.  Now a question for Nouriel about what to do in Italy. More structural reforms? OK. But as you say, it’s slow, painful, and maybe politically untenable (the new electoral law profoundly destabilizes any majority, given its internal divisions). So: is it conceivable to organise a heterodox one-off shock therapy to simultaneously cut by 10% all price & wages? Or is it mere wishful thinking? What lessons for Italy from L.A. stabilisation experiences?  Thankyou.  PierGiorgio  

Lorenzo MatteoliFebruary 3rd, 2006 at 1:46 am

Dear Prof Roubini,  I appreciated the academical parallel comparison Argentina/US and Italy/EU, but it is indeed far-fetched. The time frame is different, the fundamentals are different, the cultures are different, the history is different… so the association is actually untenable, even if some of the numbers may look familiar. Mr Tremonti lost his temper, but the provocation was also “coarse”. Which is of course nice: a tough provocation by prof. Roubini and a very tough reaction by Mr. Tremonti. Sometimes ideas clash…no big deal. At the Davos meeting every man is on his own: once Tremonti steps into that room he is not a “minister”, just Mr. Tremonti, entitled to an academical tantrum. What is less funny about the Davos Macro-Economy Tourists is that nobody dared ringing some bell on the massive debt of the US with the rest of the World and specifically with China and the looming financial disaster that it implies. If something catastrophic is going to happen the US crash will happen quite a few years (months) before the Italian. Interesting times ahead. Regards, Lorenzo Matteoli

HKFebruary 3rd, 2006 at 11:48 pm

Mr.Roubini:  I once met Minister Tremonti. He was not so bad, although his english was.  More seriously, you know so much about the Italian economy and the Argentine economy. But, any analysis based on the comparison between two countries is liable to be wrong; you can easily argue that since the two countries share this and that characteristic, they must be doomed to behave similarly, or since they do not share this and that characteristic, they must behave differently. Actually, you refer to states like Texas in the US. So, you are making comparison among three countries, Italy, Argentina, and Texas, and think that Italy is more like Argentina rather than Texas. This analysis is more reliable than the two country comparative analysis, but not so much, I suppose.  Ideally, of course, sample size must be much larger, and variables must be controled. I have no such capacity, so that I hope someone make a serious study on Italy’s likelihood of defalt and departure from the euro. In the meantime, I tend to view Italy as closer to Texas than Argentina. After all, Argentina adopted the currency board system based on the dollar uniraterally, while Italy is a full member of a currency union, the euro system.  

GiulianoFebruary 5th, 2006 at 4:56 am

Tremonti’s reaction, shows how Italian government doesn’t accept any complaint. It shows how during this electoral campaign our leaders are trying to put all the problems that Italy’s have under the carpet (Public debt, labour rigidity, loss of competitivness, zero growth, etc..). The problem is not just that… the big problem is the fact that under the carpet, most italians don’t know what is really happening. TVs are hiding everything, as our president controls public TV. How can the electorate impact our political economy?  I really hope that something will change after April, but if not… Argentina’s solution will be the only way out. At that point everything will come out of the carpet, sadly!

RicardoFebruary 7th, 2006 at 2:20 am

Two hurrahs for Nouriel.One for his economic logic and the other for prompting the unmasking of an arrogant nationalist-racist of mediocre intelect .  My appreciation for the very many italians who have to suffer the likes of this unducumented bigot .But definitely no appreciation for those who voted for them .The latter have got just what they deserve . Ricardo

Dr. Stefan EngelsbergerFebruary 20th, 2006 at 3:38 am

Mr. Roubini has done a good job so far to interfere in politics whenever he can. He is everything but an independent scientist, he is lobbyist and a very skilful one. To provoke an outburst of a minister during a panel in Davos is a stroke of spin-genius to attract attention and lead emotional acting participiants directly to a commercial blog.  If Roubini is Jewish, Turkish, Italian based – who minds? Only one fact is important: Roubini is an unresponsible person, dealing with his own carreer as al so called “academic” (US-academics are regularly lobbyists and highly paid). He is aware about the fact, that defaults like in Argentina, a promoted by him “coercive debt restructuring” hurts people, particularly the middle class and the poor.  Roubinis interference in European matters is ok., but Europeans should not fall for his professional spinning and lobbying, but build their own opinion in responsibility of the people, by the people and for the people.  

Johan PanzerFebruary 21st, 2006 at 8:20 pm

Mr. Roubini like many Anglo and American commentators seem to be obsessed with a strange wishful thinking about the Euro failing; Europe collapsing etc etc etc.  What every European should understand is that the US government has a stated aim to destabilize the EU and the Euro; the US government has declared in numerous publications issued by the Pentagon etc that America will never allow a rival power or currency to challenge the hegemony of the magic green paper that is printed so freely by the Americans. Part of this strategy includes of course using the poodle government of Britain to try to destabilize Europe and to try to derail further European integration. Part of this strategy to destabilize Europe includes also Rupert Murdoch’s violently Anti European media empire in Britain who are barraged on a daily basis with virulent Anti European hate propaganda (this American based media magnate controls 60% of the British news media and therefore 60% of the small minds of the British masses).  Mr. Roubini therefore is nothing more than another financial columnist financed by US government backed think tanks who pay for his kind of provocative doom and gloom predictions about the Euro collapsing; this or that country exiting the EU etc etc.  If Europe had listened to all these Americans and their paid stooges in the British press we here in Europe would have never built Airbus into the worlds premier airplane builder; we would have never built the worlds most prosperous and succesful common market with 450 million of the worlds most prosperous, educated and cultured people on the face of this planet. We would never havre created the European Space Agency which launches more commercial satellites into outer space than NASA. We would never have launched the dual civilian/military use GALILEO positioning system which will outclass the old American controlled GPS system.  If Europe had listened to all these Americans and their British stooges and poodles we would have never launched the Euro- the worlds most succesful new currency that is capturing market share day by day and in less than 5 yrs managed to capture up to 50% market share of foreign reserve holdings in many key countries around the world.  I would suggest therefore to Mr. Roubini and all the other American and English doomsayers to focus instead on the coming default of the US government on all its treasury obligations that it has printed so freely and dumped especially in the far east on countries like China.  China is holding several hundred billions of this magic American government “IOU” paper and many people have pointed out that there is a very high likelihood that the US government will refuse to honor all these obligations held by the Chinese government; in due time the Americans will try to accuse China of being a “communist terrorist power” and of being part of an “Axis of Evil” and this will then be used as a justification to default on these hundreds of billions of worthless paper that the Americans have printed so freely over the years.  In Europe we now need to take several steps to defend ourselves from this continued interference and agression from the Americans:  1) Replace the American controlled NATO organization with an EU only defense structure  2) Impose a strict “European Only” Defense Procurement policy by European Governments in the EU until the Americans open their domestic military procurement market and allow European companies to compete head to head on US government military procurement contracts   3) Severely limit and control the actions of US/UK hedge funds in Europe  4) Request the Americans to remove their remaining military occupation bases they still control in Germany and other European countries  5) France should share its Nuclear “Force de Frappe” technology with Germany and the departing American military forces should thereafter be replaced with German nuclear tipped missiles  6) Europe should encourage Norway, Russia, Venezuela,Sudan and Iran to denominate its oil exports in Euro’s only  7) The EU should break the military arms embargo against China and secure massive military weapons supply contracts to China – this will boost employment in Europe; limit the hegemony of the Americans and help to reduce the trade deficit that the EU suffers with China.  8) Increase trade and political ties with Putin’s Russia and jointly work to destabilize the American controlled governments in the so called “New Europe” – i.e. we should do everything possible to destabilize the pro American governments in Poland, the Baltic States, Ukraine and the Czech Republic. Once the Ukraine collapses it should be handed back to Russia and the other new European countries should be retrained to lear the “European Reflex” -i.e. the reflex to think European and to promote Europe instead of the current situation where these failed countries like Poland , Czech and the Baltics are nothing but American controlled colonies who force them to send troops to the American war of horror in Iraq.  9) And last but not least kick Britain out of the EU and politely request the next American aircract carrier that sails by Britain to tow these miserable Brits and their islands to somewhere off the coast of New England where I have no doubt that the Brits will feel much more at home and so that we here in Europe can continue to integrate the EU into the worlds most prosperous,educated,efficient, cultured society and market on the face of the planet.

SimonFebruary 22nd, 2006 at 4:46 pm

To Johan Panzer, Living in an America that is losing its ability to disagree amicably, I read your post with great amusement. I do have some questions on your multi-point plan:  1. Who will pay for this EU defense force? Currently, most EU members have defense spending around 1.5% of GDP (Greece is an exception, but not significant in gross terms)  2. It sounds like this defense build-up will be done with no purchases of US goods. This certainly makes sense, but I think it may exacerbate the costs from Point 1.  3. Limiting US/UK Hedge funds. I’m really not sure what you are trying to prevent, but it does sound like you are restricting some amount of foreign investment. Aside from the legalities of such restriction on trade, I suspect that the costs of such an action (ie loss of investment funds) would outweigh the benefits. But, since I don’t know what benefits you see from this action, I can’t be sure.  4. You would find no argument from the US on this one. The US military is actively drawing down troop levels in Europe and Asia, and I can assure you that these reductions are very popular with the US people (except maybe the actual military personnel who no longer get pleasant postings in Germany). Given your goal in Point 1, this makes a lot of sense.  5. German nuclear-tipped missles? Although given Chirac’s recent posturings on when and why France will use its nukes, this may well be an improvement. But they are your missles (is there an EU sourced nuclear capable missle?) so you can give control to whomever you want.  6. Encouragement is good, but what exactly does that mean? Are you proposing incentives to change the standard oil-trading currency from its largest market to a smaller one? Why would these countrys not choose to value in Yen, or Yuan? What is the advantage to them of trading in Euros?  7. Removing the arms embargo with China. Is there no more oppressive government that you can deal with? Sure, the Germans are doing commercial deals with the murderous lot in charge of the Sudan. Is there any country or regime that you would NOT sell arms to?  8. So you are in favour of destabilising democratic countries in order to force your worldview on them. And no, I don’t see a parallel with the US. By the way, who decides what is proper “European” thinking?  9. Now you’re just being silly and petty.  Johan, all I know about you is that you type well, speak English very well, and hate the US and UK. Please prove me wrong on the last.

Pancho VillaMarch 25th, 2006 at 2:34 am

HHMMM!  “‘Italy’s economy has “run aground” and must improve its productivity to reverse the relative decline of Europe’s fourth biggest economy, Mario Draghi, the new governor of the country’s central bank, warned at the weekend.  Speaking only five weeks ahead of a general election likely to be a bitter and close-fought contest, Mr Draghi spelt out the seriousness of Italy’s problems, saying: “Gross domestic product did not grow [last year], our products lost even more world market share and the budget deficit increased.”‘”    

retailtrackrNovember 9th, 2011 at 2:33 pm

As your commentary implies, the irony is that Turkey may end up replacing Italy as an EMU member in 5 years, assuming there the EMU exists.

It may be rather trite, but having taught at NYU for the time that you have, you might be familiar with the American athletic expression of "Scoreboard," which is a comment widely used to rebuke a sore loser's cutting remarks.

Given where Italian 2 yr and 10 yr yields are, the same expression (in more diplomatic terms) might be applicable here.

menganoNovember 10th, 2011 at 4:07 pm

Are you familiar with checking the calendar, apart from the scoreboard, in America?
This article is from five years ago so, unless you believe in tea leaves readers, it is very difficult to take Nouriel´s words as premonitory or one could wonder why didn´t he include in his discourse the demise of Lehman Brothers and a thousand American Banks as the seed and cause of a world wide financial crash.
I am afraid that the match you are talking about ended years ago as Mr. Tremonti was again elected to the disgust of Mr. Roubini. Check that scoreboard.