Could Coronavirus Destroy the European Union? (w/ Lenore Elle Hawkins)
ED HARRISON: The real story is that as we speak now, you have a contingent of Southern European economies, the four, Portugal, Spain, Greece and Italy. Then you have four northern economies. That's Finland, Austria, the Netherlands and Germany, basically tete-a-tete with each other. The last that I've heard about the Euro bonds is that there's a contingent of even the likes of Latvia, actually, interestingly enough, are moving into the Southern European camp with France as the kingmaker. From my perspective, it seems like we're at a pivotal moment in the redenomination risk game with people like Mark Rutter, who's the head the Dutch government saying under no circumstances are we changing our position. Where does this go, this whole euro bond versus ESM debate? LENORE HAWKINS: I think it is going to be very, very difficult to actually get this through and make it work. Italy's debt to GDP is already 132%. That is part of what's crippling the economy, the government is a massive portion of the economy, and there's a massive amount of debt sitting on the economy. You cannot solve this problem by dumping more debt on it. I don't see how other economies that have been doing quite well are going to be willing to put this basically a big old cement block and tie it to their feet while they try to swim across the sea. That's just-- I don't see that being politically all that feasible. The problem is you have this mentality that government will solve the problem when the problem is, in fact, the government. I think this is going to get really ugly. I think there's either one or two things is going to happen. You're either going to have significant fiscal consolidation, fiscal policy consolidation which means that Italy is no longer nearly as autonomous as it used to be. Its finances are going to be run more and more by Brussels. Now, some would argue that that might be a good idea because it's not like that Italy has this fantastic track record but history pretty much is clear that when you have some guy over there making decisions for our guy over here, that doesn't tend to go very well because you don't have any skin in the game. You're not dealing with the consequences of your own decisions. That's unlikely to work out well. ED HARRISON: Even Conte has said that's a deal breaker, just like Brussels is saying it's a deal breaker to do a euro bond, the Italian government is saying they would never do that. LENORE HAWKINS: They're the only options and you've got half the people saying no way on option A and the other half going no way on option B and it's like those are the only options. The other thing you can do is Italy falls out of the Eurozone, goes back to the lira, probably, well, definitely it would need to have a big default on the debts. That is also literally nearly impossible. I don't know how you even do that. How would Italy default, and they can't borrow any money? They have an old population, it's the second oldest population in the world. First is Japan. It was the oldest in Europe. How are you going to take care of all these people, these pensions, when you drop out of the Eurozone, and you cannot borrow any more money? There's all bad options around and the clock is ticking. Part of the work I do here now is involved in having Italian companies, some private, some public that are looking to perhaps have a strategic acquisition, be acquired or get funding primarily from American companies. What we're seeing is a lot of the big private equity companies, names that you would all know, they're looking at their portfolios right now as the world is coming to a grinding halt and saying, we know we're going to have to take losses. Where are we willing to take them, and where will we provide additional capital? Because right now, it's not like you're looking at a company and saying, well, I'm going to invest for growth, what you're doing is you're putting money in to keep it afloat. That's going to be the focus. If you're doing that, you're going to have to say, all right, we're going to have to let some of these go. Italy is probably one of the worst looking at the moment. You've got capital, investing capital, no longer coming into the economy, and that is just accelerating this pace. We have a company that last year got them some emergency funding. It's a publicly traded company. They were in a tough spot, needed some emergency funding, got them that, things were going great, they're back on their feet and after this, and it's a consumer products company, after this, they're running out of time. You're not talking about a small company. This is a publicly traded company that has a couple months at most before it's completely out of cash. That is the story everywhere, and where's the money going to come from? ED HARRISON: Well, let me ask you this. How does that compare from your knowledge to what UK companies are facing in terms of Brexit? From my perspective, it seems like Brexit is an easier scenario by far than Italexit would be. LENORE HAWKINS: Yes, much easier. Well, the UK doesn't have the percent of government, I think their government spending is like 30, I think about 38% of GDP. Government accounts for a much smaller portion of the economy and they also don't have the outrageous debt to GDP, and they have a stronger economy that's got-- there's a lot more phasing in their economy and how it operates. Here, it's actually very difficult to speak of the Italian economy because you've got two very distinct economies. You have the North, which is where I am. Thank God, we ended up being the epicenter because this is a very wealthy part of the country. Things work really well here, there's a lot of GDP generated here. Then you have the bottom half, you north, go south, when you go down there, it's a completely different world, very, very poor. There, you end up with some of these perfect examples of what is so wrong with the country where you have like more guys that work and basically their version of fishing game in the southern parts that you have in huge parts of the United States. It's just it makes no sense. You have government just paying people to do nothing because they don't know what else to do. ED HARRISON: Where do we go from here, not just in Italy, but also globally from an economic perspective? To game out different scenarios, obviously, you have to almost be a virologist at this point in time because A, you have to understand when's this going to end, and you already talked about not getting any clear signals from that. B, you have to understand what the policy response is going to be. Then C, you have to get a sense of what the backside economic damage is going to be. If you could game out best case, medium and worst case scenarios for Italy and other places that you're interested in, what would you say? LENORE HAWKINS: Well, I think what we've seen out of the ECB, I think they're going to pull out all the stops. They're going to come up with everything they can possibly come up with. I think Germany is not going to be able to fight back the way it has been. Angela Merkel, I think she knows you just can't have Italy fall out. They've at least got to give it a shot. One good thing, Salvini, he's the leader of what used to leg up and like is the much more nationalistic, very anti-EU group. He's got a lot less power than he had a couple years ago, so that's a good thing to help that relationship along. There's talk here. We'll see if it comes to pass, but there's a lot of talk of scrapping the current government which there's precedent for this in a crisis. Remember last time, the Great Financial Crisis, they basically scrapped the Italian government and they put Draghi in charge. There's talk of that happening again, and I think that would actually be probably the best case scenario. The leadership here right now, it's stunningly bad. For example, when they tightened down the lockdown rules, how that all panned out was Conte, the Prime Minister, got on Facebook at 11:00 at night on a Saturday, no preannouncement, just gets on Facebook, starts telling everybody here's the rules except for the rules hadn't really been agreed to. That was Saturday, saying, well, if you're not essential, only essential people can go to work on Monday. By Monday morning, people had no idea if they should go to work or not. That's just one little example. I already told you about the website. This government is not getting it done. We need to have an adult in charge. Hopefully, we do get Draghi in, I think that would be a really, really good move for the country. I think it would be good for the European Union to get him in. I think Christine Lagarde, having her be put in the ECB, I think that was a very big sign that they were going to be willing to do some very creative things. You're asking what would be good? Well, there's good in the short term, and then there's good on the long term. The markets really only care about the very short term these days. I think if we get the ECB to get very creative, the Euro bonds, if maybe we get Draghi or some other person that's put in charge here with some decent marching orders instead of what we've got, I think that will be very good, short term. Long term, I think if they do that, it will probably be disastrous for Italy and it will continue to struggle because the real problems of this economy cannot be solved by just loading more debt and having the government spend more. I think this is something you were saying, well, what needs to be happening all over the world. We need to get back to some basics here. To grow an economy, you can only do-- there's only two ways to grow an economy. You grow the labor pool, you grow productivity. While growing the labor pool, either you bring in immigration, which is you want to bring in like the best and the brightest. If your economy is struggling, it's very difficult to get the world's best and the brightest to want to work in your economy, or you have babies. Well, that's a long term solution. There's not much we can do on the labor force. What you can do is improve productivity. Productivity isn't really like people think about productivity is like shop floors or something like that, building more widgets. That's its '80s idea on productivity. The real what you get with productivity is information, clarity of data. What we have seen all over the world is with central banks really mucking with the price of money, that's a very important data point. There's a lack of information and productivity needs good decision making. When you don't have good data coming in, it's very difficult to make good decisions. We've seen post-financial crisis an incredible explosion in regulation and an increasingly complex tax code. That also changes the way people do things and they do things based on these regulations in this tax code. Then that means that the information you're getting is even more mucked up. Until we start really addressing that those are some of the problems and not the solutions, I think longer term, we're going to see slower and slower economy, which is exactly what we've been seeing. The rise of central banks post-Alan Greenspan, when he decided he could just monetary policy away the normal business cycle and get rid of failure, get rid of recessions. When we started doing that, and then as we saw more regulation, increasingly complex tax code, economies are just growing slower and slower.