AMERICAN ENTERPRISE INSTITUTE

ITALY’S THREAT TO THE EURO

INTRODUCTION: STAN VEUGER, AEI

PANEL DISCUSSION

PARTICIPANTS: ALBERTO ALESINA, HARVARD UNIVERSITY; MICHELE BOLDRIN, WASHINGTON UNIVERSITY IN ST. LOUIS; ERIK JONES, SCHOOL OF ADVANCED AND INTERNATIONAL STUDIES; DESMOND LACHMAN, AEI

MODERATOR: STAN VEUGER, AEI

2:30–4:30 PM MONDAY, APRIL 9, 2018

EVENT PAGE: http://www.aei.org/events/italys-threat-to-the-euro/

TRANSCRIPT PROVIDED BY DC TRANSCRIPTION — WWW.DCTDR.COM

STAN VEUGER: Good afternoon, and thank you all for coming to this event on the Italian political and economic outlook. I want to keep it short. We’re going to hear from our four expert panelists: Alberto Alesina, Michele Boldrin, Erik Jones, and my colleague Des Lachman. They’re going to give us their view on Italy and its near future. After that, I’ll let them attack each other, answer a few questions, then we’ll turn to audience Q&A.

Just so you know, this event is livestreamed, so there will be video material. If you ask questions that are not really questions, but more like meandering essays, and that video material can be held against you — (laughter).

With that, I think I’m going to give people 45 more seconds to sit down, and then I’m going to ask Alberto to start our conversation on the state of Italian politics and Italy’s economy and its impact for the eurozone and for the European Union.

Alberto, you want to go ahead?

ALBERTO ALESINA: Thank you. Thank you for inviting me. So, I think I’m going to — first what I will do is sketch a few scenarios that may occur and then start with the conversation to see what people think that is more likely to happen or not to happen.

Well, first of all there is a lot of uncertainty about what’s going to happen, which new gov- ernment is going to be, whether there is going to be new elections or not, but the most likely outcome so far — unless there are new elections, and then who knows what will happen — is some sort of government between the Five Star Movement and the Centre Right, or at least part of the Centre Right, della Lega Nord.

So I thought I’d sketch the three scenarios. The first scenario, which I think is low proba- bility, which is sort of the horrible one, is that the government, the Lega, and the Five Star Movement, they’ll implement what they promised during the campaign, the so called — (foreign phrase) — namely, the minimum income for everybody, which would be quite general. It has been estimated to cost about 29 billion euros — (inaudible) — infrastructure for about 10 billion euro a year for a while, a flat tax between 15 and 23 percent, which would imply pretty serious reduction in fiscal revenues.

Now, in October, if they produce a budget that way, of this kind, the financial market may start to panic. We may get interest rates skyrocketing, like it happened in 2011. The EU would not accept such a budget, therefore making the financial market even more worried. And at this point, what happens, Salvini, the leader of della Lega, may take the opportunity to say, “See, they want to force on us another troika, like they did with Greece,” and take the opportunity to ask for a referendum to leave the euro, and perhaps leave the euro, if not even the EU.

And if that happens, let’s not elaborate on that, but we could imagine the — (laughter) — let’s just stop there.

Now, at that point — I mean, the other alternative to this will be that the Five Star Movement may say, “Forget it, let’s put a wealth tax to avoid this problem.” And they’ve been talking during the campaign every once in a while about the wealth tax. And the wealth tax in Italy is somewhat complicated from this point of view because a very large portion, like more than 80 percent of the wealth in Italy, is real estate. And so wealth tax, a lot of it would be of real estate. And there is actually a lot of estate that is not recorded. Essentially a lot of tax evasion on real estate, much more in the south than in the north. So the wealth tax would be a tax mostly on the north, and della Lega would oppose that, presumably, so we are back to exiting the EU and so on.

Now, some people say that the EU — I think our friend Luigi Di Maio wrote that Italy is too big to fail and therefore the EU should somehow acquiesce to some of the demands from Italy. But if they — if these two parties really do what they promised — I mean there is no way that the EU can acquiesce to such deficit.

Now, the second scenario, which I think has a higher probability, is that they don’t implement what they promised, at least not so aggressively. They do something more moderate, one way or the other, and they manage to get the EU to go along with them for a while. But then what they’re worried about is that when there is going to be next worldwide recession — that sooner or later we will have a recession. There are business cycles, as we know, and sooner or later there will be a recession. At that point, the debt of Italy will not have come down particularly because they will not have done sort of policy of that kind. So Italy could be the weak link in the euro area, not because they have done something absolutely crazy, but because they have not done, sort of, an adjustment when things were going reasonably well. And that they let the debt grow even when the economy is growing like it is now. So the financial crisis may be brought by — not so much because Italy did absolutely crazy things, but because it did not much and there is a recession in the world.

And now we get back to the first point again: What do we do now? Do we have a troika coming in and get out of the euro? So, we go back to the first horrible scenario, perhaps less dramatically, but there’s a risk of what may come in the next recession.

The third scenario, which I think is more likely than scenario one, and I’m not sure whether it’ll be more or less likely the scenario two, is that both della Lega and the Five Star Movement will essentially forget everything they said to the electorate, and they will do essentially nothing, and that they will continue to muddle through, as always. So Italy will continue to muddle through with mediocre growth and high debt, and nothing particularly remark- able will happen.

We had a president in 1994, when Berlusconi was elected the first time, he made this famous contract with Italy, which he promised incredible things like cutting taxes right and left. And then at the end of the day he really didn’t do much of what he had promised. So it wouldn’t be the first time that many promises are disregarded. Not only in Italy, incidentally, but that would be a particular case.

So the key to answer — the key to see whether this scenario three is going to occur or not, is really what you think about the Five Star Movement. Is the Five Star Movement becoming sort of a new version of a reasonably moderate left-wing party, perhaps, either getting rid completely of the democratic party, of reaching some agreement or union with part of the democratic party, and becoming sort of a reasonably normal, center-left party?

I think there is certainly probably part of the Five Star leadership would not mind a solu- tion in that direction. And my sense that — the others may correct me if I’m wrong, but I have the feeling that part of the Italian so-called intelligentsia people that would participate in a meeting like this are beginning to think that perhaps the Five Star Movement is not so bad. And perhaps that’s the only way to move forward — that we should help them in this transition toward becoming a, quote, unquote, “normal party.” And in many ways, at this point, they would be right. The Five Star Movement is a much better candidate to lead Italy than Salvini, who is really, in my view, really the — would really need to be worried about.

I’ll stop here. I may have to say something later about immigration when the issues come up, because of course the success of Salvini comes mostly from the fear of immigrants. And somehow, if you take that away, one way or the other, with the better policy or better in- formation or whatever — if you take away the sort of fear of immigrants — and the share of immigrants in Italy is not higher than in other countries. In fact, it’s lower. But the rate of growth has been — after Spain it is the country which has had the fastest rate of growth of immigrants. And that is possibly a short-run — the effect of this may be a short-run phe- nomenon that may underscore the appeal of Salvini, but I think we’ll return to immigration later. Thank you.

DR. VEUGER: Thank you, very much. Let’s turn to Michele Boldrin.

MICHELE BOLDRIN: Thanks for the invitation. Very nice of you to want to listen to me. I’m going to try to make it different, but I have to say that I agree 100 percent with what Alberto just said, which is useful. So instead of debating, I’ll try to add up, and then we’ll see. And I’ll use — our hosts were so kind. They sent us five questions. The questions were very difficult. So what you will see is just the question, not the answer — (laughter) — because each answer, if one takes it seriously, would have to keep you here for hours.

But, I agree with what Alberto said. I actually agree with his implicit, or not so much implicit, ranking of probabilities. I think option three is definitely in the cards, and everything that we can see in the songs and the dance, and particularly the signaling devices that are used in the Roman politics these days. That’s where we are going, and unless there is something strange happening within the center-right game where basically Salvini is trying to pull completely the rug of under the feet of Berlusconi, the third party, the explicitly fascist party, called Frateli d’Italia that is led by this — (inaudible, laughter).

It’s irrelevant. They are an appendix of della Lega that takes care of Lazio, where they are historically rooted. But other than that, they don’t exist. They don’t have any — so the game is between Salvini and Berlusconi. Salvini got the votes now. Berlusconi’s got the TVs and the power. You have to understand that Salvini is a product of Berlusconi. Berlusconi made him in the very strict sense — made the guy a TV star. I’ve never seen anybody in the history of the last 30 years of Italy be so present in every TV show on every channel, particularly the Berlusconi channels. I mean, day and night, it’s like the guy had some form of three suzia so he could be in three studios almost simultaneously.

And I think that’s the game. The game is, Salvini is asking himself, “All right, he’s the dead man walking, I can do without him politically. Every post-electoral poll is saying the 8 percent that Berlusconi got would be easily be 5 now because 3 has already decided to vote Lega, but can I do with his vendetta if I cheat and drop him and I go over to Five Star. He’s going to unleash his newspapers and TV against me, and that’s a problem because I rely on that.” So that’s I think the name of the game. Other than that, it’s clear. And aware of that, the Five Star, which is why I think option three, is really scared of actually having to govern.

And the thing that is amazing is if you are Italian press, and the whole debate is almost crying in the front of the PD, saying, “Please govern with us.” Which is the most ridiculous thing because it would be like — forgive me — Donald Trump begging Bernie Sanders to come in to take the vice president office and also the Treasury together. It is pretty much the same thing.

But they’re doing it, and what they’re doing is desperately trying to build up a shield from having to govern. Because if you have the PD and the thing, you can always say, “Look, we wanted to do wonders and miracles, but we have to work with these bastards and it’s not working, and that’s going to be it on that.”

Question: What’s the reason? I think Alberto said it. The main reason of the thing is immigra- tion. Immigration — I’ll only mention it, and I’ll let him say more later — I think is the issue in the short run in Italy that has changed the political scenario in the last five, six years. And immigration in the sense, interestingly, of the arrival of the black people — just to make it very explicitly — from Africa and some Muslim, or so, from the Syria disaster. The numbers are actually small. We are talking a grand total, at most, of half a million during the last five, six years, in a total of 5.9 million immigrants that still currently in Italy, of which 1.2 million are Romanian.

And that may have created the usual irritation that we all have, but it wasn’t a big deal. And once the ethnically different people started to arrive and the religiously different, it became a bomb. That’s going to be the issue. That’s the short run.

The long run, the reason for this is that the country has been insurrecting in a more or less irrational way, but insurrecting against bad government, or malgoverno as we say, since ’92. If I have to read the long — (inaudible) — of this, this is nothing but another wave, of a problem that is there. The Italian political and elite class haven’t governed the country properly. Nobody governs their country ideally or properly. I mean, we have a lot of complaints here, in France, or anywhere. Italy happens to be in my view, in the Western world, couple of steps up or down — you choose — but away from the mean of this government that may characterize the US, the UK, or France and Germany — you name it.

And this continuous populistic stance of “they’re all thieves, we are all good; if things are going wrong it’s because they’re thieves,” has been there since Manipulita. Clean Hands, as I guess it was translated in English — ’92–’94, they brought the fall of the previous parties, they brought the growth of Berlusconi. Berlusconi made a lot of promises. They failed. The mechanism of corruption and bad government has kept going, and in particular after the 2008 crisis — and then the Greek crisis in particular — the thing has become dramatic, and so now we get — so that’s the long run.

So if one of us wants to ask, “Where is the solution?” It’s complicated, because it’s a long- run promise, been sitting there for 30–35 years. So that’s my answer to that. In the short run, the immigration is the thing.

The economic performance, I was tempted to say to — (inaudible) — it looks like the propa- ganda is making it to the American Enterprise Institute, in the sense that there is no connection between Italian economic performances and the euro. Italian export is going as strong as it gets, and more.

DR. VEUGER: I will let Des defend the —

DR. BOLDRIN: I’m joking, it’s actually —

DR. VEUGER: No, I’m not.

DR. BOLDRIN: It’s absolutely the appropriate question, in the sense that that’s what’s in the debate and that’s something that went through Italy. You go to Italy now, and I think there is only one stance on which I wrote a couple of articles saying, you guys don’t under- stand, this is the opinion of 80 percent of the country. The only thing that makes this Five Star and della Lega, particularly, is that they make it explicit. But, the electoral base of half of the PD, and the extreme left that went under Liberio Vali, and was this fascinating party called Power to the People. I loved that. They got 1.8 or whatever —

DR. ALESINA: The leukemia party?

DR. BOLDRIN: There is a widespread view, which is as insane as it gets, which is: It’s all the Germany’s fault and the euro’s fault. It just doesn’t square with the data. You look at the data, the Italian economic — as low down in crisis — starts around the first debt crisis of ’92. There are a few oscillations. There is a bit of inertia, but by the time the euro goes in, the TFP indicator, labor, productivity — everything is flattening out and starting to go down. And if it is for that, even Germany gets into the euro very flat — in fact, very poorly. It’s doing worse than Italy, for a while. Then the Germans reform and do what they got to do and took off. The Italians didn’t, and it continued. But the relation with the euro, it just didn’t exist. If people are interested, we can try to get into it, but there is no evidence that there is an exchange-rate problem.

Now, just to give you an idea, the Italian popular view of the thing, that it is all an exchange- rate problem, is so deeply rooted that roughly the exchange rate between the lira and the euro was 2,000 — 1,970 something when they fixed it. Mr. Berlusconi’s got lots of applause during the electoral campaign by saying that the thing would have been solved — if they’d had fixed it at 1,000, then it would have been much better for it. Anybody that understands exchange rate internationally should understand how stupid this is because it’s exactly the opposite.

But everybody applauded, the press included. That gives you a measure of how ideologically and incompletely there’s nothing to do with facts. So the economic performances are not the reason. They are bad, but the euro is not the — what are the reasons? The reasons, I think, are what I say. And the implication — again, I’m with Alberto. My view is very cynical and sociological. Della Lega is the dangerous thing, has got very strange relations. We may want to go back to that later with Putin, and it’s the object to watch. The Five Star is essentially an employment office for aspiring politicians that haven’t got a job, and they’re not going to be willing to leave their nice salary at congress. So their problem is to find a way for gov- ernment to stay in power, and the implications are going to be a little bit more of democratic- Christian party.

And with this, I think there was one last question, of the Italian election to the EU core. That’s really complicated. I think that what we are going to see, if I understand what’s happening in Paris and Berlin, they’re going to keep pushing — verbally — toward more integration. I don’t think they’re going to do it very much for the very simple reason that the key step, next, is to really integrate the banking system. This goes beyond Italy.

And I may be wrong. I don’t know those countries as well as I think — believe I know Italy, but I don’t think there is much willingness on either side to release the public control or at least the privileged relations that each government has with their own banking system. And the next step for a true economic integration is to really integrate the banking system. So I think there is going to be a lot of verbal statements on the Merkel and Macron sides, which maybe is useful to lift the spirits, but Italy is not really going to be an issue because they’re not going to do much. There is not going to be a real proposal to the table.

DR. VEUGER: Thank you, Michele. Let’s turn to Erik Jones.

ERIK JONES: I’m just going to steal that thing. Right. Now, as you can probably figured out from my accent, I’m the only one on this panel that actually lives in Italy. (Laughter.)

So, when I hear Alberto lay out three scenarios, and to be perfectly honest, I didn’t really hear the big difference between numbers two and three, and all the scenarios end up with disaster.

DR. VEUGER: I think the one and two, you meant.

DR. JONES: No, no, two and three. Number one is they do what they said. That’s immediate disaster. Number two is that they do what they think they can do. That’s delayed disaster, because they don’t prepare themselves for the next recession. Number three is that they do what everybody else did — which is what they think they could do — which is delayed disaster. So if I understood you correctly, we’re basically looking at delayed disaster. I just got to get my kids out of high school before this really hits the fan.

There is — I have some slides. Here they are. I just want to make four points about euroskep- ticism of Italy because all these stories that Alberto tells us, there are stories where Italy ends up leaving the euro. And you would get the impression that Italy leaves the euro because Italians don’t like European integration, which would actually be something new and in- teresting about Italians.

Italians traditionally have liked European integration, but, alas, Italians have become more skeptical. That doesn’t mean their skepticism vis-a-vis Europe was what was decisive in this election. On the contrary, like most elections, it was decided on domestic issues.

But skepticism toward Europe and the euro does reveal a changing relationship between Italy and the rest of its European partners that I think is worth paying attention to. Because even if it wasn’t decisive in the last elections, that doesn’t mean it won’t be decisive in the next elections. Which is why I focus so much on scenarios two and three from Alberto. The idea of delayed agony, because I think delayed agony is a lot about Italians actually connecting the domestic issues they care about with European issues that they really don’t care about and then turning it into some toxic mix where they care about European issues in a very negative way. So my advice to other Europeans is whatever you do, don’t encourage that tendency.

OK, this is some data that — my goal here really is to get you to learn as much Italian as I know. This is some data that basically shows you that these domestic issues were para- mount over the European issues. And the one you want to look for is on the all the way the right-hand side of your screen, the one that says, “cambiare la Europa.” If you look at it, what you see is that Europe lost importance and lost salience in the months that ran up to the elections. They just didn’t care about that. What they cared about were things like cutting taxes. They cared about things like putting Italians first, which is code for immigration. They cared about things related to corruption, and they cared about things related to inequality.

And this is why I’m suspecting that the Five Star Movement and della Lega are going to have to do something when they get into office because Italians actually care about these issues. And in caring about these issues they are not going to let della Lega and the Five Star Movement go beyond the five-year electoral cycle without doing something that they promised that they would do.

Having said that, Italy’s relationship with the euro is changing — with Europe is changing. I made a huge data annex that I can show you, but I’m not going to work you through. All I want to emphasize is that all that data that we looked at shows this rising distress and dis- affection. And lot of that toxicity comes from two very specific issues. One is the issue that Alberto already mentioned, which is immigration. The Italians feel that they have been abandoned by the rest of Europe as the southernmost frontier, receiving all of those migrants across the central Mediterranean route.

And although the numbers in percentage terms are low, you have to understand, when they received 180,000 migrants in one year, the processing capacity wasn’t there. And as the northern borders were closed off by other countries, the stocks began to accumulate as well. And finding a way to get these migrants into shelters or into settlements has been a huge political problem that has generated lots of unrest. And one can only salute the current minister of the interior for his success at redistributing those migrants internally. If we hadn’t stopped the flow of migrants in July of last year, this issue would have been all that we would have talked about.

But there is the other issue of banking as well. If you want to understand the fate of the PD right now, all you have to do is look at the resolution of four small banks in central Italy in December 2015 and the toxicity that generated for the party as a whole. And then run that through the monte di paschi di sienna story, and up to the Veneto region, and you have a perfect excuse for why people hate the Democratic Party. They hate the Democratic Party because it threatens their savings in a very profound and recognizable way.

Just to put not too fine a point on it, Maria Elena Boschi, who is Mateo Renzi’s closest ally, could not be run in her home city of Arezzo. They had to find a district, as far away from Arezzo as possible, to find her a safe seat. And she was supported by the nationalist commu- nity in that district because nobody else would vote for her. And that’s the kind of toxicity that explains the rise of the Five Star Movement and della Lega at the same time.

And what we are seeing also, as this is taking place, is a change in Italy’s political geog- raphy. And this political geography is important, right? Because what’s happening is you’ve got a center right that represents the north, and you got a Five Star Movement that’s actu- ally concentrated in the south. And squeezed between them is the center left, which is why I’m little bit dubious about the idea that the Five Star Movement is ever going to form any relationship with the PD and very understanding why the PD doesn’t want to get into bed with the Five Star Movement. Because in that squeeze they are most susceptible, as PD, to lose voters and support to the Five Star Movement.

And if you look at the flow of votes out of the PD, from the peak of its performance in 2014 to this disaster in 2018, what you’ll find is that one in five PD supporters actually shifted over to the Five Star Movement. Another one in five shifted out of the electorate altogether. And these kinds of transfers are not something that any center-left party can suffer easily. And, in fact, every center-left party is going through similar thing across Europe, so the PD is not unique in that respect.

Another thing that we should pay attention to is that in the Senate the combination of Five Star and PD gives them a majority of one seat. And that majority simply would not hold unless they can get some people from the mixed group to come and support them. And the likelihood that they would be able to keep all of the PD together in that alliance is, I would suggest, very, very low. So as much as Di Maio may be talking about forming an alliance with the PD, I think it’s more posturing than anything else because the likelihood of doing so in an effective manner and generating a governing coalition is actually quite reduced.

So what does that mean? What it means is that we have to look at how the Five Star Movement and della Lega come together. And they actually have relatively different constituencies. Your prototypical Five Star voter is an educated young person who went to university, lives in an urban environment, and for whatever reason didn’t find a job. Which means basically just about anybody under the age of 35 in Italy. Your average Lega voter is a little bit older, more likely to be working class, and has an industrial background — much more concerned about their pensions. So the question is how we bring these different groups together in a way that creates a coherent economic program that doesn’t break the Italian fiscal budget.

And I think it’s going to be hard for them to reconcile. If they want to do anything, as Di Maio’s suggesting, let’s have a contract for the government. If they want to do anything, they are going to have to do it in a balanced way, and they’re going to also have to balance the fiscal requirements demanded by the European Union. And I suspect that’s not going to be easy for them to achieve. And Europe shouldn’t push them too hard in this respect.

Here, Michele talked a little bit about the big macroeconomic governance issues. Italy actually has legitimate concerns in the macroeconomic governance debate — has legitimate concerns about the importance of having the same deposit insurance across all of Europe. Because, just to give you an illustration, when the Deutsche Bank changed from being a subsidiary to being a branch in Belgium and then fell under German deposit insurance, as opposed to Belgian deposit insurance as a consequence, they took out a full-page ad in the Flemish newspaper announcing that this is the best time to move your money out of Belgian banks and into German banks because then they will be as safe as if they were be in Germany. In Italy, at the same time in 2011, Deutsche Bank hired new staff to help people to get their money out of Italian banks, so that they could go to Deutsche Bank, which would bolster their balance sheets, but obviously at the detriment of those banks in Italy itself.

So there is a legitimate concern there, particularly as the northern Europeans are trying to get them to provide against their NPLs, their nonperforming loans, at a very high rate and at a very accelerated calendar relative to the accounting standards that we have today. And to the extent which northern Europeans are trying to put limits on the amount that banks can hold of their own country sovereign debt, which means basically that the Italian banks will have to have a fire sale of Italian government bonds in order to meet the standard.

Now, this is not something that we think is going to happen, but if it were to happen, it would be a problem. Now, in that context, I think what we need to do is to allow the Italians to adjust to the new environment. Whether this government is capable of doing that, I really don’t know. We’re going to have to wait and see. I think the scenarios that as Alberto and Michele laid out are realistic. What’s not realistic to me is that I’m going to have to live through some kind of disaster because that’s just not something I want to admit. Thanks.

DESMOND LACHMAN: Thank you.

DR. JONES: There is a lot of click through, unfortunately. There you go.

DR. LACHMAN: Thanks. I guess I agree with a bit of what the other speakers have said, but I take a less optimistic view of the Italian outlook. And I might suggest to Erik that he begins packing —

DR. VEUGER: You don’t like the idea of delayed disaster —

DR. LACHMAN: The disaster is a little bit earlier than he thinks. The two basic reasons that I’m concerned is it’s not necessarily what this government will do, that the other speakers have indicated, that they might do stuff in terms of pensions, in terms of the budget, that might be very destabilizing. I’m concerned that even if they don’t do that, what they are not going to do is not going to get the Italian economy to grow. And if they don’t get the Italian economy to grow, the Italian economy is hugely vulnerable to a change in circumstances.

So I’ve got deep pessimism about Italy in that sense. If it didn’t grow before, I don’t see why Italy’s going to grow now with 50 percent of the seats in the parliament likely to be held by populist parties for the next five years. It doesn’t look very good on the growth front.

The point with Europe — I agree with Alberto when he says that from Europe’s point of view Italy is too big to fail. But I would add to that Italy’s also too big for Europe to save — that the amounts of money that we are talking about, either in terms of the debt that Italy has or the amount of bank deposits that can actually flee, there is going to be limits to what even Germany would be prepared to do, even if it was wanting to do it — that it just costs too much.

So let me just structure my comments in the following way. First, I’ll just talk a little bit about the vulnerabilities of Italy. Second, I’ll talk about why the euro was a singly bad idea, both for Italy and for Europe. Then third, I’ll just talk a little about how external circumstances that have been keeping Italy afloat are very likely to change relatively soon, and then maybe a word just about the threat to the euro from Italy.

So just starting with the vulnerabilities, the most obvious vulnerability is Italy doesn’t grow. This particular chart just shows Italy’s GDP per capita. You’re looking since 2005, Italy is below where it was in 2005. Italy’s had a triple dip recession. If you look from the 2008 crisis, Italy hasn’t regained its level of GDP in 2008. This is rather remarkable. Something like 5 percent down from where it was in 2008.

Unemployment of course is a problem. Unemployment, from a regional point of view, very high in the south. But even on average Italy’s employment level is something to be desired. But the main point I wanted to stress is that Italy hasn’t grown for something like 20 years. It’s pretty miserable in terms of growth performance.

The second vulnerability is obviously the debt level. This chart goes back 100 years, shows that certainly since the postwar period Italy’s debt level just seems to rise. So since the crisis in 2010, they haven’t really taken advantage of the lull. Should I say 2012 when Draghi really entered into the market in a big way with doing whatever it takes, Italy’s debt just keeps going up. So we got at least a public debt that is something like 133 percent of the GDP. That is the second highest in the euro area. Only Greece manages to be higher than Italy. So that is a big vulnerability.

The third vulnerability is Italy’s banking system. This is already a rather rickety banking system; nonperforming loans are still something like 15 percent of the balance sheet. So if Italy doesn’t grow, it’s difficult to see how it solves its banking problem. So it’s just a matter of time before the next recession comes and these vulnerabilities are exposed.

Why do I think the euro was a big mistake for Italy and Europe? It just made absolutely no sense to link in a monetary union two countries that are so different in terms of productivity performance. So what we’ve got is we’ve got Germany that is somehow the productivity powerhouse — it increases its productivity over time. Italy doesn’t.

I am pessimistic that the fact that Italy hasn’t done well on productivity performance with more reasonable kind of governments. With the populist government, I don’t hold out any hope that that changes. So what we see is just in terms — this chart just showing you the difference in productivity. If you look from 2000, Italy’s total factor productivity’s declined, Germany’s has increased, and the net result is that in this chart, in terms of looking at labor costs, Italy’s managed to lose something like 20 percent of competitiveness to Germany.

So it makes absolutely perfect sense to me that if one country is continuing to lose in com- petitiveness, that country is going to stagnate. The other country is going to grow. That, to me, does not look like that is a sustainable proposition.

Let me just say a word about the external environments. Italy has been growing a little bit faster the last two years. That Italy’s growth picked up, but it still lagged considerably behind that of rest of Europe, the Germanys and so on. Now, a pity Italy shouldn’t be growing when interest rates are at the lowest that they’ve been historically. The euro was weak, and oil prices were low. With such an external environment, it’s difficult not to grow.

That external environment in my view is going to be changing pretty soon. The Federal Reserve is already tightening liquidity. Interest rates are already going up. The ECB is intimating that it’s going to be stopping its purchase of bonds. So you’re going to have a changed external environment that can readily expose Italy.

And also I should just add that the global economy has been experiencing synchronized economic recovery. So in a less favorable global environment, the vulnerabilities that I’ve mentioned could be exposed.

What is particularly important — this chart just shows interest rates, ready at historic lows, across Europe. But what has also occurred is — which doesn’t make much sense to me — is that the spread between Italian bonds and German bonds is pretty low. It’s only some- thing like 1.5 percentage points.

Italy manages to borrow — with all of its problems, it manages to borrow at a lower rate than does the Unites States Treasury, which is not something that is going to last long. And the reason that it can do that is that the European Central Bank is buying $60 billion of bonds a month. That really keeps those bonds well bid. What you can see from this chart is that the European Central Bank is now owning a huge quantity of Italian bonds. If that program stops, as it’s very likely to do, either in September or toward the end of the year, Italy’s going to have a problem financing its government.

The last point that I’d make is that Italy is too big to save, too big to fail. Italy being the third- largest country in the eurozone, obviously it’s difficult to imagine the euro without Italy. So in that sense I think that every effort is going to be made to keep it afloat. But Italy is also the world’s third-largest bond market. It’s got a very large banking system. As capital flows out, the Germans are going to have problems.

This is just a chart of the TARGET2 balances. TARGET2 balances are already — Germany has got a $900 billion creditor position in the TARGET2 account. Italy’s got a debit position of something like $450 billion. If capital starts flowing out of Italy and the German creditor position goes beyond $1 trillion, I’m not too sure that the Germans are going to be too excited about keeping Italy afloat.

So, in short, I think Italy is an accident waiting to happen, and I think it could occur sooner than we think. All it’s going to take is a change in risk appetite of global markets for that to occur.

DR. VEUGER: Well, thank you, Desmond. That was, indeed, even more pessimistic than Alberto’s talk. I want to give everyone the opportunity to respond to what we’ve heard before we move on to a few of my questions.

So, Alberto, you had a third scenario that did not, according to you, would not lead to disaster. That’s one where there is muddling through. Desmond seems skeptical about that possibility. Would you want to talk about that a little bit? And then I know you want to talk about immi- gration.

DR. ALESINA: I want to say a couple of unrelated things. If you want, I can start from that one. In fact, I want to disagree with a couple of things.

First one is that the three scenarios are actually quite different. The first scenario is an imme- diate disaster. The second scenario is, well, a delayed disaster, but perhaps less of disaster. The third one is very different. The third one is keep doing what Italy’s been doing for the last 20 years, but without a disaster. I mean stagnation, reasonably low growth of being part of the European Union, and continue to do what it is doing — more or less.

You’re saying, but what if the Five Star Movement and della Lega don’t do what they promised? They may be thrown out of office in the next election. Maybe. That has hap- pened before, I wouldn’t be surprised that’s exactly what would happen.

And the other point is that the reason why we may see more of the same is that some of the names that circulate about the economic minister and the other minister for the Five Star Movement are actually reasonable names. So it’s another indication of the way they’re moving.

I also don’t agree with you about — I think you give too much importance to the banks, about the collapse of the PD. I mean, the banks that collapse, and the connection with the PD are big, but the banks are small. OK, Bosky may have some trouble, but Bosky is not the old city. I think the city collapsed, amongst other things, because of immigration, which we’re going to talk about in as second. And because of their incredible division. And they are the most — they are a disaster, in terms of being unable to be united. I mean, they are still showing around people like Daleba and company. And who would vote for them? I think the bank — (inaudible).

So I would be talking about — let me say a couple of things about immigration because I happened to be doing some academic work on it, and we’re been running a service, with my colleague Stefanie Stantcheva, in six countries: UK, US, France, Italy, Germany, and Sweden. These are serious surveys done by real survey company. It cost a lot of money. There are thousands of respondents, so as far as surveys are concerned, these are a reasonable num- ber. I wouldn’t go into the details, but they are reasonable surveys.

In all of these countries, people vastly overestimate how many immigrants there are. By immigrants, we define people — and we made it clear to the respondents — we define people born abroad but living legally in the country. In Italy there are about 11 percent of immi- grants, defined as such. In our survey, the average respondent believed that there are almost 30 percent of immigrants. So three times as much. And they think that the percentage of Muslim would be the least living in Italy or North Africa. They’re both problematic types of immigrants from the point of view of our culture. They think that they are more than 15 percent, even though they are actually less than 4 percent. There is a huge — and incidentally they also think that the immigrants are much poorer and less educated than they actually are. Even though, in fact, in Italy the immigrants are the poorest and the least educated than most of the OECD countries, sort of more than our country sample.

So part of the immigration problem is that, indeed, we have immigrants that are less edu- cated and poorer than other countries, but also the huge problem of mere perception. Italy feels invaded much more than it actually is, and of course somebody like Salvini uses this sentiment. And I think that’s one of the reasons the PD lost.

Finally, whether the euro is a good idea or not I think is too much of a long discussion to have here. But I do agree that the quantitative easing the Draghi has probably lasted too long. I think now probably the Germans are right in saying that the quantitative easing of the Draghi is making countries like Italy — to allow them not to do what they should be doing. So I agree that the quantitative easing should stop, will stop, and that it will add another burden on the Italian debt.

DR. VEUGER: Thanks, Alberto.

Michele, do you want to talk a little bit about the immigration policy? And I want to see, if you can — Erik and Desmond both sounded more convinced than you, say, that Italy is stuck in a sort of trap within the European Union. I wanted to hear your response to that. Also, in the light of the fact that certainly Desmond emphasized, that Italy has also benefited from very low interest rates that it wouldn’t necessarily have faced if were outside the eurozone.

MICHELE BOLDRINI: I’m not going to say much about the immigrants. I mean, we used to disagree about what is going on. Are you becoming more like me, or I’m be- coming more like you? We’re converging?

DR. ALESINA: We’re converging.

DR. BOLDRIN: I think the thing Alberto said, I share. I would say even more. Let me add two things a bit stronger. The immigrants became a problem because the leading elite became a problem. And the misperception is underlying. It seems to be a very strange game. I’ve been monitoring this very clearly.

One of the ways in which the anti-immigration — let me be explicit, the anti-African guy or the anti-Muslim guy obsession in Italy has picked up really strongly is purely sexual. It’s the big black man coming here to rape our women. Let’s just be — make it. If we want to understand what’s going on, we better understand the way. And one thing I noticed in the last year and half is that it has been a number of episodes of violence to women. And I would say that they were proportionally equally distributed. Not one to nine; let’s say, two to eight, between the bad black guy and the other eight being Italians. And the way in which they were — this would be worth some good sociology student thesis — they were treated, handled, and distributed through the media is amazingly different — amazing, interestingly, in all the media. I’m not talking conspiracy. It’s an interesting cultural reaction.

Corriere della Serra, which is considered fairly moderate, always center establishment news- paper, has been salivating over these things in a fairly disturbing way, as much as the most extreme, super right-wing say Libero or Giornale that always make titles like, kill them or cut their blah, blah, blah. So the construction of misperception is very strong.

Which brings me to the other thing, also, Erik. The banking system in Italy has not been destroyed by PD. The banking system in Italy has been destroyed by itself, to start with, and by many other people with the PD. Berlusconi for first.

But again in terms of misperception, yes, there were the four small center banks that he mentioned, and they were a big role of the media. In terms of failure, there were two Ve- neto banks, from where I’m from — much bigger economic, much more disastrous, and that is Lega disaster.

The leading groups, of both those banks were strictly connected to Zaia and the leading thing. And they never made it through the press. And in fact, the public purse has spent much more money. The Eurostar just reminded the Italian government: “You guys have got to fix your deficit. It’s a bit bigger, because you’ve got five billion, and then maybe seven that you spend to keep those banks afloat.” But, interestingly, that thing, if you wanted to attribute it politically to a specific party, I don’t think it’s actually correct because it’s an old system that is extremely badly designed and prone for that and blah, blah, blah. You have to attribute it to La Lega much more than the four central Italian banks could be attributed to PD. This just did not happen. But the funny thing, it did not even happen in the leftist newspapers. I didn’t see Republica say, what’s Lega, what’s Zaia say about Veneto bank. They’re all his buddies from his town. He created it — he literally did. So, you know, it’s a bit of a strange thing.

The same goes for — let me also disagree. You’re portraying the various proposals to try to disentangle the public debt from the banking system. One thing that has been disastrous and caused part of the 2011 crisis was the lack of trust in some of the national public debts. This was true for Spain and Italy in particular. And became also a dramatic decapitalization of the national bank that became unable to lend. This is because they’re heavily exposed to national debt. So this has been a discussion — technical — but completely obvious that you want to at least separate the two so that a shock to the public debt does not transform itself into also a shock to the national banking system. Obviously this requires diversifying your debt. There are various proposals around. Some colleagues tried — one in particular — a complicated one, as a chance, but I think it is so sophisticated to work, because it imitates mortgage-backed securities — but anyhow.

There is a debate around, and it’s a serious problem. I don’t think that it’s fair to portray as the northern wants to — the Italian banks do — a fire sale of the public debt. The northern are trying to avoid that the Italian banks go down again, and next time the Italian public debt goes down again.

And finally, again on the euro. We really should — the euro might have been — I used to be against the euro in a sense, but this would get us in too long of a discussion. It was here on the data that Desmond was showing. Look at that TFP. It goes flat way before the euro. In fact, it goes flat in the ’90, then there is that jump, which is actually for people that know how productivity is measured, is a mismeasurement problem, that post ’95–’97. And then it goes flat completely, and then finally going down, so the problem starts way back for Italy.

The euro has — we all have been talking of a disaster waiting to happen. We might say even that we are in 2018, that it could have been better. But without the euro, Italy would have failed in 1996. That’s as simple as that. It was only the perspective and the strange opera- tion that championed the other did between ’92–’94 first, and then again ’95–’96, that assured the entry into the euro. They stopped the fear of the Italian debt. It brought the spread on. I’ve been doing back-of-the-envelope calculations for years. The spread between the bund and the Italian bond has disappeared for something like 15, almost 20 years at this point. If you take even the reasonable spread, pretending that the market would have not treated Italy worse than they were treating in ’95–’96, which I think it’s a very brave assumption. But even that would have charged on the Italian taxpayer a gigantic number, between 500 and 700 billion euros.

So that’s the big gift of the euro. The euro allowed the Italians to survive and gave them 20-year option to fix their finances, to fix their internal system, to fix their tax system and their school system and their market system. It was a gigantic leap. The cost to the rest of the countries in Europe was quite a bit, because it was a transfer of risk and a burden. Italy was in some sense the major beneficiary, so I think if we want to talk about the euro, we can, but we better put this thing into perspective.

For the future, then I close. I really think that Alberto is right on the fact that the third per- spective is the right one. They’re going to go the muddling. The problem of Italy, if you want to understand Italy for years to come, unless there is dramatic change in the culture and in the politics of the country, it is a country that has decided to slowly decline while staying afloat because it’s tied to other ships — the French, the Germans, the Dutch — that keep pushing. In fact, Italy’s GDP is growing because the export is growing. And the export is growing because the rest of Europe is growing. In fact, it’s not a problem of productivity, when you measure it properly. When you measure productivity and competitiveness in the part of manufacturing and industrial sector — their export — that small world is still there — is staying afloat. The problem is in the rest; but I don’t think the rest just wants to survive. I’m not expecting any disaster, frankly. And I don’t think the political thing will create disaster out of it.

DR. VEUGER: Thank you, Erik. I don’t think Alberto and Michele agree with you on the banks —

DR. JONES: I don’t know what they’re thinking. First, Michele, I don’t want to come across as a gloom-and-doom guy. Let’s face reality. The spread right now is not 150 basis points. It’s 127. It’s 127, down from 139 on the day the election took place, so the day after the election took place.

So in other words, the markets are looking at this and shrugging and saying, you know, what- ever, we’re going to buy Italian bonds, anyway. And I think that’s probably right. At least for the short and medium term, we’re not going to see disaster strike. I’m fairly confident in that. We’re not going to see disaster strike because of the end of the quantitative easing in Europe, either.

Now, we have to be very careful about this. The net asset purchases of 30 billion euros a month are probably going to wind up in September. But, the ECB is going to continue to reinvest maturing principle on its balance sheet for the foreseeable future. In other words, all those bonds that Desmond showed that the ECB has accumulated are going to stay on the balance sheet of the ECB, and they are going to reinvest on a like for like basis. So it’s not as though suddenly you are going to get a whole lot of absent demand for the Italian bonds on the market — another reason why the spread is so low.

The other thing that keeps the spread low is that the euro system actually provides these very powerful insurance mechanisms. And the most important of these is TARGET2. TARGET2 provides instant and theoretically infinite — as long as you’ve got the collat- eral — balance of payments financing assistance. You have a balance of payments crisis; the liquidity just shows up. And that’s why you see Italy’s position going into the debit. Imagine if Italy had actually to finance its balance of payments.

Then in 2011, when Italy started out in June of 2011, with a surplus position of its TARGET2 accounts of about 8 billion euros, and the end of the year with a debit position of about 200 billion euros, where in the course of those six months Italy was going to get 200 billion euros in balance payments financing is anybody’s guess.

But the fact of the matter is the euro system provided that automatically. And that is some- thing we’re celebrating. It held the country together in the face of an unprecedented balance of payments crisis. What was balance of payments crisis?

Well, the crisis came because foreigners who held the Italian sovereign debt liquidated about 20 percent of the country’s GDP worth of Italian sovereign debt and pulled that money right out of the country. So they had about 50 percent of Italy’s sovereign debt at the start of the period and about 35 percent of Italy’s sovereign debt at the end of the period. Now, in that huge liquidation of Italian sovereign debt and repatriation of capital, Italy experienced what’s called the sudden stop. And the Italian economy saw its liquidity freeze up across the bank- ing system.

The PD didn’t destroy the banking system. What happened to the banking system is that it basically ran out of liquidity. But the state also faced a problem in making sure its bonds would roll over — and enter Mario Draghi, president of the ECB. What Mario Draghi did was to introduce long-term refinancing operations, and the Bank of Italy allowed the banks to write bonds, for themselves, that would be underwritten by the Italian government. They pledged those bonds for liquidity. They got the liquidity under the long-term refinancing operations and used them to buy Italian sovereign debt.

That’s why the Italian banking system is loaded up with Italian sovereign debt today, be- cause the Italian banking system was the buyer of last resort in the context of a fire sale that was perpetrated by foreigners.

When I talk to people at the Bank of Italy and when I talk to people at the ECB about Italy’s unique position in this particular financial arrangement, what they say is: “Look, we are going to study, and the banks that are heavily exposed to Italian sovereign debt are no less profitable, no more vulnerable, than banks that are not heavily exposed to their home country sovereign debt.” In other words, the state that the ECB has done, and the study that the bank of Italy has done, denies that the doom loop works in a way that Michele suggested it does, and instead provides the banks as an outlet for the sale of government bonds to insure that they roll over smoothly in the process of routine refinancing.

And so what the people at both the Bank of Italy and the ECB tell me is: “Why would we want to give this up as a possibility by putting an artificial limit on the amount of bonds that Italian banks hold?” Nevertheless, there is the argument that Michele faithfully repeated, which is that this makes banks vulnerable, and my friends in the government in the Neth- erlands or in the government in Sweden tell me that they want to see this level of bond exposure go down so that their banks will be more safe.

And when I try to say that it really doesn’t work that way, they tell me the same thing that you heard right now, which is I’m wrong and obviously don’t know what I’m talking about. That’s ok — (laughter) — but there is that consideration.

The other thing is about the role of the banks in politics. The problem with banks in Italy is that they’re funding and that their assets are all local, which means that if you have to bail in their creditors, you bail in the local community. We did a bunch of surveys with SWG — 3,000-wide samples, looking at public opinion toward banks, migration, the ref- erendum campaign, and the individual political parties. On the context of the run up to the referendum, we had this problem that so many people were undecided. So we built a model that looked at the mood music in terms of attitudes toward banks, political parties, and migra- tion. And as early as August of 2016 we were able to divide out the undecided into how they were likely to vote and predicted within 2 percentage points the actual outcome. This mood music is important, not in a causal sense. Not saying that attitude toward banks caused things, but because people who tend to hold attitudes toward banks that are bad or migration that’s bad tend to be skeptical of politics and tend to be skeptical of change.

And this is the problem that Italy faces. I agree with both Michele and Alberto. We’re likely to see a muddling through scenario — very little change — but that doesn’t mean that Italians are willing to accept that scenario well into the future. And I think that’s the problem that we face. We need to have a political response to this. If it’s not coming from the Five Star Movement and is not coming from the Lega, then where is it going to come from? Because I think that’s the question that we really don’t want to answer. Because I don’t think it’s going to come from the PD, Forza Italia, or any of the traditional mainstream parties.

DR. BOLDRIN: Was supposed to come from the party that I created, but didn’t work out. (Laughter.)

DR. VEUGER: Definitely want to talk about — do you agree that the euro has been the greatest thing that ever happened to Italy?

DR. LACHMAN: Let me start with the muddling through, which all three of my fellow panelists seem to think is going to occur. I just don’t buy that. I would see the situ- ation quite differently. Italy faced the abyss in 2011–12. Spreads blew out 7 percent. Debt was looking unsustainable. What pulled Italy back from the abyss were two things.

One was Mario Draghi deciding that he was going to do whatever it took — that he would create this OMT, this Outright Monetary Transactions, that that he would spend as much of the ECB’s money to make sure that the bonds would stay well bid. That really succeeded in calming the markets down.

The second thing that kept Italy afloat over the past number of years is the global liquidity situation. The fact that central banks were printing money as it was going out of fashion. Markets ready were buying any kind of assets. That really explains the spread compres- sion that you see across markets, emerging markets, high-yield markets — including Italy.

What I’m suggesting is that if Italy just thinks it can muddle through, they’re very mistaken because those situations that have kept it afloat are now going to change. The ECB is going to stop buying the bonds. The changes in Germany are going to make it very difficult for the ECB to do whatever it takes another time around. And United States interest rates are going up, or we are having a trade war that’s going to be making markets jittery. I don’t see that as being too positive for Italy. So, I think that if they got vulnerabilities, it is just a matter of time before risk appetite changes — markets make another evaluation. I wouldn’t take too much comfort from the fact that the spreads are remaining low, immediately after the election. That can change on a dime, and when it does the dynamics are pretty bad.

The point that I’d make is that in terms of the euro and growth, it just strikes me — looking at a long-term chart — it is a very clear brake. Italy grows something like 1999, then for the last 20 years Italy literarily hasn’t grown. I think that they might be a couple of percentage points higher than they were in 1990. Two lost decades and membership of the euro. Maybe the two are related, maybe it’s got to do with something like that you’ve got to try fiscal adjustment in a monetary straightjacket. That not a good idea when you do fiscal tightening. Italy’s got a triple-dip recession after 2008. Its performance has been totally disastrous. I don’t see how you can make the argument that the euro has been good for Italy. They don’t have this ability to devalue their currency, to regain competitiveness the quick way. What they’ve got to do is just to grind that economy down.

I’d make the point on the situation of the banks. I don’t know whether it is one political party or the other political party. I would say that any country that has a triple-dip recession and has prolonged period of economic stagnation is going to have very high nonperform- ing loans in its banking system. The fact that the economy has performed so disastrously leads to weakness in the banks, and that’s a problem going forward.

The last thing I would say is that this doom loop is another reason to worry about the banks. I mentioned that the banks have got 15 percent of the balance sheet its nonperforming loans. If you overlay that with the fact that another something like 10 percent of their balance sheet is they’re holding Italian bonds of dubious value and marking it as if it’s a triple-A asset, that’s a joke. The banks are already in very bad shape, and it would seem to me that it’s just a matter of time before money starts to leave Italy again.

DR. ALESINA: Just a clarification. I think I have been dragged into the stagnation prediction, too, more than I wanted to by these two people. Because I actually pointed out three scenarios. The disaster now is the least likely, but I started saying that the other two delayed disasters, or stagnation, were equally likely. So I wouldn’t say that I said that I predicted stagnation. I said that there is uncertainty. I could either be stagnation or delayed disaster when quantitative easing ends and if there is a trade war, and some other negative shock, of course.

DR. VEUGER: Excellent. I’m going to use my power here as moderator to ask a couple of questions, and then I think we can turn to the audience.

First question I wanted to ask all of you to the extent that you have strongly held views on this. I would like to get a better sense of where you think the Five Star Movement and the Lega Norte — where they stand, what their leadership is like, what their policy goals are, those kind of thing. We talked about it in general terms, but I would like to see if we can get a more specific sense of what their role is going to be now that they are Italy’s two domi- nant movement parties. And whoever wants to go first can go first.

Michele?

DR. BOLDRIN: Let’s see to answer you. They are very different. Erik said a few things, and I tend to agree again. The mode of distribution is not the old distribution, but it’s true. The Five Star Movement is the party of protest, a bit about everything. It’s a strange mixture of ideologically of post-leftist Gavarist view of the war, it goes from, happy decline to super environmental greenish thing “let’s all cultivate our vegetables and get our little pork and terrace stuff,” you know fish only, kilometer zero, and so on and so forth.

DR. VEUGER: At the moment, we have a party for the animals, for among other things argues for the freedom of farm animals to choose their own sexual partners.

DR. BOLDRIN: It’s an interesting thing. It’s an object created by a very wise, if secretive and somewhat devilish, marketing company that monitors and controls the — (inaudible). It’s a strange exercise in Big Brother. There is no time, but I would invite you to read about. It’s a very interesting thing.

It has this component, but then it has another component, which I call fascist and people get very upset because we tend to associate fascist to the pure repression, the authoritarian, the violence. I mean fascist in the Italian sense. They invented it after all. It is a very par- ticular party. It’s actually an offspring of Risorgimento, the Italian culture at the end of the 19th century, which is a celebration of this great, mistreated country, which is the cradle of any culture and civilization we have, because we are poets and all that crap. And prole- tarian and poor, but humbly poor and nicely poor because we can cite Latin and Greek verses, and so on. “You may have your New York, but I’ve got my seaside. Have you seen my seaside in the south? It’s not worth your New York and your Silicon Valley.” It’s a very deeply rooted thing in Italy.

And the Cinque Stele is a perfect synthesis between these two, and it creates a strange form of national pride, which is hard to handle. And it is also easily manipulatable because it builds this idea that these pure people, that are the Italians, and they are studied and they all are philosophers and artists. And the typical thing there is that “I want to be a poet, but I’m supposed to be cleaning floors; hence I deserve the minimum wage from the state, so that I can write poems.”

I had recently debated with that, and I was obviously treated like the ugly marketers, lib- eral bastards, says, you’ve got to earn your living, people don’t like your poems. You’ll have to be a poet in your free time, and you’ll have to be a bartender to earn a living. It’s a matter of exchange and fairness among people. I’m not kidding. The Cinque Stele is a very particular this.

Lega is not; Lega is simpler. Lega is your small-medium enterprise: artisans, shopkeepers, and small firms. Also manufacturing small firms, small and medium firms, and work north and center. We have an extension in the south that is purely racist. The great thing — so they took that, which was the old Federalist Lega, that remained, kind of came back, it’s actually those people have mixed feeling about the immigrants. Why? They’ve got the facto- ries. They hope that their friend vote Lega and Treviso, that I know very well, I have double feelings about it because 40 percent of their workforce, 60 percent of their workforce is actually immigrants and they work hard. And they know they would go under without them.

But on the other hand, they resent them, seeing them in the middle of the square, and es- pecially if they are black.

DR. ALESINA: They should commute from work —

DR. BOLDRIN: Yes. They would like the southern solution. Southern agriculture, which is very inefficient and very poor — and I close here, I hope I answered it a bit — lives in fact on immigrants and illegal immigrants. And honestly, and I’ve been visiting the south quite frequently in the last few years for a variety of reasons. Living in near-slavery situation, there are literally isolated logger villages in which they live. You look at the culture, the pachino, the tavoliere de pullia, it lives on absolutely super cheap black labor, imported semi-illegally. They work on salaries of two euros, three euros an hour, even less, and then are shunned away.

DR. JONES: I want to add something to this because I think it’s important. These are two parties, the Lega on one hand, Five Star Movement on the other hand, that are very different in terms of style. The Lega is old-school retail populist. They do things, locally. They’re very present in the local community. If you go up north and it’s campaign season, you see them everywhere. And in that sense, they actually are committed to a program. You know what the program is; they’re going to do the program.

The Five Star Movement is this new, weird, techno-populism. Techno-populism has two characteristics that I think are not well understood. One is the ephemeral nature of the flash mob. So, meet up, where they all get together, vaffanculo there, or whatever. And then they disperse, and there is no real permanence there.

And the other thing is the way that internet democracy is managed and edited after the fact. I had a student who went and looked at the way their website actually works. And the dis- cussions that get deleted when they go against whatever the current whim of the leadership is. And that makes them a much more whimsical, much less reliable party. They are not the same as the Lega in being dependable.

And that’s why you see also Di Maio flip-flopping on issues which for a normal party would be very dramatic way. But for him, he can do it. I think one of my colleagues, and I won’t name them, because I’m probably going to misquote them, described Di Maio as the front man put out by an ad agency. And in many respects that’s it, but we just don’t know what the message is.

And the message can change, much more quickly. I’m much more convinced that the Lega is going to stick to its principles than the Five Star Movement is. And as a final point. Of the two parties, the Lega is the oldest political party in Italy right now, believe it or not. And the Five Star Movement is one of the youngest.

DR. BOLDRIN: You are right.

DR. VEUGER: The other thing I wanted to talk about a little bit more, and there has been some fighting already over it already, the banks that went under, over the past couple of years in Italy. Weren’t we supposed to have a European Single Resolution Mech- anism that would — no?

DR. BOLDRIN: We took exception.

DR. JONES: We had to, because otherwise, would have wiped out the Veneto region.

DR. VEUGER: How did that work out politically? How did they —

DR. BOLDRIN: It was mostly political. The details are boringly technical, but it was political. And it’s actually what I’d expect. All the small banks, and Monte del Paschi as well. But, Monte del Paschi was before, so they muddle through. It’s been there since, what? When did the thing started? ’10? I think it was ’10 when it started to pop out, right?

They’ve been muddling through for 80 years. And it was a political thing, at the beginning. PD controlled it in that case, and they wanted to keep it there in the city. Now, they lost everything, but at this point — the other, yes, having adopted the bail-in would have imparted on the local communities, and it was a political issue so basically the Italian government forced the —

DR. LACHMAN: I think it was a conditional bail-in clause, which for obvious reasons the Italians aren’t too happy about.

DR. JONES: But, what they did, they did find these two banks, as non-systematically significant and then allowed them to be resolved under national legislation. In the national legislation resolution. What they did is to just give a fire sale to Anton Veneto. So Anton Veneto now — not Anton Veneto.

DR. BOLDRIN: Veneto Banca.

DR. JONES: Intesa Sao Paolo bought the two.

DR. BOLDRIN: So basically what they have done, they’ve taken the two Veneto banks that were fairly lousy.

(Inaudible)

DR. VEUGER: I just want to clarify why — how this ended up being a clearly domestic issue as opposed to —

DR. BOLDRIN: This is relevant, though. I know a bit Spain. I’ve been working and researching there for a while. Right at the same time Spain sold the Populare issue completely according to rule, and it was no problem.

And again, this problem — the political thing. To keep the banks within together they gave it to Santander. Santander grabbed it. They paid what they had to pay for, they folded, they did the bail-in. There was no public money coming in. The Italians had to put the public money in —

DR. VEUGER: Maybe that will happen in Italy next time as well.

DR. BOLDRIN: Yes, maybe. I’m sure DeMaio will take care of that.

DR. VEUGER: Exactly. I want to open it up to questions from all of you. Let’s start here, at the left. Please wait for a mic, say who you are, and then ask your question.

Q: Hi. Good afternoon, my name is Lorenzo Forni, and I lead a think tank in Italy. Actually in Bologna, where Erik lives. And I also teach at the University of Padua in the north. I think sincerely a lot of issues have been put on the table, even I think too many. It’s very difficult to navigate across all these issues, but there is a lot of gloom here. And if you look at Italy now compared to few years ago, things are going much better on a number of dimensions.

Italy went through two big crises, the 2008–09 and then again the euro-debt crisis in 2011–12. Two deep recessions. The country would stand without external support, which might not have been the best strategy, but I’m not going to discuss about that.

What are the three main — I’ll try to be short, sorry, I see already your face. What are the three main issues in Italy? The public debt, the banks, and the euro. Why am I not concerned about the public debt? That dynamic is very stable now. Interest rates are extremely low. The cost of the debt is low. The debt maturity is long. The primary surplus is 2 percent. If you shock that, you see that there is time to adjust even if there is some change in growth or change in interest rate.

The external constraints. Exports are doing very good. They haven’t done so good in years, so that doesn’t seem to be the biggest issue. The banks. The banks have been at trouble for 10 years now. Things have been, more or less, to a certain extent adjusted.

So my question is this: Why did this election change completely the landscape? I think just because Italians were not able to appreciate these improvements after10 years of such deep recession, increased unemployment, and so on and so forth. And if election would have been two or three years down the road without any major international crises, probably things would have been different.

Now, the question is: Usually Italy is like that, and you know, there are ups and downs, and it is a very diverse and heterogeneous country. And the question is: Usually what happens is that from time to time, a shock comes, and there is a reaction. This happened with Champi and Prodi, just to make the euro is not easy. This happened in 2011, with Monti. So if another shock comes, what is going to be the reaction of the country? Is it going to stick to the euro, the fiscal sustainability, or is going to give up? So that’s the question.

DR. VEUGER: So, well what you think, Des? Do you want to go first, and talk about why you do not necessarily agree on that analysis?

DR. LACHMAN: I think what you’re doing is you’re saying the country is likely to be subjected to a shock at some point in time. Things have been relatively good in the last couple of years, but what has to give one pause is that at the peak of the cycle the vul- nerabilities haven’t declined. The vulnerabilities are still clearly there. The debt is 133 percent of GDP. The nonperforming loans are 15 percent of GDP.

That doesn’t put the country in a good position to sustain an external shock. So the exter- nal shock can come from a variety of ways. The global economy might not be as good as it is, that you might have change in the liquidity, the interest rates go up. Italian interest rates don’t stay at 2 percent. They go up. The spreads widen. The debt dynamics then don’t look so good. Then you get yourself into a cycle, and then, you know, you’ve got a problem as well is that if Italy gets hit by an external shock — that brings you back to the problem with the euro: that Italy gets hit, by an external shock, GDP goes down, the budget widens. The Europeans say you’ve got to bring the deficit down to 3 percent. OK, so you engage in fiscal tightening in a pro-cyclical way without the benefit of an exchange rate devalue.

So my concern is that about Italy hasn’t reduced over the loss, since 2012. Italian vulner- ability hasn’t declined. It’s in fact increased. The debt has gone up. The nonperforming loans have gone up, so it’s not in a good position to sustain a shock.

DR. ALESINA: If somebody from Mars came in this room and listened, they would say, “Wait a sec, are things going great in Italy, or are they terrible?” We can hear people saying exports that are doing great, and people saying we are about to fall into a great dis- aster — (inaudible).

And to some extent they are both right in the sense that when we talk about productivity in Italy, the average is bad, but there is a big variance — very important. There are parts of the economy that are doing extremely well, before they’ve done better when the euro emerged. Part of the economy, part of this part, related to the public sector that has gone very, very poorly.

So, depending on where you look, you can come up with the more rosier or a more nega- tive story. Having said that, Lorenzo’s description of Italy seems a little bit too rosy in the sense that, yes, things are going better than before, but relative to Spain, Ireland, Portugal, we came out of the crisis less quickly and probably worse. We’re still below the — and I think this is an issue. And a regular point that Michele was saying before, yes the Five Star Movement has all the characteristics that it has, but he also got most of its support in the south. So it seems like a way of the south saying, “we want more money, we want some- thing from you,” and it’s something about the south.

And the final point on the euro. We can debate on and off about the euro, but in the interest rate and so forth. But if Italy got out of the euro, the interest rate on the Italian debt would go through the roof because of the devaluation risk. As they were, by the way, before the euro. The interest rate on the Italian debt in the early ’90s was something like 10 percent, because there was a devaluation risk. For the euro itself, there are pros and cons. It is a tough question, and incidentally we should not forget it. One thing is to debate whether the euro was a good idea or not then. The other thing is to say whether it was a good idea for Italy or for any other country to get out now unilaterally.

DR. LACHMAN: I would very much agree that once you’re in, the cost of getting out, you don’t really have — it’s not going to be a pretty picture, so you’re going to try to make the best of it. But an added reason I’d say one has to have some kind of skepticism now is the kind of government that you’re likely to get. You know, what Alberto mentioned in one of his scenarios — that they decide to have a minimum income that’s going to cost a boatload of money, or they change the pension reform, they reverse some of the labor- market reforms — you just not going to get the growth.

Growth is really key to Italy, and I would say that that election has made some prospects look worse than they did before.

DR. VEUGER: Thank you. Let’s go right here.

Q: Hello. Una MacDonald. I want to ask couple of questions. One is: Can Italy ever succeed unless it tackles the deep-seated corruption, including still, the influence of the ma- fiosa? For example, in its protection rackets on small businesses in Naples, for example.

The other question is: Some attempt to reform the influence of the foundations on the banking system. Can Italy’s banking system ever improve, unless the foundation running the banks, which makes them not only open to political influence, but the influence of local worthies, pet projects, bad lending — what can be done to remove the foundations from the Italian banking systems so that banks can be run in a better way?

DR. BOLDRIN: Look, no. (Laughing.). I don’t know. When Mario is out, I mean, the only people that can try to push on that is literally the European Central Bank, with a variety of these regulation rule things that are meant in fact to force and create straitjackets and incentives that make the foundation less.

One has to say, on a positive note — I don’t know if you want to take it positively — foundations are been made less important now by brute force. They just lost all their capital. They are so poorly managed, if the Italians really do want to insurrect and hang somebody, they should’ve been hanging who ever ran this foundation for the last 25 years —

DR. VEUGER: Can you explain briefly what role of the foundation?

DR. BOLDRIN: All right, very quickly. In the early ’90s they — Draghi at that time was the general director of the treasury in cooperation with the Central Bank ran by Ciampi. They said, “Look, we got all public banks basically and particularly a lot of saving and loan. Let’s try to privatize them and going in steps.” And the first big step was each bank, basically, creates a foundation and turns itself into a limited liability company issuing shares — takes the share, deposits with the capital as an endowment for the foundation. And now we have two separate things that kind of save it to the face because the local wealth remains in the community. The local foundation is supposed to help the widows and the orphans of the war and repair the streets and fix Pompei with that, and the bank can get into the market and shares can be traded.

This process was supposed to go eventually further. It was blocked by Tremonti in the first Berlusconi government because the Lega wanted to get their share of the banks. Basically they said, “Look, wait a second, we’ve been managing banks for the last 30 years. We finally got some mayors, some provinces, some regions. We can get our banks, and you want to take them away, want to make them private, give it to the market? What is it?” And that thing was stopped. Anyhow, I hope this explains for —

So it’s not in the cards and certainly neither Lega nor Cinque Stelle has any desire to do that, for the reason I just said. They want the banks. They won’t actually — you know, in case it’s really under threat, they are going to try and jump and manage those things.

The other, you’re right. But you see that’s what I had in mind — do you want to discuss — I think we are discussing the short term. If we want to understand why Italy is not Germany, is not France, is not England, if you want — and it’s started to not be even Spain and is becoming this strange animal — we have to look at the long-run issues. And one of the long-run issues is that Italy is a very divided country. A federal option is crucial. It will never — I’m afraid during my lifetime — become implementable. But as long as it is this decentralized, unified state that keeps together Sicily and Lombardy, the thing you said will never be eliminated. And some of the parts we are debating — the Five Star vote that Alberto was mentioning, for example, will be there.

Italy is a country that desperately needs some strong form of federal — fiscal federalism — but the political equilibrium is such to make it impossible, so it’s a, you know, it’s a catch-22.

DR. JONES: Can I just have one thing? I think you’re really asking a really important question about these paying foundations. But you have to understand when they did this thing in the early 1990s, the banks that they were privatizing actually were quasi-public institu- tions that served the local good, and so the foundations were created to provide public services. And the problem with this model — it was unimaginably successful because the banks had all these foundations, had all these bank shares. They became almost overnight the largest philanthropic units in Europe. And if you talk to people who study the third sector, they’ll say this is a model we would like to replicate. And, yeah, you know, unfortunately it does have this corrosive influence when they retain those shares.

Some of the foundations divested from their original bank, and some of the foundations remained close to the original bank and played a role in administering the bank. And so there were ways that we could’ve done this better, right? But without these things, a lot of the public restoration — almost all of the museums, huge amounts of public institutions, the whole University of Sienna, I mean — these things would not exist right now because the foundations were the ones that were the major source of financing. So getting rid of them would be a real challenge politically because of the good work that they do.

DR. VEUGER: Thank you. Let’s go over here in the middle and then — light blue tie.

Q: Thank you. Chris Rell with the Zimmer Biomet. I was wondering if you can comment a little bit on the implications for business of some of the political and economic trends that you laid out here. In general, what are the attractive economic sectors besides, let’s say, tourism? And what would any Lega combination with Five Star mean for busi- ness and in particular health care — the health care sector in Italy? Thank you.

DR. ALESINA: Actually this is a very interesting question because I was thinking that everybody talks about the Lega and Five Star Movement government as if it was the obvious thing, but from the point of view of business, amongst other things, they could’ve been more farther away. I mean, Lega wants low taxes and presumably, well certainly low taxes. Five Star Movement promised that they will level government spending that would require very high taxes, so in this point they are actually on the opposite side of the political spectrum.

DR. VEUGER: They can probably agree on high spending, low taxes, right?

DR. ALESINA: Right, right, right. On health care, you know, health care and pension is part of a much bigger issue about how to look forward to Italian welfare state, which is very ineffective. And on this point, neither of the two has said anything intelligent so far. They want to eliminate the pension reform by Monti and Fornero, which would increase even more welfare move towards pension rather than other support, and that would be a really step backward.

You know, I’m not an expert on health, but the issue of health in Italy is that it’s very cheap for everybody, including the very rich. And that makes it to some extent unfair and in many ways effective. But I think you’re asking something much more detailed about the health sector that I’m not an expert on, so I’ll leave it to the —

DR. JONES: You know, just this point that Michele has been making repeatedly through this conversation. There are high-productivity gross sectors in the Italian economy, particularly in the area I am, in Emilia Romagna and just a little bit to the north. One of those sectors is the health technology sector, so a lot of medical equipment is built there, and a lot of that industry was actually capital starved during the crisis. So there are actually some good bargains to be had in terms of going in and providing replacement capital.

The same is true also in the light textile sector, so companies like La Perla, Furla. Some of these are privately held, but they’re also in need of capital. So La Perla I think was just recently bought out by a Chinese group. I think that there are real investment opportunities that could be taken care of. And these investment opportunities would continue to be attractive even if the, you know, Five Star and the Lega got together.

That said, Ambrosetti and Cernobia just the other day, they’ve polled the business community and said, “You know, what do you guys want for a government?” And not overwhelmingly, but the plurality of these people, about 30 percent of the business managers polled, came back and said, “What we really want is for centro-destra and PD to come together, right? What we really want is a return to the old center, and we’re willing to tolerate the Lega in that company.” And that, I would posit, is probably the least likely option.

DR. VEUGER: Yeah, yeah, when Michele says Italy is a very divided country, he’s not kidding. There are parts of northern Italy that are among the most prosperous in all of Europe.

DR. BOLDRIN: Yeah, I think — oh, sorry.

DR. LACHMAN: No, no.

DR. VEUGER: Let him go.

DR. BOLDRIN: So in terms of business, yes, the health sector actually, some of the private provisions, Italy is not all public. The growing private thing, which I have ex- perienced myself and I know that in the United States people are very proud of their medical system, well let me tell you, you can do better.

I’m actually very happy of the private, being I’m still an Italian citizen, but I can’t use really the public system when I get there, so I go straight and I use the private one. And I basically, short of an emergency, I take care of myself. It costs about a third, and it’s a lot more effi- cient. I don’t have to wait, much nicer people. And it’s high-quality service that — yeah, doctors don’t think they’re god. They say, you know, “I have a degree like you. We can talk.”

And so there is a lot of it, and the high-tech stuff on impact, DRI, radiology, and so on, I actually — yeah. That’s a very, there’s a lot of stuff, and it’s tried, so from the people in- terested in the business perspective, partly because of the banking thing, there’s a lot of undercapitalized human capital cum entrepreneurial skill in Italy, which may need some friendly character that goes in and says, “Look, let’s cut a deal. You manage. I’ll put you a 40 million; we need 60 million. Let’s go a bit more global than we are.”

Yeah, I think. It ends, more or less in the Apennine, follows a bit the Adriatic Coast down to Pesaro, and once you get to Pescara you’re done. In case you’re taking a trip, once you get to Pescara you can turn around.

DR. VEUGER: Desmond, do you want to — let’s do the next question. Oh, sorry. Let’s go over here.

Q: Hello. My name is Alberto from the embassy of Portugal, and I have two questions.

In the coming European debates about reforming eurozone, what would be the likely po- sition of Five Star–Lega Nord Movement? Because so far in the debates between France and Germany, France has normally counted Italy as the strongest —

DR. VEUGER: You have two questions — they have to be extra short.

Q: All right, so what would be the position? Would they stick to the normal France- led line in the coming debate? And also in this debate, if there is no decision, that’s also a decision. And the second would be — would Italy, led by this government, accept Weidmann as the next ECB president? Thank you.

DR. VEUGER: What do you think?

DR. ALESINA: Well, of the first question I think that the Five Star Movement has no clue. They wouldn’t even understand the question I think. And the Lega, for everything having to do with Europe, recently, I mean — Salvini said something like, that the — we, Italy need a strong government to be able to fight Brussels and to fight Bundesbank. I think he meant the ECB, but he got confused between the two. So I don’t think they even distinguish between the ECB and the Bundesbank, and I think Weidmann is — they probably never heard this name before.

DR. LACHMAN: If Weidmann’s there, then there won’t be a distinction.

DR. ALESINA: Right. Exactly. (Laughter.)

DR. BOLDRIN: For the confirmation, they’re right.

DR. ALESINA: So I think that — I think that they have no clue frankly. So they will learn by doing. I have no idea. But they certainly are not sitting there thinking about these issues.

DR. BOLDRIN: Let me be more explicit in making a forecast.

DR. ALESINA: More explicit?

DR. BOLDRIN: Here is my forecast. No, no, more explicit means it’s going to be the same tradition because everything’s being done by the funzionari in the administration.

DR. ALESINA: Yeah, that is very true.

DR. BOLDRIN: That’s another thing that people have to understand: the reason why a thing is going to be muddling through. It’s because in Italy — trust me — politicians don’t make decisions. They don’t have the technical ability to do it. It’s the bureaucracy, the high- level bureaucracy and the treasury and the industry and the — (inaudible) — that takes care of things. It’s a closed circle of about 150 people, and that’s it. So whoever they have seen in Brussels, in Strasbourg, in Frankfurt — (inaudible) — the last 20 years, it’s going to be the same people.

And my forecast is that the solution to all this is going to be some figure that would look like a Berlusconi type but would not be, some puppet that will become prime minister and then we’ll allow. But it will not be explicitly Berlusconi, so somebody that Berlusconi can trust but can be sold by Cinque Stelle as a non-Berlusconi person.

I think the real problem they have is that they can’t find a guy like that or a woman like that. They’re trying to find it. Once they find it, it’s done, because then it’s going to be Centro- Destra and Cinque Stelle on the only things on which they can agree, which is a little bit more public spending, maybe a few — a little bit tax, lowering taxes symbolically on this and that and a lot of talking against Amazon and IKEA and all these damn foreigners and all that and that’s it.

And then for the rest, you’re going to stay within EU and try to get by because they under- stand perfectly in spite of the various pseudo-economists they have embarked that if they get out of the euro it’s a disaster and they can’t do it. And given they don’t have a plan B, they’re just going to say to Direttore Generale del Tesoro, you go figure out what the hell they want and then when you come back you explain to me in Napolitanian so I understand it.

DR. VEUGER: OK. Next question. Over there, sorry.

Q: Hi. My name is Leonard Campbell. Just a quick question about the quality of life adjustments that would take place, if any, were Desmond to be right and spreads were to blow out and Italy were to eventually dump the euro.

DR. VEUGER: Des, do you want to do your doom scenario?

DR. LACHMAN: Yeah. No, that would really be not good news not only for Italy but for the global economy as well because leaving the euro would automatically, as Alberto has pointed out — it would mean interest rates would shoot up — they would default on the debt. And what you’ve got to remember is that Italy is the world’s third-largest sover- eign debt market, so there’s $2.5 trillion of debt, something like a trillion dollars of that is held by foreigners so it means that it would be a massive hit to the global banking system. You’re really not wanting to contemplate that. You know, that’s the reason why the Italians will try to stay in, and the Europeans, as far as they can, will try to keep them in. But as I said before, in the end it’s going to prove too costly — you know, that we will get there eventually, you know. It’s just a question of time.

DR. ALESINA: Well, I think that in addition to all — I mean, just to be, to give, to go even deeper in the doomsday scenario that in addition to all these economic issues that you briefly mentioned, I think there’s even more sort of a darker view about Italy sort of moving away from the Western world and be attracted to Russia and Putin. I think Michele was pointing already before how Salvini certainly has a connection with the Putin area. And it’s interesting that a couple of days before these horrible things happened in Syria, Salvini said the first thing he would do when he is in, if he is in office, is to eliminate any trade restrictions against Russia. And when Putin was elected, he — you mentioned, somebody mentioned he called him. He tweeted that the dear President Putin, the dear President Putin has been elected, our dear president.

So I’m actually quite worried about the Russian influence on European politics, from Brexit, to what happens, what’s happening in Italy and so forth. I think that may be, in the long run, the worst thing that could happen to the doomsday scenario.

DR. VEUGER: Erik?

DR. JONES: Just three things, right? In that slide of the big issues that people care about, inequality is a really big one, and I think Alberto mentioned at the start of this that a lot of the wealth in Italy is in households. That’s not going to disappear if it leaves the euro, so what’s going to end up happening is that anybody who doesn’t own their home is sud- denly going to find themselves priced out of the property market again because they’re never going to get access to a credit, right?

When I moved in Italy at the end of the 1980s, the mortgage was five to 10 years, right? That’s not a mortgage — that’s like a credit card. And by the start of the 2000s with the euro, you got mortgages out to 15, 20, 25 even 30 years, and that’s going to disappear. So that would be one thing.

The other thing is that the SME sector in Italy borrows mostly on unsecured credit. So if you look through the bank details, what you find is that they’re doing unsecured credit. Unse- cured credit is not going to be very cheap in this future scenario as a consequence of which they’re going to do is hunker down and auto-finance like they used to do in the past, which means the growth prospects from Italy instead of getting better because they have control over their monetary policy and competitiveness and whatnot are going to get worse because they’re going to be starved for capital in the SME sector, which is the most dynamic part of the country.

Inequality, as the SME sector goes down and then you have the migration issue that remains, right? There’s still going to be the southernmost part of Europe. Migrants are still going to come in. Those migrants are still going to still try and get out, but nobody’s going to let them out so Italy’s going to get bottled up with migrants just like Greece is today in a way that’s going to make the political situation even more toxic. So when you add all these things together in addition to the obvious legal and economic implications of leaving the euro, the fact of the matter is there’s no part of Italian society that would benefit, except for large estate holders who like a slave population of migrants and don’t depend on small and medium- size enterprises for their income.

DR. VEUGER: Let’s go right here.

Q: Erik and Alberto, you guys mentioned some surveys out there. Even if we take that into account that, let’s say we have the disastrous scenario or potential for a referendum on euro departure, let’s say in the coming years, how likely would that succeed? I mean you have to — you know, you really would have to be in your mid-30s to have any recollection, a reasonable recollection of an Italy with the lira. And you really have to be in your early 40s to have any recollection — adult recollection of how the lira operated. How likely would that portion of the population vote for something that they never experienced? You know, that it’s something that their father, maybe grandfather experienced, but it’s an Italy they have no recollection of.

DR. VEUGER: Erik, do you want to?

DR. BOLDRIN: Yeah, I don’t know. Yes, I mean one of the things that people, many people like to do is in fact publish continuously articles from pages of journals of the days of the lira, reminding them you know it wasn’t the dream. It’s become a dream, you understand what I mean? There is a projection of the so-called miracle of the ’50s and ’60s. So in many debates I reminded them — look, when we were growing, the lira was strong. In fact, the big debate was that we had too strong a lira, but we grew. It’s when we stopped growing, the lira became weak. And those were not good years. Those were the ’70s; we had to ship the gold to the Germans to get a loan and so on and so forth.

It’s not a reality thing, but I honestly — even if there are — it’s not impossible what Desmond describes, so it’s a positive probability event, but it’s a very low probability event. In any case, it would be Greece. It would not be getting out. It would be another Cyprus. In fact, sometimes I joke saying I’d like to see it because I want to see their faces in doing the, the turnaround, but I don’t wish it for the country, obviously.

DR. LACHMAN: I would disagree, you know, both in terms of the probability and comparison with Greece, you know, because the big difference — and I think that this is very important — is that Italy is a serious economy — you know, that Italy is 10 times the size of Greece, so the cost of bailing it out is just going to be huge. You know, it’s not going to be $100 billion or $200 billion that is going to do it. You’re going to be talking about trillions of dollars, and I don’t see that Germany, at this stage of the game, is going to have an appetite for it.

So I just say that it’s not going to be something — it’s not going to be a choice that the government makes, you know, in the sense of in advance of a crisis. It’s going to be some- thing that happens in the midst of a crisis and that it just becomes too expensive for the partners. You know, what the Germans tell me is that a horror without an end — it’s bet- ter to have an end with horror than a horror without an end. You know, so we might get to that point.

DR. BOLDRIN: Desmond, let me ask you a question then. Can you describe this scenario that is happening in the middle of a crisis because I don’t understand it. How does it work?

DR. LACHMAN: Well how it works is that the Italian government would have a tough time in selling its debt or rolling over the maturities. You know, that the European Central Bank might continue — I would agree that they’re not going to run off their debt, but you’re going to have trouble. Italy’s debt maturity isn’t that long. It’s like a seven-year maturity. It means they’ve got very big rollovers to do foreigners aren’t going to be too excited about doing that. So you’ve got a problem on the debt side, interest rates go up. You get yourself into that cycle the debt looks like it’s more unsustainable. That’s one side.

DR. BOLDRIN: That’s a five days, two weeks fee. Why wouldn’t the Germans be so crazy not to let — (inaudible) — whoever it is say, “Go in. Just go in.”

DR. LACHMAN: What do you mean “go in”?

DR. BOLDRIN: Just buy, damn it. Buy, exactly like the Fed did.

DR. LACHMAN: Who bought —

DR. BOLDRIN: The ECB.

DR. LACHMAN: The ECB — you can’t have the —

DR. BOLDRIN: Look, if — (inaudible) — doomsday, so why are the Germans so crazy to call it suicide?

DR. LACHMAN: It’s not doomsday. It’s a question of Germans want to cut their losses, that the Germans — if you look at people like Hans Werner — (inaudible). What he is concerned about is that the Germans already have a credit position in TARGET2 accounts that are $900 billion. If the whole thing blows up, they left holding the bag of $900 billion–$1.5 trillion, $2 trillion. There’s going to be a point in which you say, let’s just fold, let’s just give in.

I just want to finish the thought that it’s not simply that you’ve got $3.5 trillion of debt that you have to keep rolling over and keep that show going on. You’ve got something like $3 trillion in deposits that are likely to be leaving the country, you know, so that is going to be I think far too big for the Germans to take. So I think that, you know, the notion that we’re going to be a repeat of 2012, I think that that’s wishful thinking.

DR. ALESINA: There’s an interesting point about people not remembering the lira, but I think if there were — I never thought about it — but it’s actually very interesting. But I think if there were a referendum against the euro it would be fought by those in favor of exiting with an anti-German rhetoric. “We need to get away from Germany and free our- selves from Germany.” So there wouldn’t be a campaign about the lira. It would be to get away from Germany and we need out own thing. So not remembering the lira I don’t think it would be a huge deal, but it’s interesting though.

DR. VEUGER: (inaudible) — some words from Erik Jones.

DR. JONES: Yeah, no, just very quickly and riffing off what Alberto just said. In all the work I’ve done in public opinion polling, the premise the people actually answer the question you ask is the most dangerous one to start with. And that’s true particularly in the context of questions about the euro because people don’t know anything about the euro. And so if you ask them, “Do you want to leave the euro?” what you’re getting actually is information about something else, so we normally use data-reduction techniques to try and extract that information.

And just to give you an illustration of that in the big surveys that we did, we asked people two questions: Would you be in favor of leaving the euro? And would you be in favor of leaving the European Union? And many more people wanted to leave the European Union but stay in the euro. (Laughter.)

And I thought that this is like the coolest thing ever, right? But alas, what we know from Britain and what we know from the Netherlands and France and from Denmark is that if we do have a referendum like this, the referendum result will not be a function of the question.

DR. VEUGER: All right, and on that note I think we’re going to call it a day here. Sorry for that last person who wanted to ask a question. All right. Thank you all for com- ing. How about a round of applause for our wonderful panelists? (Applause.)

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