Overcoming the Emergency Syndrome

Published: 2008 - August/September, Business, Current Affairs

The global macro-economic scenario has been modified as a result of the increase of energy and oil costs, which clashes with the Dollar’s weakness. Even the surge of the agricultural products’ prices is conditioning the global economy. What are needed are medium-long term actions in the energy and agricultural sectors, so not to be overrun by the syndrome of emergency. The considerate advice comes from Giacomo Vaciago, an outstanding economist and Professor at the University Cattolica of Milano.

The weak Dollar is contrasted by the unexpectedly strong Euro. What can the consequences be for the European economy?
“The strength of the Euro has been reinforced in the past two years. Allow me to make a clever remark: when Americans have a problem, they tend to export it. We have been able to verify it through the crisis of the subprime, the loans granted without guarantees. In fact, banks have financed American citizens who could not afford to buy a home and then have securitized them and placed the contacted debts in the portfolios all over the world. Just as a reminder, the United States is not a Country of Savers.”

Agreed, the stride was longer than the leg. But what happened?
“Then they brought down the interest rates to the ground, at ridiculously low rates. I would like to point out that in the USA there is a rate of inflation at 4%, while interest rates are at 2%; substantially it is about negative real rates and this has brought the direct consequence of a weak dollar, causing the prices for food and energy to shoot up to the stars.”

In other words, the speculative bubble has been triggered by a series of related variables? The classical method of devaluation to improve export.
“The whole world is paying more for oil and food, exactly because the dollar is weak and the American economy, through the devaluation of its currency, recovers competitiveness. The umpteenth case in which an American problem is tolerated by the whole world.”

Sure. But hasn’t the Old Continent been affected by this never-before-seen macroeconomic picture? The unevenness of the exchange Euro-Dollar is proof.
“Europe, thanks to a careful guidance by the president of the European Central Bank Jean-Claude Trichet, has not followed America on the foolish road of accepting anything as long as returning to growth and thus, wisely, has kept the rate of interest higher and sending to the USA a clear message, meaning, of not liking inflation. This way Trichet has sustained the Euro. The weakness of the Dollar over the Euro has been the cost to pay to prevent that inflation, even in Europe, would accelerate too much and all of us lose the benefits of monetary stability.”

Good. Europe has sought shelter from inflation, but hasn’t it lost it in competitiveness?
“No doubt that the weak dollar in Europe has hurt the profits of our businesses, which export to the Dollar area. Let’s not forget that the dollar area reaches all the way up to China and, on the other hand, the Chinese maintain the exchange rate anchored to the green ticket, de-facto, being part of the Chinese-American monetary union. Not a bit of detail for which the European Union is left to face this other monetary union and clearly we, in Europe, are bearing the costs.”

How has the monetary repercussion been handled in Italy?
“Italy in some ways has managed to meet the difficulties exactly because some of our companies have costs in dollars and invoices in Euro.”

The surge of the oil and commodities’ prices has prompted the cry-out of a looming recession. This, at least, has been the alarm launched by the General Director of the International Monetary Fund, Dominique Strauss-Kahn. 
“We must pay careful attention not to run after the current problems. It is clear that because of the current maximum weakness of the dollar and oil and food at price levels never before reached, we run the risk of implementing measures dictated by the emergency. We must take a step back and consider that food and energy are two sectors in which the decisions made few years ago weigh a lot. To find oil it is necessary to carry out researches and drillings, which last at least three years, and, as far as agriculture goes, plowing the fields and harvesting is not done on a daily basis, but once a year. We’re still paying, in a certain way, the incorrect agricultural and energy policies of the past years. Emergency has had the advantage, at least for this, to make us understand that agriculture is a very important sector.” 

There is no doubt that in the past years agriculture has been rather transferred to the back seat. Or rather, it was a “bothersome” subject for Europe.
“Exactly so. Until some years ago, they huffed and puffed because they did not know where to put the surpluses. Brussels floated on mountains of eggs, butter and milk; I remember the destruction of food products to sustain farmers’ income. It’s necessary to face the emergency through well-pondered measures. Agriculture, environment and energy require a long-term approach and planning. In the next two decades, agriculture must be followed systematically; there are uncultivated lands that must be brought back to cultivation. There are lands never used, we’re thinking about certain areas of Australia, which can be cultivated. Another important chapter refers to the possibility of raising the yields of lands in emerging countries; just think that they still have the meager yields of a century ago. There is a problem of investment. The advice I feel giving is that we can exaggerate in implementing emergency measures, but it is necessary to use common sense.” 

Are we then in the presence of an excessive alarmism?
“The situation is critical, that’s true, but now we must sit around a table and discuss to plan the policies for the next 30 years.”

In Italy, we are doing it through the Robin Hood Tax against the oil industries.
“It’s a measure that will bring in more money to the Treasury, thus reducing competition of the system. If I must say it all: my feeling is that this looks like the umpteenth tax. And taxes are paid by consumers; there is not a tax that it is not transferred onto the consumer, unless there is a truly strong bona fide competition. In sectors like oil where there is little competition, oil companies will raise the prices. Like the saying goes, one of the two: either you raise competition or raise taxes; in the second instance the consumer always pays. It doesn’t seem wise to hit the oil companies with the result that these pass-it-all on the consumers.” 

As for the USA… Are they coming out of the subprime bubble?
“Since the Fed has assured, see the example of Bear Stearns, that it will not let anyone go bankrupt, we can safely say that the scare is over. At this point, we must handle the tail end of the speculative bubble. Many Americans have been deceived with having become well-off and could afford to own a house and then were told “we were wrong” and now are thrown out of those homes. Obviously, there is a social problem of let-down by those who believed of being rich; the problem is that if banks don’t fail, crises are always overcome. We have seen the worst in the past years.” 

Right, we are seeing many of them: from the rise of crude’s prices to the downturn of automobile markets. General Motors will close a plant producing SUVs. Not much to rejoice for.
“True, we have oil at 140 dollars a barrel and have underestimated what was happening. In ’73 and ’78 there was OPEC, which closed the taps after having served-up many rationings, today it is not here anymore, but we have never seen such higher prices.”
 
The outlook is the evil omen of crude oil at 200 dollars a barrel.
“I don’t believe it will go that high, if Ben Bernanke (president of the Fed, ‘editor’s note’) will give signals of sternness, as announced, on the rates of interests. The American Central Bank has realized that the weak dollar was becoming a global problem; I expect signals of future increases of interest rates and stem the dollar weakness in the short-run. At this point the situation could improve in the second half with a stronger dollar and a dropping of oil price.”

Could some benefits finally come to our companies?
“Many Italian companies have grown in Europe and are not so much depended on America. Italian companies exporting toward the US have decreased in the past years and those who have followed this trend have gained.” 

Who is Giacomo Vaciago?

He is a full-time Professor of Economic Policy at the Faculty of Economy at the University Cattolica of Milano. Born in Piacenza in 1942, Giacomo Vaciago has obtained a degree in Economics and Business in 1964. In 1968, he obtained the Master of Philosophy in Economics at the University of Oxford. Between 1970 and 1989 was first appointed and then full professor of Economic Policy at the University of Ancona, of which he directed for various years its Economic Institute. He has been vice-president of Ancitel, economic adviser at Citibank (1980-1991), president of Citinvest (1983-1991), director for the economic special-purposes Project at Cnr (1985-1989), visiting scholar at the Fed in Washington D.C. (1985), an economic adviser for the Minister of Treasury (1987-1989) and adviser to the President of the Council of Ministries (1992-1993), member of the technical-scientific committee of the Minister for the Budget (1992-1998), and scientific adviser to Minister Urbani (2003-2005). Since 1976 he is a member of the Italian Society of economists. He has been Mayor of Piacenza between 1994 and 1998. Since 1983 he is leader writer fro the “Il Sole 24 Ore”.