(Bloomberg View) -- As Europe’s politicians digest the lessons from Italy’s recent 17 billion euro ($19.34 billion) bailout of two Venetian banks, two schools of opinion have emerged. The majority view is that the bailout, while less than ideal, at least brought greater financial stability to Italy.
Italians themselves seem pleased with the outcome. So far there has been no great taxpayer outcry, a sign that the Italian public is ready to pay a price for returning stability and confidence to the country’s banking system. Further evidence that Italian taxpayers are willing to pay up for bank stability is the injection of 5.4 billion euros in Banca Monte dei Paschi di Siena, a transaction that was approved this week by European Union officials.
And then there is the German view. German politicians appear to be competing with one another over who can sound the most outraged. An ally of Angela Merkel, Markus Ferber, claimed that the promise of no taxpayer money for failing banks has been broken for good.
Not to be outdone, a prominent Social Democrat, Carsten Schneider, warned that the bailout undermines the completion of the banking union -- which has no taxpayer bailouts as one of its pillars -- and pushes back the common deposit guarantee scheme.
The German view is shortsighted and for the most part guided by pre-election posturing. It has been clear for some time now that without adequate growth, Italy’s non-performing loan crisis would require public intervention. Persisting with the fiction that there was a private sector solution to the Venetian banks’ troubles made the eventual bailout costlier and more dangerous than it had to be. But it would have been worse still had the government of Prime Minister Paolo Gentiloni, with the acquiescence of the European Commission and regulators, not found a way to sidestep the EU’s unrealistic rules prohibiting state aid.
Though there were disagreements over the prospect of contagion given the small size of the banks, the Italian government, the Commission and some within the ECB clearly felt the risk that it might impact other bank bonds, or even Italian sovereign debt, was still too big and dangerous to ignore.
Moreover, the bailouts buy time for economic growth -- the real cure for the NPL problem -- to pick up in Italy. The wait may not be long. Last month the IMF revised its 2017 economic growth forecast for Italy to 1.3 percent gross domestic product from 0.8 percent. Confindustria, the Italian employer federation, last week increased its 2018 growth forecast to 1.1 percent from 1.0 percent. But even those forecasts might have been jeopardized had the distressed Venetian banks been left to fester.
The growth numbers are still too low to fully dispel the risk that Italy’s NPL problem will prove an economic drag. And Rome cannot rescue bigger banks the same way; only robust growth of, say, 2 percent to 2.5 percent per year can hope to make a real dent in the NPL problem given the fact that many of the NPL are in obsolete industries like clothing and textiles for which growth is largely irrelevant. Private capital inflow into the banks is still required to finance the write down of these loans which often are carried on the banks books at inflated prices.
Still, the rescue encourages a more stable, growth-oriented Italian economy, and that is to Germany’s benefit too -- especially since a more settled banking situation in Italy is likely to speed the process of bringing the tighter monetary policy favored by Germany itself and other northern economies. The ECB’s asset purchase program has hurt pension funds and pensioners in the Netherlands and is generally regarded in Germany as a subsidy to southern countries that are undisciplined in their public spending. But the ECB would find it hard to take measures that might be destabilizing for so important a euro-zone member as Italy.
Whatever they may say in public, one suspects that even the Germans don’t see Italy’s bailouts as all bad.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.
To contact the author of this story: Melvyn Krauss at melvynbkrauss@gmail.com.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.
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