So let's look at the next say, 2, 3 years.
Italy has-- in terms of near-term debt maturities in Italy, you're talking about $820 billion
of next three to four years of near-term debt maturities.
You have, in Italy, for example, a movement with Mr. Salvini, an incredible populist who
has gone from single digits in the polls to, I think, upwards of the 30s.
On one side, this is a Reagan-esque tax cutter.
And on the other side of his marriage party, you have Five Star, which is really like,
a Bernie Sanders populist, which is fascinating.
Because Europe is a little bit further than the US in terms of populism.
Whereas we've had Mr. Trump in more of a right wing populism, the left wing populism so far
has risen but failed in 2016.
If we look at the near term debt maturities-- if you're a bondholder right now in Europe
or own the part at some of the banks and you have these near-term debt maturities, and
you have Italy going up against France, and you see France with their budget starting
to blow through because the yellow vests and what Mr. Salvini might say to the European
Union and the EU in the next say, six months-- how do you see that whole debt profile playing
out over the next year and a half, 2, 3 years?
Well, I've spent a lot of my career thinking about public finance.
In fact, I think the very earliest article I ever had published in the scholarly journal
was, in fact, about public that in Europe, admittedly before World War I rather than
more recently.
But I spent a lot of time writing about this kind of issue.
Back in the late 1990s as the European Monetary Union was taking shape, Larry Kotlikoff and
I-- professor at Boston University and I, got together and wrote a piece for Foreign
Affairs, predicting the ultimate degeneration of Europe's monetary union.
And the argument we made in this-- I think it was published back in 2000-- was that the
monetary union would ultimately be unsustainable because of the fact that it wasn't in any
way a fiscal union, and that there was bound to be substantial fiscal divergence between
the member states.
That was baked into the cake because of demographics and differentials in growth.
So I was a skeptic about monetary union, mainly because of fiscal imbalances.
And back then when we were discussing where would things most likely go wrong, it was
Italy that we always tended to come back to.
Greece, of course, had even worse public finances, and probably should never have been allowed
to join the monetary union.
But Greece is relatively small, whereas Italy is not only a founding member of the EU, it's
also really quite big economy.
So I guess the big question for any investor is what's the end game for Italy.
It has zero to negative growth.
It is a huge stock of debt, as you rightly mentioned, a quite large proportion that falls
due in the relatively near future.
In history, stories like that tend not to have happy endings.
And they can end in a bunch of ways.
They can end in default, or they can end in some monetary inflation if the country is
in a position to do its own monetary policy, which of course, Italy isn't.
Or it can end in agonizing austerity as the government runs primary budget surpluses to
try and get out of the hole.
And when you look at the Italian case, you find yourself wondering, well, how can any
of this happen?
How can any of these classical historical scenarios play out?
Because it would be so disruptive to the rest of the European Union if Italy defaulted.
It would have terrible consequences for the Italian banks.
It's impossible for Italy to inflate its way out of the situation, because it doesn't have
an independent monetary policy.
And it's very hard to imagine a populist government, especially a coalition of the populists of
the right and the populists of the left, which was never supposed to happen, doing austerity.
From an investor's point of view, this is lots of flashing red lights on the dashboard.
Go nowhere near this.
My hunch is that when push comes to shove two things are going to happen.
One, the ECB is going to find a way to ease in so far as is necessary to avoid an Italian
crisis.
Because it's just too big a risk for the system.
The reality is that the ECB can't really stop quantitative easing.
It can't normalize monetary policy, so long as Italy is in this situation.
But the other thing that has to happen is a political change in Italy.
And the question really is at what point does Matteo Salvini, the leader of the League,
press the button and take advantage of the fact that his party's far ahead of the populists
of the left, of the Five Star Movement?
And he could do that this year, but I don't think he's going to.
What Italy needs is actually the Brazilian formula.
If you look at Brazil, you've got a populist leader, Jair Bolsonaro.
But they're doing free market economics.
They're doing structural reform.
And that's what Italy needs.
And as long as they're held back by the populists of the left, the Italian economy is not going
to grow.
So you've got the right wing populists, or the Reagan-esque populists in Salvini still
rising in the polls, whereas the Five Star or left wing is kind of receding a touch.
So there's a little bit of a spread developing, which you're saying over the next year could
have actually Salvini and the League actually leading the whole show.
Yeah.
I think that's going to happen.
The only question is when.
And it's really the only way out for Italy.
Italy needs structural reform.
And it needs something like Reaganomics.
And I think what's interesting about the Brazilian example is we're beginning to see, for the
first time, that you can be a populist on issues such as law and order in the case of
Bolsonaro, or immigration if you're Salvini.
But you could also do free market reforms.
Now most people assume that even the populists of the right are going to do non-free market
economics.
I think that's an incorrect assumption.
I think populists of the right are capable of doing good economic reforms that actually
generate growth.
And let's face it, say what you like about President Trump, the economy in the United
States grew 3% in 2018, which is not something that the economists of the Democratic Party
expected to happen.
So I think that's the kind of winning formula.
There's no other way out for Italy.
It can't escape what was once called nasty fiscal arithmetic if it continues with zero
growth and an ever rising stock of debt.
When I was younger, my dad constantly referenced to Alexander Fraser Tytler, a Scotsman.
And through my life reading some of your works, I always made that-- maybe I was wrong or
right, but I always made that connection with the two of you.
And I remember as being a young boy, my dad reading this phrase to me.
A democracy can only last until the voters realize that they can expunge the public treasury
with their votes.
And the cycle that he talks about, Tytler, where he talks about a classic democracy--
if you think of Venezuela, if we just think of any democracy of the last 400 years, you
have this period of original bondage like the United States in 1750, 1775.
And then you break out and you're into patriotism, entrepreneurship, abundance, and then a dependence
phase, an apathy phase, and then a back to bondage.
It looks like, to the untrained eye, that Tytler was onto something here.
I always wanted to ask, what's your personal view on that cycle in terms of do all democracies
end up in that same place historically.
I'm not one of those historians who thinks that history is cyclical.
If it were, it would be so easy to predict, wouldn't it?
But in fact, what's interesting about the historical process is that much as we would
like states or empires or democracies to behave like individual human beings, to have vigorous
youth, and then to reach their prime, and then to kind of get a little bit old, and
then to collapse and die, that is not in fact how they behave.
And indeed, the key to thinking about history is to recognize you're not studying a bunch
of living organisms with a natural life cycle.
You're studying complex systems.
And complex systems behave differently from individual organisms.
They can last an extraordinarily long time, and then very suddenly fall apart.
It's only with hindsight that we say, oh, there was some kind of life cycle to the Soviet
Union.
And it went through that kind of trajectory.
It didn't.
The Soviet Union seemed to be fine until it wasn't, and it fell apart in the space of
two years, really from 1989 to 1991.
Thanks to old Boris.
Hardly anybody predicted that.
And when I wrote-- A lot of vodka.
Even in the summer of 1989 when I wrote a piece predicting some kind of collapse, the
British newspaper I was working for refused to run it, as it seemed as if I'd, to quote
the editor-- Is that right?
Wow. --been listening to too many Ronald Reagan
speeches.
So rule number one of history is that if things were cyclical in that way, then history would
be much more predictable than it is.