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11.12.2011

The Lure of Self-publishing: Can Amanda Hocking's Success be Replicated?

A Black Swan adult with chicks swimming on a l...Black swan on a lake in Australia Image via WikipediaThe stigma attached to self publishing has gone, but is that reason enough to self-publish?


True, the stigma has been removed by the digital revolution, but the hype about self-publishing has risen to such dangerous heights that it threatens to topple over!


Can you really repeat the success of Amanda Hocking, J.A. Konrath and John Locke? 


J.A. Konrath was a published mid list author when he started to self publish so one can always argue he had a fan base, a known name and could reasonably expect success. Indeed, his blog, so he says, attracts some 500,000 visits/year, a good "platform" or Internet presence, by any means! 


But the other two? They were classic black swans: no one had heard of them, they swooped in from the outside and both sold millions of copies of their books in just a few months. And Amanda Hocking famously went on to land a multi-million deal with a major legacy publisher (St. Martin's Press) and I hear reports that Locke is now working with Simon & Shuster. Enough to get any newbie drooling...


We're in late 2011, and things have changed a lot. There's a tsunami of fiction titles on Amazon's Kindle (at least 750,000 and rising) and e-book sales are outpacing printed book sales. New e-readers are about to come to market (chief among them Amazon's Kindle Fire) and they will presumably further expand the market (more readers, more books sold). On the paperbook side, bookstores are closing, Big Six Publishers have to deal with various game changers, not least of them the bid Amazon is making to become the Next Big Publisher.



So it makes sense to publish e-books, right? Let's all go and self-publish and live happily ever after sunning ourselves on Caribbean beaches! If you read the grand-daddy of bloggers providing self-publishing advice in this new digital age - I'm talking about J.A:Konrath's famed Newbie's Guide to Publishing, the outlook is more than rosy, it's positively exploding fireworks! 


Lately he's opened his blog to other writers who are successfully self-published. The latest is David Gaughran who enthuses about connecting with readers on Internet and recounts how he's known instant success in 6 months, with 20,000 visits/month to his blog plus stratospheric sales for his two novellas. If you haven't read his account and enthusiastic call to all fellow writers to follow him on the glorious road to self-publishing, click here, read it and come back here for the discussion.


How likely is it that you can duplicate Amanda Hocking's success?


In my view, and I know a lot of people aren't going to like me for saying this, I think it's very, very unlikely. 


We hear about the success stories, we don't hear about the (countless) others who sell few copies or none at all.


Why is that?


Because there are pitfalls in self-publishing that  Konrath and his writer friends tend to gloss over (no doubt because they were so successful and didn't fall in any pitfall themselves). He's moving in a restricted circle of successful self-published writers and doesn't know what the world looks like on the outside - particularly if you are (to use his favorite term) a "newbie", a newcomer to the world of publishing.  And I think that the kind of hype you find on his blog and on so many others could be quite dangerous and misleading for aspiring writers (I apologize for singling him out but I did so because he's the best - the others tend to  follow him, echoing the hype). It's just the sort of message that can mislead you into making life decisions that will really hurt you...


Four Pitfalls in Self-publishing


You're on your own and you need to behave as an entrepreneur in all aspects of the publishing process from production to marketing. The only thing that's easy? Getting an ISBN number: it's cheap and anyone can get it for you.
The rest is full of pitfalls: 


1. ms editing and file conversion: 


Not as easy as you might think. If you've been reading ebooks lately, you must have come across an incredible number of formatting errors (too much space, lack of it etc) and typos galore.


So you have to find the best editors to assess book structure, language etc including of course proof-reading. And since this is an e-book, you need people technically able to convert your files into e-books and upload them on all the major platforms (Kindle, Barnes & Noble, iBookstore, Sony Store etc). There's plenty of advice on Internet and you'll find other writers with self-publishing experience all willing to recommend you names. Fine and good, and I'm sure that many of these free-lance people you find in the market are excellent. The only trouble is you can't be sure...not until you've actually tried them, and spent your money on them only to find you've wasted both money and time!


Why? Because free-lance experts come and go, they don't work within the framework of a publisher's organization, with career prospects to cater to. Those who work within such a framework have to be good to avoid a slowdown in their career or being fired. So when you hire a free-lance expert, you don't have the guarantee of work well done that normally comes with an editing job done by the staff of a legacy publisher.


When it comes to file conversion, it's even more difficult and at times (judging from the errors in e-books) even legacy publishers seem to run out of capable staff. You don't have too many options: DIY (I know I can't, I'm a famous digital dunce) or turn to experts like Smashwords (they take a percentage cut) or BookBaby (they charge for the service). 


BookBaby might be the better option since it's only a service charge and not a percentage; also their prices are lower than the usual free-lance expert, except that you end up being published...by BookBaby (!) because Amazon et. al. recognizes the entity that has uploaded the e-book file and not you, the author! Very inconvenient, because as a result, Amazon will not share sales information with you...they share it with BookBaby and the latter is ill-equipped to display the information on-time and in a user-friendly manner (I know because that's what I did - I wanted top notch file conversion quality and got that - at the expense of not being able to follow closely my sales.)


2. Book covers 


As a self-published author you have a big advantage here: you're in charge and you have none of the problems of your published fellow writers who often find that publishers impose on them covers they hate. You have the last word since it's yours but that can be a problem too.


Also a professional book cover is essential for your sales and don't believe you can do it without expert help. Everything I said above applies here too. So, once again, it's a jungle and if you want to survive (and get a smashing cover) you had better act as a savvy entrepreneur! My job was half done because I used my own paintings for my book covers but I still couldn't for the life of me do the cover design as such (choose the lettering, shading etc). Once again, BookBaby did that for me charging for the job a very reasonable amount taking into account I provided the illustration.


Now do my covers "work"? You tell me! The lion is a hieratic statue in Book 1 Forget the Past because precisely it deals with the past that cannot be changed (hence it's a stone statue); Book 2 Reclaim the Present is a lively lion with a honey-colored mane because it deals with the present that can be changed if you work at it; Book 3 Remember the Future is the outline of a lion (you can't quite see him because he's somewhere in the future) and he holds a...tablet computer in his paws. Why remember the future? Because the future will be what you make of the present...The whole trilogy Fear of the Past is focused on the weight of family inheritance and the lion is a symbol of destiny (hence his scowl...). The whole issue the book addresses can be summed up in one question: is heredity destiny? And it takes three books and three lions to answer the question!


Here are the original paintings I did for the book covers (I've set them on the mantelpiece in my studio) and you can compare with what BookBaby did to turn them into book covers (look at upper left angle of this blog page): 




Could I have convinced a legacy publisher to do it in this special way? Maybe or maybe not (because they have their own standards they like to upkeep). But one thing is certain, being on my own I was able to bring to its conclusion what is essentially a rather complex idea for my book covers...


3. Book promotion  


For me, marketing is by far the hardest part. And it's bound to be the hardest for any newbie. Regarding the price you should set your book at, there's plenty of good advice around - so it's probably relatively easy to decide. You'll find that most agree that for a self-pubbed author 99 cents is a good price to launch a title (think of it as a "loss leader") and that $2.99 to $3.99 may well be the "sweet spot" for indies, where sales are maximized. 


There's also a lot of discussion as to whether it makes sense to let a title go free for a time. Some say it boosts sales but no one's been able to prove it. Personally, I'm not sure it does: I can't see that much of a psychological difference with a 99 cents price...


Be that as it may, the real problem is book promotion. A direct promotion doesn't work: you can't tweet like mad "buy my book", no one will! As John Locke advises, use an indirect method - so called "loyalty transfer". Align yourself with some major cause or idea or whatever you think your books stand for and can fit in, then promote them on that basis to "like-minded" people...And maybe they'll buy your books (John Locke swears that's how he made his sales). 


Or you can do what Amanda Hocking did: ride on the tail of Stephanie Meyer's books that opened the royal road of teenage vampires. But make sure you find the right "tail" to ride on!


Or you can pay for a book publicist. I haven't yet and I might...but it's expensive! 


DYI methods all start, according to market gurus, with having a blog (such as this one) and spreading yourself all over the place: from social networks (Facebook, Google+, Twitter, Stumble Upon etc) to readers communities (Goodreads, Shelfari, The Reading Room etc).


Now, it seems that this is something publishers don't do for you (unless you're their star author of course). But as a beginning writer published by a legacy publisher you're expected to do all this yourself. So why would a self-published writer be at a disadvantage?


Oh, but he/she is at a disadvantage, believe me. Once all that Internet  promotional work is done, he/she is still nowhere in terms of landing on a NYT bestseller list, getting reviews from big literary critics or obtaining book prizes (I mean those that count like the Pulitzer). All that glorious stuff is reserved to writers published by the Big Six.


Let's face it: Big Six publishers make "book discoverability" easy.


So, yes, choosing the self-publishing road means foregoing all that. If you sell a lot and make a nice percentage - indeed a better percentage on sales than if you're traditionally published, no doubt about that - then, as Konrath says, you're ok. You're a free person, you make more money, you're not any publisher's "slave" (as he puts it).


But...there's always a but somewhere:


4. Your sales numbers are in the public domain. 


This means that if you don't sell well, that's the first thing a would-be literary agent will find out. And so will a publisher. Unless your numbers are good, they won't take you on.


That's a very big risk. It could cost you your career. Because to promote your books on the sole strength of your blog and a few customers reviews on Amazon and Goodreads isn't going to get you very far...contrary to what Konrath et al. are telling you!


And don't lose sight of one simple thing: the traditional paper book market still accounts for eighty percent of book sales! Yes, e-book sales are rising faster (they're some 18 percent ahead this year) but they account for a still relatively small section of the whole. That will change over the next five years, but not now. Not yet.


So think about it. Do you really believe you've produced an outstanding book? Because in the end, it's content that counts. Sure, if one book doesn't work, you can always put up another on that virtual shelf, and another and another...And every time, making sure you do all that hard work to ensure quality production and book promotion.


Do you feel up to it? If yes, bravo! Go ahead. If not, then a few additional rejection letters until you land that perfect agent who supports you, who believes in your talent and helps you get a decent contract with one of the Big Six should still be one of your career goals...I know it's mine with regard to the manuscripts I'm presently working on and that (for the moment) I have no intention to self-publish. But I also know that the sales for my books that are now up on that virtual shelf could affect my chances of ever landing a contract with one of the Big Six. 


In other words, self-publishing could reduce your options...So think about it well before going ahead!


Do let me know how you feel about this and what decision you've taken!

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11.09.2011

Literature vs. Genre Fiction: A Lost Battle in the Digital Age?

RomanceRomance by Thomas Hawk via Flickr
Is Literature a poor cousin?

It has always been one category among many, and the poor cousin of big genre categories such as Romance, Science Fiction or Thrillers, the main wage earners in the publishing industry.

Think of it as a three-star Michelin restaurant against the likes of MacDonald, Kentucky Fried Chicken or Pizza Hut. Which makes more money?

Okay, that's one a question that needs no answer.

With the Digital Age now upon us, the role of "genre" as the main book distribution and marketing tool in the industry has come under fire. Amazon in particular disrupted all accepted marketing schemes (and so did all the other digital platforms, Barnes & Noble etc). For the first time, genre became less necessary as a tool to (1) plan sales and  (2) ensure book discovery.

The digital revolution has done away with one of the big hurdles of traditional publishing: gauging sales demand to determine how many books need to be printed. E-books are stored in the "cloud", no need to print in advance. And  Print-on-Demand technology solves the problem from paper books. So in principle, both the virtual and physical book markets should be enhanced by the digital revolution. 

The virtual book market has one big advantage on the real paper market. 

Amazon (and other digital platforms) is able to do something traditional publishers can't:  they can track customer purchases on their computers, and that allows them to operate on the concept "if you liked this [book], you going to like this one [suggestions for another book]".

That's something traditional publishers can't do. They have to rely on bookstores to do this particular work for them - not big bookstores, but small local ones who know their clients and have established a relationship of trust with their readers. For example, when I walk in my favorite bookstore in Paris, the old-fashioned Delamain library near the Louvre, I find they've got the big sellers all laid out on a table so I can't miss them as I walk in, but they've also peppered the whole store with little index cards stuck on book piles with hand-written notes telling me how they felt about the book, the genre, how well it did in its genre and why. I'm grateful to them for these little flyers, they help me in orienting myself among titles that I don't know.

But this is horse and buggy technology! With the digital revolution, book discoverability can be refined, accelerated and fine-tuned to the exact tastes of the client (as expressed in past purchases). And of course readers can get directly involved as they themselves write "customers reviews". Inevitably, as a reader you always trust another reader more than the author or the publisher. 

Indirect marketing (i.e. readers' buzz) always works better and in the digital age, it has become a lot easier to organize (as Amazon knows very well).

That's a sea change in the industry - of course, it applies mainly to e-books, and this year so far e-books have outsold paper books by a whopping 18 percent in the United States. And that's only the beginning of the digital tidal wave: it has yet to come to major readers markets like France, Germany, Spain and South America etc. Amazon has just opened Kindle Stores in some major countries on the European continent but it hasn't really spread yet across the globe (for example there are whole regions like English-speaking Africa - some 200 million readers -  that are still not covered).

We're on the verge of a Guttenberg style change in reading habits. 

I really believe we are. A few weeks ago I blogged about the awsome fact that more american adults read literature than ever before - in 2008, close to 17 million more and most of them young adults  of which the largest group is between the age of 18 and 24, and it's also the one most rapidly increasing: 21%!  

When the Christmas season comes, that's the age group that will be given Kindles and other e-readers as gifts, that's the age group that will download books that are 99 cents or free. Such prices do not however spell the end of the book market. E-reader buyers are still mostly older and better off. For example, they are the ones who buy Apple's Ipads.  But Amazon has quickly grasped that there's a big market out there for a cheap computer tablet.

We all fully expect the Kindle Fire to set...fire to the market this coming Christmas!

That relatively well-off e-reading majority is the one going for the more expensive e-books - at $10 and above, the price practiced by traditional publishers. Below  the $10 point is the preserve of the Indies - self-published authors who incidentally continue to debate among themselves where the "sweet point" of prices might lie (between $2.99 and 4.99) and how long they should leave their books for free before raising the price again etc etc.

Such debates are not terribly useful because nobody knows exactly what is the market composition age-wise and income-wise (though Amazon may have some notions about this)

Market Analysis by Genre Remains the Main Tool for Traditional Publishers

Only one thing is certain: in this fast shifting readers landscape, traditional publishers are at a disadvantage compared to digital platforms. To plan their sales, analysis by genres remains their main tool but, based as it is on past sales reported by bookstores, it will become increasingly unreliable as a means to predict the future. 

How will traditional publishers react? Well that is something we already know. When the world collapses around you, you hold on to what you know. That means traditional publishers continue to privilege all genres that have sold well in recent years (chief among them Romance) and within the genres, their leading authors: facing the digital competition, they can't afford wrong bets (and that of course is not good news for aspiring new authors or mid list authors with declining sales). 

Moreover, news that have recently come out that the leading genres among e-book readers are Romance and Sci Fi is likely to further comfort them in their publishing choices.

Is Literature, already a poor cousin, likely to get thrown even further down the line?

I don't believe that's a likely outcome, on the contrary. First consider the statistics: apart from the fact that we are facing an expanding readers' market, let's remember that it hasn't yet gone digital entirely, and not by a very long shot: at least 80% is still printed material! As Laura Hazard Owen reminded us in an excellent article (in The Truth about Amazon Publishing), while Amazon has done beautifully so far in the digital world, its battle in the real, traditional paper world is not yet won. Libraries continue to have their say and view Amazon as a dangerous rival. It's going to be hard for Amazon to place its published trade paper books in traditional bookstores...

So horse and buggy technologies for book discoverability still prevail in about 80% of the readers market in the United States (and of course more so elsewhere). 

Genre as a marketing tool isn't about to be blown away or replaced with sophisticated purchase tracking computer technology.

Literature will continue to be aptly supported by traditional marketing methods, including book prizes like the Pulitzer and Man Booker Prize.

This is not to say that the digital age will have no effect - or has none yet. I believe it is already having some effect in that it improves the chances of authors who don't fit into formulaic genres to be discovered. Including literary authors who (by definition) are NOT formulaic.  

The digital age's biggest effect: expanded book discoverability

Readers who have eclectic tastes will find more easily what they're looking for on a digital site by typing in key words of their own choosing. For instance if you typed in historical+paranormal+thriller+coming of age you'd be likely to come across odd books that would include my Fear of the Past trilogy (mmm, you'd have to add Sicily to the lot! And besides, I don't pretend to be "literary"...) 

And I'm convinced there are many more eclectic readers out there than most publishers give them credit for. I'm certainly one. I don't know about you, but after reading a series of books in a given genre or by the same author, I get tired of it. I start to see the formula too clearly and I need a change of pace. Monotony breeds boredom, change is the source of all pleasure. 

In that sense, literary fiction has the ability to surprise and delight. It doesn't fit into any predetermined formula, as was brilliantly displayed by Jennifer Egan in her Goon Squad (she even had a chapter in the form of a Power Point Presentation). She won the Pulizer Prize but didn't draw much consensus on Goodreads, one of the American main readers community site. As I mentioned in an earlier post, I participated in a reader group reading Egan's novel and noticed that my fellow readers on the whole felt the book didn't "grab" them. Not too surprising, considering that points of views kept changing from one chapter to the next making it difficult to "enter" the book. 

Another example of a literary letdown? Take Simon Mawer's The Glass Room, last year's runner up to the Man Booker Prize. It also drew lots of mixed reviews and for much the same problems.
 LONDON, ENGLAND - SEPTEMBER 08:  The six short...Image by Getty Images via @daylife
If you've read it, you'll have noticed right away a problem that seems to be common to a lot of literary fiction: as a reader, you can't get "into it", and whenever you finally do, you can't stay "in it". Because the author constantly changes the game on you: characters drop out and don't reappear until much later if at all. Major tragedies happen to them (like in the Glass Room, the husband dies in America and his wife goes blind) but this is never adequately explained or explored, yet they were both Main Characters at the start of the novel.

When Literature becomes too "literary" for its own good.

This ability to set up a plot and characters and then drop them, then pull them up again is pure virtuosity. You as a reader are literally asked to admire the talent with which it's done, and of course you do. But you also get annoyed after a while: what you want is to be told a good story that is going to keep you going with bated breath! It's not pleasant to be picked up only to be dropped down again.

Now some big literary giants don't do that and (not too surprisingly) they are rewarded with stratospheric sales. And something else is noteworthy about them:  they tend to come up from among the genre fiction writers. Perhaps one of the most famous examples is Stephen King. He came out of the horror genre but has shown himself to be capable of pure "slice of life" writing in the best tradition of Great Literature. I can think of many more like Khaled Hosseini or John Le Carré, and you might care to add to that list.

But I think what all these particular GLS (Great Literary Sorts) have in common with GR (genre writers) is the ability to fix on a plot, keep the characters in there from the first page to last, and never drop their readers out in the cold, forcing them to make efforts to "get into" the book again and again. On the contrary. They grab you and keep you in.

That's a trick literary guys could really learn from genre fiction writers!

The Outlook for Literature: Rosy!

Once literary authors do - and I'm sure a lot do and will - then chances for Literature with a capital L will really start looking up. Literary novels will become page-turners, exactly like genre fiction!

And the outlook is rosy indeed. More books are sold than ever before, both e-books and printed books, and  there are more readers than at any time in human History. And with the digital age, more flexibility is introduced in book access and discoverability. If as an author you don't fit into any genre niche, you can still hope to make it!

In spite of all the moaning and groaning brought on by the digital age, writers take heart, the future of publishing looks very bright indeed! And readers enjoy, you'll get more and more of the stuff you like!


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11.05.2011

Euro Crisis: After Greece, Italy?

Secret denunciations against anyone who will c...Image via Wikipedia
The G20 meeting in Cannes was rocked by the Greek Prime Minister's antics - first a  referendum on the proposed European bailout then a quick withdrawal. 

But the real concern was Italy. 

Is Italy the equivalent of Lehman Brothers whose failure on 15 September 2008 threatened Wall Street with collapse or is it bigger still, like AIG, "too big to fail"?

Italy is of course much larger than Greece. It is the third economy on the continent after Germany and France. Whether it really is the third in Europe is a matter of debate: there has always been a rivalry between the UK and Italy for that position.  What is certain is that Italy is actually a lot bigger than the official statistics would allow - probably some twenty percent larger because of its "economia sommersa", the hidden part of the economy that escapes all taxation and does not show up in national statistics. 

What it means to have an economia sommersa.

Anyone who lives in Italy (as I do) is instantly aware of the situation when at the restaurant you're asked whether you want a bill ("fattura") or whether the cash ticket (the "scontrino fiscale")  will be enough. With a bill,  the tax (IVA) is fully counted in, with the ticket it's not. In other words, most restaurants never fully pay the government the taxes they owe - just a part of it. And that's only the tip of the iceberg. Tax evasion in Italy is massive and affects just about every economic activity. As it is massive in Greece of course.

And tax evasion is not considered immoral by most Italians. On the contrary. The government is the one viewed as immoral: services are bad, trains are always late, the roads are full of potholes, whole towns in the South go without water in summer, hospitals are overcrowded, the bureaucracy is bloated, slow and inefficient. It is the direct result of clientelismo, the Italian version of pork barrel. Everybody knows that politicians win over votes with lavish distribution of  favors. Careers are made on "raccomandazioni". Meritocracy is not a word in the Italian lexicon.

Berlusconi's empty promises.

When Berlusconi came to power in 1995, he promised reform and never delivered on any of his promises. Yet Italians had hoped to see change: here at last was an entrepreneur, not a professional politician. Here was someone so rich that he wouldn't be open to corruption. 

Unfortunately, that was not counting on the skeletons in his closet: throughout his mandate, the Law has been after him. He's faced charges ranging from tax fraud to sex with an underage prostitute.  Instead of pushing for reforms he has only defended his own interests. As a result, under his stewardship, the situation that was bad got worse.

But then, what could one expect from a leader with such a tarnished profile? Nothing but more and more corruption. The fish always starts rotting from the head. For example, Berlusconi had promised a big infrastructure plan: some 189 projects to overhaul the Italian highway system etc. Out of these, over the last decade, only 40 came to fruition! Berlusconi had made a big fuss of building a bridge over the strait of Messina to link Sicily to the continent, but of course nothing came out of it (and whether such a bridge is at all needed is a good question).

Now Italy is faced with continued slow growth and a locked political situation.

Berlusconi, to save his majority in Parliament, has allowed himself to be highjacked by Bossi, the head of the Lega Nord, the northern secessionist party whose avowed aim is to get Northern Italy to break away from Rome. Not something the Left or the Center relishes, and neither does Napolitano, the Italian President. Meanwhile the public debt has grown to 120% of gross domestic product, some two trillion Euros, threatening the survival of the Euro.

Everybody in Italy knows what the reforms should do: streamline the bureaucracy and get rid of excess fat, liberalize the labor market with a special effort to include new entrants (the young with unemployment nearing 40% are especially affected), introduce measures for growth to cut red tape and support business innovation and entrepreneurship. 

In August the European Central Bank sent Berlusconi a letter detailing all the needed measures, plus an appeal to sell the "crown jewels", i.e. government property to pay for the debt (I'm not sure that's a good idea, but I'll get to that in another post).

The letter went unheeded, Berlusconi didn't even show it to his cabinet.  However a minimal series of "austerity measures" were passed in the summer aiming to balance the budget by 2013 but application has been slow and erratic - except for an immediate rise in the IVA tax (although as we all know this is a widely evaded tax).

Meanwhile rating agencies got in the act and started the process of downgrading Italy's debt ranking (for example, one month ago Fitch downgraded Italy from A+ to A--). And it is becoming increasingly expensive for the Italian government to raise money on the bond markets: the spread with Germany is now averaging over 4 percent - an unsustainable amount.

To prepare for the November G20 meeting, Berlusconi sent a letter of his own to the European Union. It  was accepted probably because there was no time to discuss it. Rejecting it would have made matters worse at the G20 meeting making Europe look like it couldn't handle one of its major members - although nobody was duped. 

Because Berlusconi's letter was remarkably devoid of any real content. Indeed, Tremonti, his own Minister of the Economy, refused to subscribe to it. Just consider one of the points Berlusconi made, that he would see to pension reform and bring the Italian system in line with the rest of Europe - with pensionable age at 67 years for both women and men (something strenuously opposed by the Italian labor unions). Sounds good but the timetable?  It is not planned to be introduced before 2026...that's15 more years of mismanaged and unsustainable expenditures!

So a lot of pointless letter writing is going on and a lot of wrangling.  Including such hot points of contention as a wealth tax (politicians, all very rich thanks to their super salaries, fight it) and a proposed amnesty (condono) on tax evasion. The condono system is well established in Italy and it recurs regularly: rich people who have built "abusive" houses (i.e. without building permit) are very fond of them. And they inevitably cause the Left to rise up in arms.

No wonder the  budget bill presently in the Senate is getting nowhere. Because nobody agrees on the exact content of the reforms or the timetable. Big business is getting increasingly nervous: both Marcegaglia (head of Confindustria) and Montezemolo (Fiat group) have appealed to the government to do something or step down. That's democracy for you.

The way out? 

First get rid of Berlusconi! His reputation is destroyed, the man is finished. But he's desperately holding on to his seat, as is the rest of the Italian Parliament. No one wants to leave a table with so many goodies on it.

Will an Italian politician rise above the corrupt mass? Berlusconi is losing his supporters (another six just left his party) but more, much more needs to be done for Italy to have a new government capable of reforming the system.

I'm not very optimistic.The timetable promises to be a long one - just like in Greece, by the way, if not worse. People expect Berlusconi's government to collapse at year end or January. Then two or three more months will be needed for elections and to get a new government started.

Even if Italy opts for a coalition government Greek-style, times will be long, reforms can never be actuated overnight. Berlusconi has agreed to let the International Monetary Fund monitor the process, but that won't change much of anything and hardly accelerate the process. The IMF can only monitor - not impose anything.


Times in a democracy are very long, and times on financial markets very short. 

Euro zone leaders thought the G20 meeting in Cannes would help them solve their fundamental problem: how to strengthen the EFSF (European Financial Stability Facility) and make it big enough to protect Italy while it took its time to undertake reforms. 

Europe has enough firepower for Greece, but not for Italy. Europeans knew America could not help. They hoped the BRICS would, but they balked. Even China hummed and hawed. From that point of view, the G20 meeting was a total failure.

Bottom line Europe  has to build up its own firepower

That means either strengthen the EFSF or allow the European Central Bank (ECB) to act as a Central Bank. 

The new head of the ECB, the Italian Draghi who (contrary to his predecessor Trichet) is an economist, knows something needs to be done. He immediately moved in the right direction, lowering the interest rate - and managing to do so with the approval of his whole Council, Germany included. 

Because so far, it's Germany that's been dragging its feet: they don't want to hear about Euro bonds or any other mechanism to defend the sovereign debt of Euro zone members. They want Euro members to "put their house in order" first (read: adopt austerity measures). But with too much austerity you kill the hen and you won't get anymore eggs.

The Greek hen is almost killed and the Italian one is badly wounded (not to mention Ireland, Portugal and Spain). 

How much hen killing will it take to convince Germany to adopt mechanisms that truly defend the sovereign debt of members under speculative attacks? 


Additional firepower is needed to give Euro member countries the time to put their house in order. It's as simple as that.

With a caveat: additional firepower should not be used as a pretext to continue playing the game as before, lavishly spreading about unaffordable salaries, pension benefits and other privileges. European countries need to reform, no question about it.


This said, in the end, something will need to be done to avoid the immediate collapse of the Euro. My own favorite means would be Euro-bonds. It's simple, financially elegant and easy to control (say via the ECB).  And it's a means you could fine tune and use as a whip against member countries that do not toe the line - in other words: you could threaten to withhold the Euro-bond cover if they don't reform.

What's yours?
  



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11.03.2011

Euro Crisis: If Greece Exits Europe is it the End of the Euro?

Euro ManImage by rockcohen via Flickr
It looked like the Euro crisis was finally on the mend when Greek Prime Minister Papandreou threw a spanner in the works, on the eve of the G20 meeting. 

His proposal to go to the Greek people with a referendum about the austerity package agreed to by the European Council on 27 October caused a slump in the markets and a political furor across Europe and the world - a collapse of the Euro would impact everyone, the US included. 

Merkel and Sarkozy immediately called Papandreou to order and he dutifully flew to Cannes on the eve of the G20 meeting to explain himself.

There are times when I wonder whether Germany and France are the new Axis of Evil in Europe calling all the shots and trampling on national sovereignty, or whether they are what they pretend to be: the saviors of the Euro?

I prefer to think that Merkel and Sarkozy are convinced Europeans - they certainly look like a minority among politicians in Europe because here in Italy, there is no doubt that Berlusconi hasn't got Europe at heart, nor his own country.  And this no doubt goes a long way to explain Italy's absence from European leadership. If the Euro and Europe are in the hands of Sarkozy and Merkel (and of course the EU's van Rompuy and Barroso), it's because Italy's Prime Minister hasn't paid attention to anything beyond bunga bunga and his own personal interests. 

Now, is Papandreou also a non-European? Not at all. He said to Merkel and Sarkozy just what you'd expect him to say: Greece is a democracy, Greek parties are stuck in an unmanageable opposition. His own party just lost another two members and now he can only count on 151 out of 300 for the vote in Parliament that will take place this coming Friday. 

For him it makes sense to bypass the parties and consult the people. But not for most people around him including his Finance Minister. 

Merkel and Sarkozy did not appreciate either and told him Greece would not see any European money until the situation was cleared up.

Now there are two ways the situation could clear up:

(1) if the Greek Parliament votes yes on the 27 October European help package (they have to do it this coming Friday), then the referendum will take place on 4 or 5 December, asking the people the same question the Parliamentarians answered (i.e. do you accept the proposed austerity measures in exchange for saving Greece from default - actually a 50% "haircut" on Greek debt is already included in said package).

(2) if the Greek Parliament says no, then there's no need for a referendum: the European austerity package is rejected, the  political crisis is opened. Europe will not pay any further money to save Greece from default.  Greece will need to go to early elections to put its house in order (i.e. decides on whether it really wants to apply austerity policies or not).

How early? Even if one rushes things through, you can't expect to hold elections in a democracy in less than two months. That means sometime in January or February 2012. Plus you need the time to re-discuss the European austerity proposals and adopt a policy both at the level of the new Parliament and the new government. In short, nothing can move before March or April, way too late to save Greece financially. 

Snap elections are not the answer. Why add the referendum to the process? It's clearly a non-needed step. But Papandreou probably felt politically fragile. He wanted to get rid once and for all of that social tension that had been building up through the summer.

I'm willing to wager Papandreou didn't expect so many to rebel to the referendum proposal in the Pasok (his own party), including his all powerful Finance Minister. The idea didn't appeal to the man in the street either. Various TV channels interviewing at random people in Athens found that most felt a referendum was too late, that the people should have been consulted earlier in the process.

Now that's a pernicious idea. The idea of consulting people is a recurrent one but, let's face it, so far European construction has NOT been built on a series of referendum (with a few exceptions that were never a success). The process has always been built on existing democratic institutions (i.e. votes in parliaments) and there really is no reason why this should change. Either you believe European member countries have working democracies or you don't... 

Why did austerity packages go down so well in Ireland and Portugal and got stuck in Greece?

Because the opposition in Ireland and Portugal agreed austerity was the way to go. In Greece, the opposition did not. Street protest and strikes were a constant throughout the summer. And small wonder considering the sacrifices that will be demanded (but not yet imposed) - not to mention a soaring level of unemployment, now close to 20 percent. The economy is frozen, exports are down. For a lot of Greeks, the Euro looks like a very bad idea. 

When the government runs out of money at the end of this year and will stop paying its dependents, it will look like a very bad idea indeed. 

Because leaving the Euro and moving to the Drachma is not going to be painless. On the contrary. Banks will fail. People's salaries will go unpaid. Distribution of goods will be disrupted. It will look like World War III.

Is that what the Greeks want?

Yet...From a purely abstract point of view (that's the economist in me speaking) it is very likely that the Euro can easily survive without Greece and Greece can better survive without the Euro: the reborn Drachma would be so cheap that Greek exports would be boosted sky high! 

Withdrawal of the Greek economy from the Euro-zone is not likely to permanently affect the Euro because, put quite simply, it is too small in relation to the whole. It would hurt the Euro no doubt but not kill it.

I know - we are grappling here with the "unthinkable". The Euro wasn't supposed to be something you could get out of at will. It was - as so many commentators repeatedly say - an irrevocable choice

Is the Euro really an irrevocable choice?
Quite frankly, nothing is irrevocable in life, and especially not contracts humans get into.

But the Greeks should keep firmly in mind that the road to the Drachma will be a long and hurtful one. Are they willing to walk down that road?

Are they willing to get out of Europe?

Because that is the exquisitely political - and dramatic - choice they are now facing.

Unless Papandreou withdraws his referendum proposal. I wouldn't be too surprised if he did, though perhaps he can't do it without losing face... 

Post-scriptum: on Thursday 3 November he withdrew it! Not afraid of losing face, it seems...On Friday 4 November he won a vote of confidence from Parliament but the Greek crisis will not go away with political games. Any new government of coalition drawing in the opposition  will still have to deal with the same issue.

All bets are open. What is your opinion?  
Will Greece exit the Euro? 

My opinion is that it won't but do you think I'm too optimistic? Do you think Greece will make the necessary sacrifices, including the necessary reforms, to stay in the Euro-zone?




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10.30.2011

Euro-Crisis: An Alice-in-Wonderland Non-Crisis? Not quite...

Merkel-citronpresser               by hoppetossen via Flickr
Last week, it looked like the Euro-crisis was about to be resolved. 

Media hype was high, the European Council, originally scheduled for Sunday October 23 finally met on Wednesday October 26 and by Thursday the markets were ecstatic, happily bounding up. 

By Friday, the euphoria had died down. It had become crystal clear that Italy was the problem. 

Since Italy is not Greece, that was rather bad news. The nearly two trillion Euro Italian debt was bandied about and it sounded like an uncomfortably large amount of money. Plus German Chancellor Merkel, in her inimitable school-marmy style had grimly told everyone that this crisis was going to last a long, long time. And that unless everyone buckled up German-style, the Euro would  not be saved.

We've all heard that before: austerity ja. Follow the German model or die. 

So what's new about the Euro-crisis? 

The efforts of our European political elite, particularly the European Council, have an increasing Alice-in-Wonderland quality: the results of the last European Council looked very much like non-results

Yet those were non-results the markets liked. 

Does that mean investors know something we don't? Does it mean that the Euro crisis is a non-crisis? Yes to the first question and no to the second.

What happened on Wednesday at the European Council was this: in very simple terms, the banks bowed to Mrs. Merkel's (firm) entreaties and agreed to take a 50% haircut voluntarily. Money was set aside by governments to help those banks that might find themselves in difficulty because of said haircut.

The point here is that the agreement is voluntary. This means that an official declaration of default is avoided. Therefore, the insurance systems currently in place that rely on derivatives are NOT triggered into action. That was a huge relief for the markets, because derivatives are so opaque - and possibly so widespread -  that nobody knows what sort of tsunami à la Lehman Bros might occur if an actual default by Greece was announced.

Moreover, for the banks involved (that hold Greek bonds), it's not a bad deal: the markets had valued Greek bonds at 40% of their face value. They're getting 10% more. For sure. That's nice, right, so it's no wonder the markets bounded up for joy.

The euphoria didn't last because the fundamental problems remain unchanged. 

The Euro crisis is unfortunately very real. I've said it many times on this blog: the Euro hobbles along on one leg only (the monetary one). It needs a second leg (the fiscal one) to walk properly.  

That's because the European Central Bank (ECB) is NOT a real central bank. It's not at all like the Federal Reserve. It can't engage in "quantitative easing" or, put more bluntly, it can't print money if that's what's needed to convince the markets that the currency will be defended. 

That's something the ECB won't do. Because that's the way the Germans want it: a Central Bank to fight inflation, not a Central Bank to defend its currency from market attacks.

So what instruments are there to defend the Euro? 

The main one, the European Financial Stability Facility (EFSF) is still sitting at a modest €440 billion - nowhere near the amount needed to save Italy should it go under. At this moment, people are busy in Brussels. All sorts of financial machinations ("special vehicles" and an additional, stronger role for the IMF) are being concocted to try and expand the reach of said Facility. Like for example turning it into an insurer and/or trying to make it palatable to the Chinese. 

Actually other big holders of Euro reserves (of which there are quite a few among the BRICS but also in other countries like Norway or the Gulf States) can be expected to show interest. Nobody really wants to see the Euro go under: that would mean their most lucrative markets would go under too...

And yet, and yet...when all is said and done, as Krugman and Charlemagne (of the Economist) recently pointed out, the Euro crisis would be disarmingly simple to solve. All you have to do is turn the European Central Bank into a real central bank with the ability to print money as needed...

Wonder when that will happen...Any idea?

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