The big news today is the ECB 'taper'

Outlook:

The big news today is the ECB "taper" from a purchase schedule of €80 billion per month to €60 billion starting next April plus extension to end-December next year. Analysts say they are surprised at the strength of the statement—they had expected more tap-dancing. We will know more after Mr. Draghi starts to speak (and we would bet that the Draghi press conference is the most well-attended and most-watched of any financial event—ever).

No matter what Draghi says, the market likes news-bite sized words and the word this time is taper. We know what happened when Mr. Bernanke even suggested tapering a few years ago, long before the actu-al event. Do we have any cause to imagine this taper will be different from the US version? Never mind that Draghi will be able to say the economy is behaving robustly and a reduction in extraordinary measures is justified. Withdrawing even 20% of support from the fixed income market will scare the horses. We shall see how far the euro drops, but at a guess, it can go all the way—i.e., to 1.0504, the low from Dec 5. If not more.

Contributing to a euro downside move might be Italy. We don't want to beat a dead horse, especially now that the euro has recovered from a 20-month low on the Italian referendum outcome, but this story is not over and done with. Italy poses three giant issues. First is the vast overhang of non-performing loans in Italy. Private investors who can see an exit are headed for it. Monte dei Paschi will almost cer-tainly need to be rescued, either by the state or by the ECB. Bond-holder bail-ins may exempt retail in-vestors but it will be a crisis, all the same. Remember Cyprus.

Secondly, Italy is not enjoying any of the benefits of globalization and suffering from many of its draw-backs. The Guardian reports "national output per head in Italy is only 4% higher than it was 15 years ago. The economy is still smaller than it was in 2008. Unemployment is at 11.6%, labour market partici-pation is low, and its birthrate in 2014 was the lowest since the modern Italian state was founded in 1861. If there was a contest for the unwanted title of the sick man of Europe in the 21st century, Italy would walk it."

The Italian economy is dominated by small companies that have comparatively low productivity and thus high output costs. It cannot compete with China. "Italy's competitiveness problem is not new. Since the second world war, it has tended to have higher costs and higher inflation than rival countries. But up until it joined the euro, Italy was able to restore competitiveness by devaluing the lire, which made ex-ports cheaper." That option is no longer available, and Renzi's labor market reforms are now gone, too. And third, Italy cannot leave the eurozone to retrieve its devaluation capability without constitutional change—a referendum would not suffice. Since Italy has so much trouble getting and keeping govern-ments, it's not hard to see the appeal of any "strong man" leader who may emerge. We like to think no-body could be worse than Berlusconi, but that's never true. Someone could come along who would be worse.

And the institutions of the eurozone are no match for whatever type of populism might be coming. We recall the debate over whether Italy was qualified to join the eurozone when it was formed in 1999 in the first place. All the fears expressed then are still with us. Therefore, we must confess that if we de-duce the third largest eurozone economy is not qualified to be a member, what use is the eurozone? Journalists like to write about the "existential" eurozone crisis and that gets pretentious and pompous very fast, but it's not wrong or misplaced. The only solution is the one that was proposed in 1999 by Larry Summers, among others, and most recently by Joseph Stiglitz—the eurozone needs a transfer union.

The Germans, of course, are violently opposed to hard-working, well-managed workers paying taxes to support pensioners at age 50 in Greece or Italian unemployed, but that's precisely what the US does and it works. It's no doubt true that if US workers knew their taxes were going to support some lazy Alabamian who won't work and feels entitled to a federal handout, they would rise up with pitchforks. But they don't know. So that's the key—don't tell them. A secret transfer union? Why not?

In the UK, Bloomberg has a story that data is about to "break bad" next year. Yesterday's weak manu-facturing numbers could be the beginning. HSBC put it nicely: "It's not so much that the U.K. is out of the woods already. More, in our view, that the U.K. has not yet entered the woods." Perpetual gloom-ster Roubini sees "all the risks to the downside." Business investment is erratic. The export boost from devaluation is slowing and will soon be offset by higher input costs. Job growth may be slowing. High retail sales may be stealing from next year. When analysts start to eye data skeptically, traders are not far behind, sharpening their knives. It's not true that "nobody even went broke shorting the pound," but it is true that when traders start gunning for sterling, the best course of action is to get out of the way.

Tidbit: The WSJ has a good story on US presidents trying to control prices—Lyndon Johnson, in particular (although Nixon also comes to mind). It never works. Put a tariff on Japanese TVs (Carter) and Korean imports go up. Put a tariff on Chinese tires (Obama) and the "The action saved at most 1,200 jobs, a study by the Peterson Institute for International Economics found, at a cost to consumers of $900,000 per job because of higher prices."

Presidents can't "make every business produce things in the U.S. that are cheaper to make elsewhere, any more than President Barack Obama could persuade insurers to keep selling money-losing health policies or consumers to buy overpriced electric cars. Mr. Trump's pressure tactics won't take away Mexico's comparative advantage in labor-intensive manufacturing. In fact, it's become 10% cheaper to manufacture in Mexico thanks to the plunge in the peso that followed his election. His tactics will, however, encourage other companies to seek special arrangements, even at the expense of consumers and taxpayers."

And there's something worse, as the Carrier deal reveals. The $7 million in subsidies will keep some jobs, but Carrier's parent and sibling companies may think they now have an inside track to the White House. "The gas furnaces Carrier builds in Indianapolis are a low-tech product in which the U.S. has no comparative advantage, in contrast to the sophisticated aircraft engines that Carrier's affiliate, Pratt & Whitney, builds in Connecticut for which it plans to add 8,000 jobs in coming years. "Indiana chipped in $7 million of tax incentives to keep the plant. But the real costs to the public may show up elsewhere. When a company does the president a favor, it expects something in return. While the Trump team didn't reportedly bring up United Technologies' lucrative defense sales, it may have been implicit... When United Technologies bids for its next Pentagon contract, wouldn't it want last week's deal weigh in its favor? And if a competing bidder has outsourced jobs, wouldn't United Tech-nologies want that to count against it?

"Opaque, ad hoc deals between business and government breed crony capitalism." Look at the mess Brazil has made.

Tidbit: We misquoted Chinese reserves yesterday, saying they now stand at $3.051 billion. The correct number, of course, is $3.051 trillion. A sharp-eyed Reader noticed and wrote "To paraphrase Senator Dirksen, ‘A trillion here, a trillion there, pretty soon you're talking about a lot of money.'" A quick search discloses Dirksen never actually said it, but who cares? Somebody did.