Posts Tagged Monti

Only in Italy?

A common phrase was on the lips of pundits this morning – only in Italy.

With the centre-left scoring only the narrowest of victories, leaving them with control of the lower house – the Chamber of Deputies – but a good 40 seats short in the Senate, it is hard to imagine a set of results less amenable to the creation of a government.

The results will have sent shivers down the spines of breakfasting EU officials just as it has spooked the hell of the markets. The Italian stock market has already dropped by 5%. Interest rates on 10 year government bonds have jumped 0.4% to 4.8%.

Last month, the outgoing finance minister of Mario Monti’s technocrat government, Vittorio Grilli told MEPs on the European Parliament’s Economic committee that the country would run a balanced budget in 2014. Then, last Friday, the Commission’s economic Winter Forecast indicated that Italy’s finances were returning to good shape, with the budget deficit to fall below 3% in 2013. In the space of less than 24 hours, eighteen months of painstaking work to claw back credibility and market confidence risks being undone.

However, taking a step back from the economic panic caused by the stalemate, there are so many fascinating sub-plots in this election that it is difficult to know where to start.

What is the main story? Silvio Berlusconi’s refusal to give up on politics after three separate terms as Prime Minister and enough scandal to fill over 100 unprintably salacious novels. What about the inexplicable reluctance of the Italian electorate to finally kill off the 76 year old dinosaur? How it is possible for a convicted fraudster currently on trial for having sex with an underage prostitute, to claim 30% of the vote?

Then there is the failure of Pier Luigi Bersani’s Democratic party, who could only secure victory by the skin of their teeth, separated from Berlusconi’s Freedom party by fewer than 150,000 votes in the elections to the Chamber of Deputies and less than 1% in the Senate. Indeed, the centre-left was also dogged by allegations of scandal over its involvement in the Monte Paschi bank collapse.

What about the sudden emergence of Beppe Grillo, who has made a comedy career out of lampooning Italy’s political class, and now holds the balance of power?

Or, last but not least, the routing of Mario Monti? The favourite politician of Brussels (and Berlin), who could only finish a dismal and distant fourth place with 10% of the vote in his first election contest.

What next you might ask?

Well, short of a Bersani/Berlusconi grand coalition, it is difficult to see how a government of any colour could take office, let alone be able to survive for more than a matter of weeks. The centre-left and right blocs are both well short of the 158 members needed to form a majority in the Senate even with the support of the 18 members elected on Monti’s ticket. For his part, Grillo has so far insisted that he will play no part in a government with either of the mainstream parties. Italians are likely to be sent back to the polls sooner rather than later.

That said, however, the election produced such a fragmented result that it is far from likely that fresh elections would deliver a majority government. In any case, the instability caused by months of inaction could well take Italy back to the mercy of the financial markets.

A week ago, the EU and the watching world would have scoffed at the idea of a maverick comedian holding the balance of power in the eurozone’s third largest country. They’re not laughing any more.

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Surprise summit success buys time and credibility

Last Wednesday I was bracing myself for yet another failed EU crisis summit followed immediately by the usual flight of capital courtesy of panicky financial traders. It was a relief to find that Italy scored a surprise diplomatic win over Germany just hours after their football team did the same in Poland.

But after marathon talks, during which Messrs Monti and Rajoy refused to budge until they had obtained measures to reduce their borrowing costs, Angela Markel finally backed down and we have the first significant breakthrough in response to the crisis for over a year. The EU’s permanent bail-out fund, the European Stability Mechanism, will be able to directly recapitalize banks and buy government bonds without tough conditions. The ECB has been appointed as supervisor of the eurozone’s banks and may well have the powers to wind up broken banks.

At last, we have got some realism about how to stave off the crisis.

As ever, the devil will be in the detail, particularly about the new powers for the European Central Bank as the eurozone’s bank supervisor. The current ECB statute and the treaties do have a reference to the bank acting as a ‘prudential supervisory’ role, but I doubt that the draftsmen had the idea of the ECB being a super-regulator in chief of the continent’s banks when they drew up its mandate.

It also remains to be seen how the ESM will directly prop up the banks. There are still no plans to give the EU bail-out fund a banking licence or to increase its size, but I imagine that EU leaders will choose to cross those bridges when the time comes. Once the precedent of buying bonds and propping up banks is established, it will be difficult to put a stop to it.

However, while we undeniably have the tools to stave off bond market pressure onItaly and Spain, and should protect them from needing a full rescue package, the long term future of the euro is still uncertain. For all Merkel’s protestations, it is difficult to believe that some form of debt mutualisation will not be needed. The German Redemption Fund proposal is probably the most likely solution – pooling the excess debt beyond the 60% threshold laid out in the Stability and Growth Pact into a fund that must then be paid off each year. The Redemption Fund uses the same logic as the economic governance’six pack’, with countries required to reduce their excess debt by at least 5% each year.

Crucially, it might well be possible to set up a Redemption Fund without a treaty change, although I wouldn’t recommend saying this to a German politician.

In any case, with any serious talk of debt mutualisation still off limits for Germany, leaders did the smart thing by parking the issue with European Council President Herman Van Rompuy. Van Rompuy, who, as usual, played a quietly important role in brokering the summit compromise, will now draw up a detailed proposal to be discussed in the autumn.

Last week’s summit is just the first step, but for the time being, we should now enjoy a long overdue period of relative calm. Here’s hoping…..


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