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Are clouds forming over Italy and will the political risks sink the debt-laden nation?
Italy’s President Sergio Mattarella may have ended a political impasse this week which robbed the third-largest euro zone economy of a government for more than 80 days – the longest time since 1945 – but it appears he has also speared democracy with a harpoon.
Ironic, because he and other do-gooders like the Bank of Italy governor Ignazio Visco, had intended to safeguard Italian assets – but instead unwittingly achieved the very reverse. What is more, their actions may add impetus to risk in other peripheral European sovereigns such as Spain which faces a no confidence vote in Rajoy’s hardline Madrid government on Friday.
The Italian drama began after anti-establishment election winners Five Star Movement and the ultra-right League managed to agree on the names of ministers to form a coalition government last week. The small print included the name of Paolo Savona, a self-confessed Eurosceptic. Italy’s President refused to accept him for the ministerial role of Finance/Economy and this caused the fledgling coalition partners’ proposal to collapse before the weekend.
Had Savona, an Octogenarian, been declined on account of his age, it might have been painful but not altogether unreasonable. Rightly or wrongly Mattarella has turned the decision into one of protecting the euro and national assets.
Mattarella put his office on a collision course with democracy, defying the vote of Italians in March who supported policies tougher on immigration and a possible “Itaxit” of the nation from the euro currency, or as some have coined it, “Quitaly”. It goes against the grain of the UK principle where a slender vote to Brexit from the European Union in 2016 was respected and the government is trying to piece together a solution befitting.
Mattarella’s actions, aimed at protecting international confidence in Italy’s debt assets – the most bloated portfolio of any European nation and fifth biggest in the world – as well as the comments of Visco on Tuesday, served only to send investors to the door out, plunging the stockmarket and causing Italian 10-year BTP debt yields to nearly double to 3.39pct from 1.71pct at the start of May. Most of the rise came in the past day and led the BTP spread over 10-year German Bunds to blow out to their widest since 2013 when the euro zone sovereign debt crisis was in its last throes.
Quite apart from just how “dangerous” Savona really is, the reality is that both parties, especially Five Star, have insisted they are not anti-euro. What is more, a stint in government tends to remove the most populist policies from most slogan-ridden political movements. A few Italian strategists have gone further and accused international markets of overreacting They say that most Italians are disillusioned with the austerity of industrial policy but are not anti-euro.
So yes, Mattarella might have rubber-stamped their government and let them make a mess of it. Let them be roundly punished by voters next time (which in Italian politics averages at around 12 months’ time!). Meanwhile, bond yields might have remained elevated during that experiment, but nothing like the numbers we witness today, destabilising Europe and other financial markets.
Instead of a 12-month circus, what we are now at risk of is a contagion which will poison assets across the eurozone and might even blight the U.S. economy. The White House is no fan of the euro, thanks to its reputation being tarnished by former policy adviser Steve Bannon. Yet on Tuesday the White House urged Italy to resolve its problems within the eurozone. Read = No one wants a euro fall out.
The ECB is so far taking a hard line, with its vice president Vítor Constâncio saying on Tuesday that Italy needs to re-read the rules of the euro. Hardly a helpful quip and its timing could not have been more vexing. Perhaps tamer words will be forthcoming once the Italian problem becomes a fresh euro zone crisis – and in that an example of never choosing the right words for the mood of the moment!
Instability is now only likely to be extended, rather than capped. That’s because the coalition-in-waiting have vowed not to support the temporary technocratic government of one Carlo Cottarelli, a former IMF official named caretaker prime minister and remembered in Italy as Mr Scissors for introducing austerity policies.
Unpopular with the voters and hated by the coalition partners, his government has also been torn down as Cottarelli was unable to name his ministers on Tuesday and they will have one more attempt today. If that fails it will force the President to call an election within 60 days, That chimes with calls for an election by the March election victors as soon as July. Mattarella would no doubt prefer a September poll because he will be only too aware that an immediate election is likely to boost the defiance of the voters and lead to an even stronger coalition emerging.
A Spaghetti western is a low-budget western movie made in Europe by an Italian film director. Everyone can see this director is Mattarella.
