The international business media are in denial about it, but the advent of Italy’s new coalition has put that country on a course clearly set to clash with the ideas of Brussels and Frankfurt. Whether Rome achieves shit or bust, the European Commission and its Central Bank will be faced with rebellion at best, or bond yield inflation at worst.
Pierre Moscovici, the EU’s economic affairs commissioner, is a Frenchman. Twenty-five years ago, he co-authored a dissertation (with Frances Hollande) offering a vitriolic critique of the idea of a single EU currency….or EMU, as it was then known.
The analysis was spot-on: the two men argued that Southern Europe would lag behind Northern Europe in terms of growth, and thus EMU would be a dangerous – probably doomed – project.
There is a bitter-sweet irony in the fact that Moscovici is now the man in the hot seat when it comes to Italy’s economic attempt at The Great Escape.
This is not Greece2: the Coalition agreement between the 5 Star Movement of Luigi Di Maio and Matteo Salvini’s Lega makes it abundantly clear that the flat tax rate (15% for companies and families) and a universal basic income of €780 per month are not up for negotiation. For the time being at least, there will be no Troikas of any colour.
This time, the stakes are much higher for the EC’s monetary control-freaks. The rebel State is not a small eurozone member: we are talking the EU’s third largest economy here. Italy’s economy has all the problems ignored by Remain spinners during the UK referendum: its public debt stands at 132% of GDP, and the low growth rate – averaging -0.6% between 2006 and 2016 – is second only to that of Greece. Its banking system has the largest amount of non-performing loans in the eurozone.
And it doesn’t end there.
The new Coalition Government wants 500,000 migrants from Libya and Syria to be deported with immediate effect – a direct punch on the nose for Angela Merkel – and also demands a reversal of the pension changes that helped to stabilise Italy’s finances a few years back.
In that context, Italy’s 10-year premium over German Bond yields has reached 189 basis points….the highest level for a year. And a daily average of some €16.7bn of Italian government bonds changed hands over the last four trading days — double the average daily volume over the previous months, according to data from Trax, a subsidiary of MarketAxess.
Meannwhile, the ECB’s Benoit Coeure says, “It’s too early to comment on plans we don’t know. On fiscal policy in general, the ECB’s view is well known: Europe has fiscal rules and they should be respected.”
Coeure is being extremely economical with the Truth in saying this. The reality is that Rome has said, “To hell with monetarism, we’re abandoning Hoover in favour of Roosevelt”.
If the Italians succeed, Berlin-inspired austerity will be consigned to the dustbin of history. If they fail, it will be Brussels’ problem. And Brussels will be unable this time to resist the ruthless demands of Bond vultures.