Two of Italy’s three largest parties are anti-Euro. The only party in Italy that does support the euro is ex-prime minister Matteo Renzi’s Democratic Party. And with Renzi gone, there’s a huge risk the party splinters.
Regardless, there are no likely scenarios that can keep things from flying apart according to Wolfgang Münchau. I believe his analysis is solid.
He lists five ways the Eurozone can stay intact. However, none of them stands up to close scrutiny.
- Italy and Germany could converge. To do this, Italy would need to undertake economic reforms to clean up the justice system and the public administration, cut taxes and invest in productivity-increasing technologies. Germany would need to run a higher fiscal deficit.
- The northern European states accept large fiscal transfers to the south.
- The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners.
- The ECB finds a way to bankroll Italian public and private debt indefinitely.
- Italy’s government will forever continue to support euro membership.
“Only one of those five conditions may be sufficient for Italy to remain a member of the euro. The problem is that each one is extremely improbable. And I cannot think of a sixth one,” says Münchau.
However, the consensus opinion is that Italy will not leave the Eurozone because the deck is stacked against that event.
The Italy won’t leave rationale looks like this:
- The Five Star Movement (M5S) would have to get into power, but the new technocrat government’s first mission is to rig the rules so that does not happen.
- Even if M5S wins the lower parliament, it still may not control the senate.
- Even if M5S takes complete control of parliament, it would have to change the constitution.
- Changing the constitution without a super majority would require a vote.
The problem with the above thesis is there is only one party that wants to keep the Euro and coalitions will form if for no other reason than people are fed up.
Showdown with Germany
According to Münchau
The next Italian prime minister will need to explain to the next German chancellor, presumably Angela Merkel, that her choice will not be between a political union or no political union, but between a political union or Italy’s withdrawal from the euro.
Would it even be Merkel’s choice to make? I think not, it would take a German constitutional change. And not only would Germany have to go along, so would every other nation in the Eurozone.
German politicians would not agree, and even if they would, it’s likely Italy would never present the demand, at least as implied above.
Italy will simply hold a referendum. That would be the demand. By then it would likely be too late.
Biggest Default in History
The latter would imply the biggest default in history. The German banking system would be in danger of collapsing, and Europe’s biggest economy would lose all the competitiveness gains so painstakingly accumulated over the past 15 years.
It has been the historic failure of consecutive Italian prime ministers to avoid this necessary confrontation, and to think that staying off the radar screen constitutes a viable strategy.
What about point number 5?
I addressed that long ago, and I am still waiting the inevitable.
Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the “bail out” debt foisted on their country to be null and void. That person will be elected.
I said “EU treaty”, implied is “EMU treaty” (Eurozone Monetary Treaty).
Mike “Mish” Shedlock