Italians are outraged this morning and rightfully so. Over the weekend, President Sergio Mattarella enraged populists by rejecting a cabinet minister he feared would lead Italy out of the eurozone.
If anything, Mattarella dramatically increased the likelihood by appoint an IMF technocrat as Prime Minister when a clear majority of parliament agreed to someone else.
EU Arrogance Compounds the Problem
With all the grace of a drunk elephant (not to be confused with Jean-Claude Juncker) in an Italian China store, Europe uttered not one but several words very badly out of place.
And the reason why Italians are seething with growing rage aimed squarely at Europe's unelected institutions, is because European Budget Commissioner, German Guenther Oettinger, said the one thing that he should not have: that "the negative development of the markets will lead Italians not to vote much longer for the populists" according to an interview set to be published in Deutsche Welle later in the day.
The Italian reaction was fast and furious, with the anti-establishment 5-Star Movement and anti-migrant Euroskeptic League both blasting Oettinger for bringing up Italy's painful past, when the ECB's indirect intervention in Italian markets prompted the resignation of Berlusconi back in 2011, with his suggestion - which while 100% accurate makes a mockery of the one thing that nobody dares to talk about, that there is no democracy in the EU - that markets would persuade Italians not to vote for the two populist parties.
The head of 5-Star's European Parliament delegation, Laura Agea, said "we ask European Commission President Jean-Claude Juncker to immediately deny Commissioner Oettinger. Quoted by Ansa, she said "his words are of an unprecedented gravity and are proof of the clear manipulations that Italian democracy has suffered in the last few days".
League leader Matteo Salvini pounced: "They are without shame in Brussels. "The European budget commissioner, Germany's (Guenther) Oettinger, says that 'the markets will teach Italians to vote for the right thing'. If that isn't a threat...I'm not scared Italians First.
Mattarella has accomplished three simultaneous disasters with a single decision:
- He turned the upcoming election into a referendum on the future of the eurozone. Nobody will campaign on the euro exit overtly. That’s not the point. But whichever coalition emerges from it will have a stronger mandate than the frustrated Five Star/Lega coalition.
- He managed to frame the upcoming contest in terms of EU versus democracy. He appointed a bureaucrat committed to EU rules, and frustrated a government that would have won democratic backing by the parliament.
- He prolonged the uncertainty among investors who will now have an opportunity to consider the question of Italy’s euro exit for a long time without any resolution. It will give them time to reduce their exposure. We have always argued in our briefing that the probability of an Italian euro exit is non-trivial. We are not in the business of making predictions, or attaching fake probabilities to events. But we can say with confidence that whatever the probability of a euro exit may have been on Friday, it is higher today.
What political dynamics to expect now? The Lega is going back to the coalition with Silvio Berlusconi and Georgia Meloni, leaders of Forza Italia and Fratelli d’Italia. Don’t count on Berlusconi being able or willing to tame Salvini. The Lega is now the senior partner in this coalition, and the current opinion polls suggest that its support has risen since the last election while that of Berlusconi has fallen. We expect Salvini to become prime minister, and that he will once again propose Savona for the finance ministry job. Forza Italia will do whatever it takes to protect Berlusconi’s personal interests.
Five Star meanwhile will once again radicalise. There had been a hope that government would tame Five Star. Five Star’s anti-establishment position is of the centrist kind. This party exists as an antidote to a corrupt political system. It is not extreme. The party will now claim that it has been robbed by the establishment, and will become more extreme on the economy, competing more forcefully with Salvini, and able to lure disgruntled PD voters. The polls suggest a moderate weakening in the support for Five Star, but we expect that Mattarella just managed to energise its support.
Either way, the outcome is likely to be a more extreme government with a clearer mandate.
"Whatever It Takes" Italian Style
Mario Draghi’s defining moment as ECB president came in July 2012 when he unexpectedly pledged to do “whatever it takes” to preserve the euro. That reined in spiraling bond yields in stressed southern economies, though it was subsequently backed by an actual tool: Outright Monetary Transactions.
Under OMT, the ECB would make large-scale purchases of Italian debt, bringing yields down and ensuring the government can fund itself. It’s a powerful tool -- and one never used. Its mere creation ended the 2012 crisis.
There is a catch: The country must apply for it, and must also go to the European Stability Mechanism, the euro area’s bailout fund. And an ESM rescue comes with conditions requiring economic reforms, something unlikely to appeal to Italian populists who won elections by railing against austerity and pledging higher spending. even lower if the bank lent the money on.
Similarly, the Bank of Italy can fund solvent lenders directly through Emergency Liquidity Assistance, at a penalty interest rate. That lifeline kept Greek banks afloat in 2015 as the government haggled over its bailout.
It’s double-edged. ELA is temporary and requires regular approval by ECB policy makers. When they capped the amount Greek banks could access, the government was forced to impose capital controls.
Cyprus also found itself unable to avoid that outcome, though both countries are still in the currency bloc. But those are minnows in comparison with Italy.
Too Big to Push Around
Unlike Eurointelligence, I do not believe the Lega will necessarily go back into a coalition with Silvio Berlusconi.
Moreover, the "whatever it takes" pieces don't quite seem to fit.
Italy is too big to push around.
Mike "Mish" Shedlock