The dark side’s henchman has revealed himself.
We still don’t know who is pulling the strings behind the scenes. But Italy’s President Sergio Mattarella is doing her dirty work with an emphatic “Nein!” of his own.
This weekend, President Mattarella rejected the Italian coalition government which sought his permission to form. Included among the ranks of ministers was a prominent eurosceptic economy minister. You can’t have that, said Mattarella.
Actually, he said that he didn’t say that, but he did do it: “Nobody can say that I have put obstacles to the so-called government of the change. […] [But] I need to take care of the savings of the Italian people.”
After all, “Every day, the [bond] spread goes up, it raises our debt”. This is doubly wrong, but politicians aren’t good at finance. We’ll put it down to a translation error. German to Italian to English was bound to cause a problem somewhere.
Accepting the proposed economy minister would “have probably, or more likely inevitably, led to the exit of Italy from the euro.”
That’s the president of Italy telling you the nation wants out of the euro through the democratic process, but he had to stop it…
Mattarella claims he suggested alternative ministers who would’ve been acceptable, so none of this is his fault. The parties stuck by their man. And lambasted the decision to reject their government
A protest is organised for 2 June. Unless something changes, it’ll likely be massive.
The Five Star Movement leader called for impeachment of the president. And pointed out the logical conclusion of the president’s actions: “Why don’t we just say that in this country it’s pointless voting, since it is the ratings agencies and the financial lobbies who decide the governments?”
Lega leader Matteo Salvini chimed in: “We have a problem with democracy because the Italian people are sovereign and they cannot be ruled by spreads. […] It is a very serious matter than Mattarella chose the markets and EU rules over and above the interests of the Italian people.”
Lega’s economic spokesman Claudio Borghi was the most plain spoken:
“In a way I am very happy because we have finally wiped the bull**** off the table. We now know that it is a choice between democracy or comfortable bond spreads. You have to swear allegiance to the god of the euro in order to be allowed to have a political life in Italy. It worse than a religion.
“What we are seeing is the fundamental problem with the eurozone construction; You can’t have a government that displeases the markets or the spread club. The ECB and the Eurogroup will use this to crush your economy. You are very lucky in the United Kingdom that you still live in a free country.”
Do you remember when it was democracy that the West stood for?
This is how it falls. With an Italian leader who serves those above him instead of those below him.
By the way, did you notice the obsession of Italian politicians with bond spreads? That’s something we’ve been covering for weeks in Capital & Conflict. It’s the divergence between Italy and the rest of the eurozone that’s the key problem.
Back to politics for a moment. The size of the president’s gamble is terrifying. Ambrose Evans-Pritchard said it best in the Telegraph:
Italy’s pro-euro elites have overreached disastrously. President Sergio Mattarella has asserted the extraordinary precedent that no political movement or constellation of parties can ever take power if they challenge the orthodoxy of monetary union.
He has inadvertently framed events as a battle between the Italian people and an eternal ‘casta’ with foreign loyalties, playing straight into the hands of the insurgent Five Star ‘Grillini’ and anti-euro Lega nationalists. He unwisely invoked the spectre of financial markets to justify his veto of euroscepticism. Taken together, his actions have made matters infinitely worse.
The Italian stock and bond market rallied on the news that the populist government wouldn’t be approved. Then plunged again when people realised what’ll happen next.
The next few months of Italy’s crisis
The Italian president asked a former International Monetary Fund economist to form another technocratic government instead. That quote about ratings agencies and the financial lobbies deciding governments wasn’t hyperbole.
The new government will exist purely to organise the next election, of course. That should be in early 2019. Enough time to bring things under control?
Strangely enough, the technocratic government needs approval from parliament in a vote of confidence. Which seems rather unlikely given the president just rejected parliament’s choice of government.
Which means elections are likely in just a few months’ time instead, as parliament is officially declared hung.
Where will the next election take us? Polls suggest Lega and Five Star have gained ground since 4 March. In the aftermath of the Italian president’s stunt, you’d think the two will surge dramatically. Perhaps that’s why the president is trying to buy time with his technocratic government.
Also consider that Silvio Berlusconi is back. He’s allowed to run for office after a judge ruled his good behaviour made him eligible again. His party could do well with their leader officially back in charge.
During the previous campaign, Berlusconi ran as the most conciliatory towards the EU of the upstart parties. But don’t forget he lost power because of the EU-demanded budget cuts a few years ago. And it reportedly manipulated bond spreads to add pressure.
Realising that all this meant the political crisis in Italy is more likely to get worse than better, stocks and bonds resumed their crash on Monday.
But will Italy’s crisis spread? To the UK?
So far, so bad
A month ago, I predicted that Italy’s politics would lead the country into a crisis. A crisis that can only logically end in default.
That’d be the biggest default in history.
Four times worse than Lehman Brothers…
Ten times worse than Greece…
Thirty thousand times worse than the Asian financial crisis…
Since then, the most likely path to this destination has flip-flopped all over the place. One minute there’ll be elections in August. The next in July. And then there’ll be a government in May.
Just when that’s been decided, it’s rejected, and a different government says there’ll be elections in 2019. But it turns out that government is unlikely to be successful either, and we’re back to elections before then. Probably in October.
The financial carnage hasn’t spread outside of Italy just yet. Markets are surreally calm given the size of the threat. Italian bonds still yield less than those of the US, even after a crash!
Default risk in Portugal, which isn’t far behind Italy in terms of debt-to-GDP, is growing. Spain’s government is looking wobbly.
This may be your last chance to find out what’s coming next, before the fallout spreads to the FTSE 100.
Until next time,
Nick Hubble
Capital & Conflict
Category: The End of Europe