Italy’s false dawn after ‘helicopter money’ guru takes treasury
Populists’ Eurosceptic finance chief on course for clash with Germans, says Ambrose Evans-pritchard
Italy’s new finance minister is an advocate of full-blown fiscal reflation and printed money to rescue Europe’s high-debt states, putting him on an inevitable collision course with Brussels and Germany’s policy elites. After weeks of brinkmanship, the radical Five Star Movement and the Lega nationalists have largely succeeded in forcing their own Eurosceptic choice on the Italian political establishment. Professor Giovanni Tria is a soft-spoken but tenacious critic of the eurozone’s Fiscal Compact and the EMU apparatus of debt-deflation austerity.
His economic outlook may prove just as threatening to Berlin and the euro policy regime as the previous vetoed candidate, Paulo Savona.
While Prof Tria argues that it “makes no sense” to walk out of the euro, he says it is equally senseless to persist with the euro if EU leaders refuse to make it workable. The real risk for monetary union is “implosion rather than exit”.
For now markets are reacting euphorically to the eleventh-hour deal between the insurgent parties and President Sergio Mattarella.
Days earlier, the president had precipitated a constitutional confrontation – and calls for his own impeachment – by rejecting the last line-up of ministers as too dangerous and Eurosceptic. His veto set off panic in bond markets.
The accord averts the prospect of mass political protest against an unelected “technical government”, followed by a snap vote that would probably have led to a clean sweep by the two rebel groups and destruction of the Italian political centre.
Yields on two-year Italian debt fell to 0.72pc in early trading yesterday after spiking to 2.8pc earlier this week in the wildest moves for a quarter century. The bonds had briefly become the proxy gauge of eurozone break-up risk. The Italian treasury intervened directly on Thursday in a successful bid to shift sentiment.
Surging bank stocks led the relief rally on Milan’s MIB index of equities. Banco BPM was up 8.5pc, Banca Generali up 4.8pc, and Intesa Sanpaolo up 3.3pc. All have large holdings of Italian sovereign debt and had been caught up in a replay of the 2012 “doom-loop”, the nexus of public debt and banks that dragged both into a downward vortex.
Lorenzo Codogno, former chief economist at the Italian treasury and now at LC Macro Advisors, warns that the rally may be a false dawn. He fears a long struggle of “trench warfare” between the rebel government and President Mattarella over Europe and fiscal discipline.
Silvia Ardagna from Goldman Sachs said the market exuberance was “misplaced” and warned that months of confrontation over spending rules will reopen the question of Italexit and the future of the euro.
The coalition’s budget-busting proposals amount to 6pc of GDP and are fundamentally incompatible with the current German-inspired architecture of monetary union. The “contract for government” includes a flat tax, universal basic income, a costly rollback of pension reform, and a reversal of a VAT rise.
Prof Tria is a veteran scourge of German mercantilism. He argues that Berlin has in effect used monetary union to lock in a structural competitive advantage, ending in a permanent – and illegal – current account surplus of 8.5pc of GDP at the expense of eurozone partners. The self-correcting mechanism is jammed. This leaves the debtor states of the South trapped in a vicious circle.
The supposed remedy of an internal devaluation within EMU to regain viability leads to a contractionary bias for the eurozone as a whole and has a fatal contradiction: it smothers nominal GDP in those economies that are already in trouble and further skews the debt trajectory. It is self-defeating over time.
In an essay last year, entitled Rethinking the Deficit Monetisation Taboo to Save the Euro he said the attempt to restore debt sustainability through austerity had failed. The only way out is “strong fiscal stimulus” to boost demand and close the output gap, accompanied by “conditional and temporary overt monetary financing at European level”.
This is what is known in central banking circles as “helicopter money”. The paper drew heavily on work by Britain’s Lord Turner, a global champion of controlled monetary financing of deficits for countries in a liquidity trap.
Whether or not Prof Tria and the Lega-five Star alliance are actively pushing for Italexit – or “Libertalia” as some prefer – is an idle discussion. Both parties accept that a euro referendum is unconstitutional in Italy. The anti-emu hardliners in each movement have studied the fiasco in Greece and switched to subtler tactics.
They are preparing ways to undermine monetary union from within if the EU refuses to accept the fait accompli of their budget plans. “It’s blackmail,” said Clemens Fuest, head of Germany’s IFO Institute.
Their plan for a “minibot” parallel currency is still in the contract for government. The proto-lira can be activated as a means of self-defence at any time should the European Central Bank up the ante by restricting liquidity to the Italian banking system or by using the pretext of collateral rules to halt the automatic rollover of its Italian bond holdings. “The moment they issue this parallel currency, it is the end of the euro,” said Professor Costas Lapavitsas from the University of London.
Pro-european optimists have interpreted Mr Mattarella’s deal over the ministers as a retreat by the Lega and Five Star. It could equally be seen as a disguised climbdown by the president himself.
As a leaked email from Mr Savona put it, the president did not seem to understand that the nation was “in rebellion”. He understands now.
There remains a strange naivety among EU insiders and foreign investors over the political character of the Lega-grillini rebels. Some still seem to think that the Lega’s Giancarlo Giorgetti – the powerful cabinet chief – is a pro-euro loyalist. In fact he gave a long TV lecture last September explaining why Italy had to leave EMU.
Five Star leader Luigi di Maio is equally seen as defender of monetary union. But as recently as December he made a passionate plea for liberation.
The EU may have to meet them at halfway and accept the end of the Fiscal Compact if it wishes to avert disaster. But if it does that, it risks losing German consent for the euro project. The AFD anti-euro party is the official opposition in the Bundestag, and leads the budget committee.
A group of 154 German economists signed a joint letter in late May warning that the slide towards a eurozone “debt union” was undermining the Bundestag’s budget powers and was a mounting threat to democracy. The IFO Institute wants a legal mechanism to let a country leave the euro. The presumption is that Germany may require it.
“If the EU allows the Italians to do what they want on spending, the Germans will not accept it,” said Prof Lapavitsas. “The euro will still die, but it will die in a different way. It will be a slower death.”