Italy’s Political Crisis….How Ugly Might It Get?

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Italian politics are messy even at the best of times. The battle over forming a government took a nasty turn. We’ll give a short overview and then make a few observations, in the hopes of eliciting informed reader input.

The right wing Lega Nord, or League party, which won in the wealthy north, was seeking to form a coalition with 5 Star, which led the polls in the South. One of the things they agreed on is opposition to the Eurozone, so that looked likely to feature even more prominently in any joint policies than it had in their respective campaigns.

The coalition had proposed seating Paolo Savona, a very vocal critic of the Eurozone, as finance minister. The president, Sergio Mattarella, nixed the appointment, which he has the power to do. The coalition’s proposed prime minister, Giuseppe Conte, abandoned his efforts to form a government.

Mattarella has proposed that Carlo Cottarelli, a former IMF official, form what amounts to a caretaker government, with his key task to get a budget passed, which would have the convenient effect of calming down Mr. Market for a while. Italian bond spreads are at their highest premium to German bunds in four years.

However, Lega Nord and 5 Star supporters are not surprisingly up in arms, so the current conventional wisdom is that there will be snap elections in the fall instead.

Mattarella was seeking to appease the bond gods. From the Financial Times:

Mr Mattarella, who has the power to approve or block cabinet appointments, considered Mr Savona a threat to Italy’s position in the eurozone, at a time when Italian debt was already taking a big hit in the markets. 

“The uncertainty over our position in the euro alarmed Italian and foreign investors who invested in shares and companies,” Mr Mattarella said. “The rise in the [bond] spread increases the debt and reduces the opportunity to spend on social measures. It burns companies’ resources and savings and foreshadows risks for families and Italian citizens.”

Unfortunately, that didn’t work as planned. Mr. Market at first liked the idea, with both the Euro and Italian bond prices rising, but then went into full reverse when they saw the severity of the political backlash.

Note that despite Savona, the proposed economics minister, having a fabulously acid tongue, he had said he would uphold Eurozone rules. So was the issue that Savona was seen as such a fierce opponent to the Euro that he’s renege on his promise or that he could be still be plenty disruptive while not crossing any official lines?

The flip side, as Politco snarked in its daily e-mail:

All the fuss, remember, because the president of the Republic rejected one minister (and this is not the first time that has happened) — who seems to have been so crucial to the whole project that without him, it’s better not to govern at all.

Even though the caretaker Cottarelli does not on paper have the votes to secure a majority, it’s premature to rule that out. Remember there are other factors that come into play….like looking responsible, particularly when Italian banks are still mighty wobbly, and not wanting to have to campaign again, particularly for any representatives who won with less than comfortable majorities.

The right is the big winner in this upset.

This is not a constitutional crisis. This is a very bitter, high stakes political crisis, but there are not yet any constitutional issues in play, despite 5 Star calling for Mattarella to be impeached.

The underlying issue is austerity and budget constraints. Italy’s economic distress comes from having its GDP contract over the last decade. It needs deficit spending. Eurozone budget rules severely constrain running fiscal deficits.

The worst is the Eurocrats should know better by now. Even the chief economist of the IMF, Olivier Blanchard, said his own data showed that for weak economies, fiscal multipliers were greater than one. That is economist-speak for deficit spending results in even greater economic growth, so that the end result is that debt to GDP ratios fall.

Similarly, Yanis Varoufakis proposed a finesse during the 2015 Greek debt negotiations, a European infrastructure bank. The reason for focusing on infrastructure is it provides for even more fiscal bang for the buck, potentially $3 of GDP growth for every dollar spent. However, colleagues who believe that the Eurozone needs to relax its budget rules said the infrastructure bank idea would run afoul of them as currently constituted. Predictably, Germany nixed the idea.

A fall vote as a de facto vote on the Eurozone….or not? The press has been quick to seize on the notion of an election in the autumn as a vote on the Euro. But it isn’t so clear cut, and the two leading parties may not play that up as much as one might anticipate despite that being their biggest area of common ground.

Recall that in Greece, which has suffered far more under austerity that Italy has, in 2015, the Greeks wanted relief but did not want to leave the Eurozone. It was only some time after Syriza knuckled under to the Troika, that Greek votes turned against the Eurozone.

Italian polls show majority support for staying in the Euro. Like Greece, they want to remain but to have more room to spend. So making Eurozone exit, as opposed to Eurozone reform, the campaign pitch might backfire, and Lega Nord and 5 Star pols have to know that. So until we have the government fall and see how Lega Nord and 5 Star position themselves, it’s too early to say how the campaigns will address the Eurozone choke chain.

Financial time moves faster than political time and may affect outcomes. Italy has been in the throes of a slow-motion banking crisis since mid-2016. The fall in Italian bond prices will put weak institutions under even more pressure. From a Don Quijones post yesterday:

A recent study by the Bank for International Settlements shows Italian government debt represents nearly 20% of Italian banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign-debt holdings that represent over 100% of their tier-1 capital (which is used to measure bank solvency), according to research by Eric Dor, the director of Economic Studies at IESEG School of Management.

The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier-1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), Monte dei Paschi di Siena (206%), BPER Banca (176%) and Banca Carige (151%).

In other words, despite years of the ECB’s multi-trillion euro QE program, which is scheduled to come to an end soon, the so-called “Doom Loop” is still very much alive and kicking in Italy. The doom loop is when weakening government bonds threaten to topple the banks that own the bonds, and in turn, the banks start offloading them, which causes these bonds to fall further, thus pushing the government to the brink.

Quijones pointed out that French and Spanish banks are big holders of Italian debt too. So too much Italian political stress could morph into financial freakout. Contagion, anyone?

I suspect it did not go unnoticed that European officials were just about as unhelpful as they possibly could be when Italy was pressing for a waiver from its budget rules so it could rescue its banks. In other words, we’ll see soon enough how committed the upstart parties are to their principles when following through with them could produce a banking crisis.

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  1. PlutoniumKun

    I can’t offer any significant insights to Italian politics, except to restate something which is often overlooked – the euro is extraordinarily popular among Italians, Spanish and even Greeks. The majority in those countries blame their own politicians and establishments for austerity and bad policies, not the euro. The reason is quite simple – most people are old enough to remember what it was like to have lira, pesetas, drachma in their pockets. And they were not good memories.

    I don’t know enough about politics in those countries to know what the general consensus is on the way forward, but I suspect that what people want is to keep the Euro, but have deep reform to allow for the necessary fiscal expansion. The problem of course, is northern Europeans (not just Germans, the Dutch and Finns are, if anything even more hardline). I don’t see any evidence that the broader banking and political establishment in Brussels and Berlin, etc., truly understand that reform is needed. Historically, the EU was constructed on the basis that crises provide the opening for reforms needed to ‘cancel out’ badly designed policies arising from political compromises. The huge problem for the Eurozone is that a crisis may simply be too big and too fast to allow the changes to be made that are absolutely essential.

    1. pietro gori

      PK, You are hopelessly outdated about Italians unrequited love for the Euro

      There is indeed a powerful self-hating streak to Italian cultural attitudes and a misconceived love
      for everything foreign, but after almost two decades of withering economic crisis they are starting
      to realize that the EU arrangements may not be the best of all worlds for them

      Don’t forget that up until the late 90’s Italy’s per capita income was still growing, and the participation to the EU project has had destructive war-like consequences on the country’s economy and self-esteem

      Not to speak of the effects on the national psyche of the constant outpouring of scorn about what are perceived to be ingrained and unpardonable national ways from those who should know better

      It should be self-evident that being part of a dysfunctional EU is going to destroy, slowly but surely, Italy and the other south European countries. The whole project works against them, and those who stand to gain show neither concern nor are willing to help redress the underlying causes of the present predicament.

      On the contrary they seem oblivious to fact that the Union is a train wreck waiting to happen, but cannot be convinced to mend their ways. In fact 20th century history speaks volumes about the political savviness and farsightedness of the present EU rulers

      Italy is a country in deep distress, but pace the free press sycophants, is neither Greece nor Argentina,
      and cannot be bullied like those unfortunate countries

      Although highly desirable, euroexit may not be technically feasible for Italy. But I think the country is in a good bargaining position and the threat of exit could be, in the hands of staunch negotiators, a bargaining chip to push for a profound overhaul of the Union the Overlords are not willing to contemplate

    2. Anonimo2

      Plutoniumkun I am afraid you are completely, absolutely and utterly wrong about that:

      “most people are old enough to remember what it was like to have lira, pesetas, drachma in their pockets. And they were not good memories.”

      Most people, especially the oldest, remember with nostalgia the times of the peseta. They feel that their purchasing power has been in decay since we have the euro and they know that precisely the euro is partially to blame.

      You are promoting some kind of collective amnesia and implanting false memories, not intentionally I assume, but as a result of misreading the results of the polls. Yeah the majority of spaniards and italians would prefer to stay in the euro because dropping it would be an uncertain and painful process, because we feel that it is too late and we are trapped. Nevertheless, if we could choose again almost everybody would say: keep the peseta, especially those who indeed had lived with it.

      Going back to the false, implanted memories you are putting forward. They fit perfectly well the mainstream orthodox economic thinking that prevails in our times: that having a sovereign state issuing its own currency it’s somehow bad and that this power has to be in the hands of a tiny unelected elite.

      Let me be clear: we do not fall into this narrative anymore. Nor spain neither Italy were zimbawe, life was much better under the peseta and the lira. The euro has hurt us and benefited the core countries and it has been by design.

      1. Yves Smith Post author

        Even though polls have shown a lot of antipathy with the EU, consistent with electoral results, they also show that leaving the EU is not high on the list of political priorities for most people. See the discussion in the video here, for instance:

        The other practical problem is that the policy priorities of the two anti EU parties are reasonably different. Lega campaigned hard on the anti immigrant issue, pumping hard for deporting as many as 500,000. 5 Star avoided the issue of what to do re current immigrants as much as they could, since they’d lose center-left voters.

          1. Yves Smith Post author

            Straw manning my comment. Being anti-immigrant (as in restricting/barring entry of new immigrants) is not the same as advocating large scale deportations.

        1. Anonimo2

          The point was, we do miss our national currencies, we do not have bad memories about it.

          The euro has helped deinustrialize and destroy our economies and we know it.

  2. Frenchguy

    FYI, the “plan B” of Savona to exit the euro (in italian):

    Short version, it appears more competent than anything Varoufakis has shown. Savona has been a high-ranking official before and he might have pulled it off. His recent reassurances that he wasn’t against the euro were rightly taken with a big grain of salt since one of the main feature of the plan B is that it must stay secret till the very end. Mattarella had very good grounds to suppose that he was going to take Italy out of the euro without any public debate.

    On the other hand, this plan B is also full of classical eurosceptical “legal theories” and sleight of hand (it reminds me a lot of what the FN says in France). Basically, to work it has to assume perfect cooperation from every branch of the state and from every other state in Europe because, you know, they have the “law” with them. Not going to happen…

    1. Yves Smith Post author

      I can’t read the Italian. Unless it deals realistically with the IT issues surrounding the introduction of a new currency, it is a non-starter.

      It took eight years of planning and three years of execution for the Euro to be introduced without a hitch. There was a way way less bank code back then. It would take an absolute minimum of three years to do the needed coordination and coding, which given 1. the fail rates of large IT projects and 2. this involves tons of players, not many of whom will make coding for a new lira their most important project, means more like at least 5 years even if everyone was nice and hurried up.

      I didn’t discuss that in this post but we did go over this in nauseating depth when the idea of a Grexit was getting some play among economists in 2015.

      The general rule is that economists have absolutely no interest in real world practicalities, when that is pretty much always where things have to be done.

      If Clive resurfaces, he can give you examples of a few of the many hairballs. Just getting ATMs retooled and restocked would take about a year…and the currency side is the least messy part of this equation.

          1. Oregoncharles

            Wonderful. You have seen “The IT Crowd,” haven’t you? British comedy series, a masterpiece. I didn’t see a link to the show, but here’s the IMDB:

            The IT dept. is two dysfunctional guys in the basement, and a manager who knows nothing about IT.

      1. Frenchguy

        Sorry if I appeared to overstate the case, I certainly didn’t mean to say that it was a workable plan…

        Section 3 of the doc is deals with the technical issues (titled “dealing with redenomination”). First section starts with “let’s turn to the historical precedent of 1936”, its conclusion: “Italy needs to fix a new parity with the euro”. Then the second section has its main concern with actual cash (how to print new banknotes, the main conclusion is that they may need to do away with them for a while and rely on credit card and the sort). Third section is on capital controls and the need to close banks during the first week.

        You are right that there is no attention given to IT issues.

      2. nervos belli

        We had a change of currency in 1948. It worked over night, it was prepared in secret, it was secret.
        So it is possible, even today.

        For example: retooling ATMs is unecessary. Use Euro notes with a big stamp of ink across the whole note that says “LIRA ITALIANO” and the denomination. Over time, your proposed several years, print new ones without using the old euro notes as a basis anymore.

        Of course there will be lots of chaos, but it’s still doable easily if the political or rather societal will is there.
        The reason the euro took actually decades to implement was to minimize any disruption and avoid even the slightest bump in GDP growth. This is something Italy wouldn’t care about in this scenario since here it’s a crisis reaction: it’s better for Italy to take a hit now economically even if it’s rather big than continued hits forever. Similar to our german Währungsreform in 1948.

        Note: I never wrote in any way if a Lira would be desirable or politically/societally feasible (see PlutoniumKun’s post), just that it would be easily practically doable if there is a will.

        1. Clive

          1948? In 1950-ish my mother grew up in a house with a dirt floor and no electricity, water was drawn by hand from a single pump in the scullery. My point is, that was to all intents and purposes a different world. A 1948-era solution would simply never work today.

          The “franked euro” idea was debunked comprehensively during the Grexit crisis of 2015. For a start, it is counterfeiting. The EU has Eurozone-wide laws on protection of the euro currency enforced by Treaty. The proposal you’re suggesting would be the equivalent, therefore, of a crash-out Brexit and a crash-out Grexit all at the same time (even if Italy abandoned the euro, you don’t get to abandon the EU just like that). In case you’re not aware, the UK has been faffing around with Brexit for nearly two years now and we’re still no closer to anything resembling a sensible set of policy responses. Besides which, Article 50 triggering only starts a 2-year countdown clock ticking, there’s no such thing as an immediate EU exit for any Member State.

          These — and other similar “ideas” are all based on turning Italy (or Spain, or Greece, or wherever) into a Mediterranean version of North Korea. Becoming a rogue state is not a good outcome for anyone, no matter how much you dislike the EU.

          1. nervos belli

            Erm, you mean enforced by the same treaty that mandates the Euro as single currency for the eurozone? That treaty?

            What will the EU do when Italy uses the Euro paper for their own currency? Invade them? These arguments are silly. The EU won’t even throw Italy out of the EU, probably never, but after Brexit it’s totally unthinkable.
            Again, the UK is irrelevant here: they want to exit the EU, not pay a penny, have a booming economy, keep all the advantages of the EU and keep all the forruhners out. With goals like these, it’s always hard to make any progress.

            The thing for Italy simply is: how much you want to pay for exiting the Euro. If you are prepared to pay more than current (UK) or former EU politicians (Euro architects), it’s easy.

            It’s not about being a rogue state, it’s not “North Korea”. That is stupid FUD and simple fearmongering. It’s at most a default, a state bankruptcy. And capitalism being what it is, they will lend you money very soon again, few years. Right now, we don’t know where to put the money to invest.
            After all, Italy would be debt free. AAA rating all around.

            Sarcasm aside, yes it would be a few years of hardship and I doubt the Lega would want that: their base in industrialized northern Italy with all the export oriented industry would be hit quite severely. Usually governments who do such drastic things get voted out, see the first comment above from PlutoniumKun. But your arguments are *censored*.

            1. Yves Smith Post author

              See my comment. The ECB can shut down Italian banks any time it wants to, or more accurately, when its political minders give it theh go ahead. That brought Greece to its knees in less than three weeks and led Syriza to repudiate the promises it campaigned on and impose yet more austerity.

              You don’t need tanks if you control the payment system.

              Plus you appear to have missed that Italians do not want to leave the Eurozone. They want relief from austerity. Unless polls change a lot, the public will oppose a government that goes in a serious way, as opposed to at most posturing, re leaving the Eurozone.

              1. Lorenzo

                but nobody is actually going with ‘ok people, it’d be wonderful to leave the Eurozone’ rather, as Greeks approached it in 2015, it’s ‘we start getting some fiscal breathing room, or else’. And we’ve established 1. that you can’t be as heavy-handed with Italy as they were with Greece and 2. that a Eurozone exit isn’t being brought up because of some design fault that might or might not lose Italians a few GDP points or somesuch, but rather because there’s a dire situation reaching boiling point right now, to which the Northern countries have been mindbogglingly unresponsive.

                So technical difficulties notwithstanding, I just have to agree with nervos belli that something’s got to give. And I think this latest development shows quite clearly that the EU camp -in my mind Matarella did this with some sort of blessing of the EU- is willing to budge not an inch.

                1. Yves Smith Post author

                  “Something has to give” is not a Eurozone exit. It’s not going to happen anywhere near quickly enough to solve any problems. 5 years away at the very very best isn’t meaningful relief for Italian citizens.

                  And I think you all have your eyes on the wrong ball. What is going to make things break, and what also makes this different that Greece, is the fragile state of Italian banks and contagion if the Italian government has difficulty funding, which will impair Spanish and French banks.

                  But a lot of Eurocrats, and even more so Germans, believe austerity works and really do believe that having Italy spend more, which is clearly what needs to happen, would lead to even worse outcomes. So I don’t have the foggiest idea of how they are brought to heel….save they may not understand that leaving the Eurozone would happen at a snail’s pace and might regard the threat as way more imminent than it is.

      3. Tony of CA

        Hi Yves,

        You are simple over stated the IT issues. As an IT Services Professional, the conversion problems you continually state on no longer much of an issue. Converting code is not all that difficult anymore nor is change minor business problems. Hence, most Global IT service providers are rapidly scaling down their resource count.

        1. Yves Smith Post author

          With all due respect, you clearly don’t understand bank IT architectures or even what it takes to complete large IT projects and more specifically how many systems are involved not just at a specific bank but at all the other payments systems players, like the participants in the highly fragmented retail payment networks. We’ve both written and published many posts on this topic. I suggest you read them.

          1. Tony of CA

            Actually, I do. I have worked on several. I didn’t say the system weren’t complex. The IT architecture in banks are extremely complex. It is just not as nearly as labor intensive as it once was.

            1. Yves Smith Post author

              That is not true either. Dealing with the legacy code component is no easier than it ever was and arguably worse as people who know that part of the systems continue to retire.

              More systems on top of existing systems means more complexity and more opportunities for breakage when you make significant system changes. Adding a new currency is a very large scale task.

            2. Clive

              Not nearly so labour-intensive? That is counterfactual. Some of what were traditionally time consuming tasks in IT have been automated, especially testing where scripted test packs are a mature solution or code management where there are very sophisticated versioning and equalisation/branching/re-merging tools. And it is good deal easier writing a compiled language compared to assembler.

              But for every win there’s been at least one loss. Understanding — let alone designing a robust solution for — security is far, far more complicated with open systems than it was in the days of a mainframe chugging away in the basement with dumb terminals in the rest of the office being the only interface. Hence the almost daily diet of security breach stories.

              It is the biggest risk to IT in government, for example, as documented comprehensively by the U.K. National Audit Office. I’ll quote in detail as it debunks the “it’s all really easy now” notion:

              Deploying people with the right skills

              3.21 The increasing use of digital systems and the changing security landscape has placed additional requirements on departments to deploy staff with the skills to design, develop and operate all aspects of protecting information. This applies both to handling data in joined-up government operations and to building, buying and operating appropriately secure infrastructure and systems.

              3.22 In recent years, demand in the private sector for digital and cyber skills has grown significantly. This leaves departments facing challenges in trying to develop capability and capacity, as they are usually unable to match the financial and other benefits offered by private sector companies. We have reported previously that the UK has a shortage in digital and cyber skills. Industry and the government are competing for the same scarce staff.

              33 The government also reduced staff in all areas over this time and this has resulted in the loss of some expertise.

              3.23 Across central government there are 73 teams covering security (physical, personnel and technical/information), with more than 1,600 staff. However, the Cabinet Office believes there are too few staff with specialist information protection skills, and departments contract with the private sector to provide technical and consulting services as a result. The Cabinet Office’s March 2016 review estimated that central departments will spend around £28 million on external IT security consultants in 2016.

              Which captures the source of the problem very well. Has it escaped your notice that no one, anywhere, wants to train up anyone ? It’s no use saying that 50% (say) less resources are needed to complete a particular task if there’s only now 25% of the trained and experienced people available in the first place.

              Regular readers will need no reminder that this is a result of deliberate policy by business the world over — they don’t want the cost of upskilling a workforce because then they’d have to bear the cost and responsibility of keeping them in place and that isn’t compatible with paying the minimum you can get away with and treating people badly. The same factors are prevalent in government, too.

              I am not at all keen on glib, throw-away one-liner comments which are made without any substantial evidence to back them up. Not least because it makes my day job continually more difficult because it perpetuates the endless nonsense I get about “it’s all so easy, all we have to do is…” or “there must be a simple way to do this, how hard can it be to…”

          2. Anonimo2

            Yves, once people start starving they will not give a damn about IT issues. If you think that code lines will stop an angry, starving and hopeless mob, then you are the one who does not know how the world works.

            The real question is if our unelected elites will push the population beyond the breaking point. If this happens, forget about IT uses.

            1. Lambert Strether

              This is just silly. You’ve got the explanation of why at some point the ATMs will fail staring you in the face, which will be one reason for people to pick up the torches and pitchforks.

              Fewer pseudo-left poseurs, please. There’s enough stupid in the world already.

              1. Anonimo2

                What a lack of respect. Can you expresd yourself a little bit more politely?

                Was it really necessary? One of the things I like about this site is that people do not seem to feel the need to insult. But you do. It is really disappointing.

            2. Yves Smith Post author

              I suggest you examine what happened in Greece when the ECB shut down its banking system and Greece was for all practical purposes unable to pay for imports (the few businesses that were able to were doing things like trucking or flying cash across the border…..which even for the ones that did that was not sustainable since they’d at some point deplete the currency they had hoarded, and banks were severely restricting daily ATM withdrawals).

              After three weeks, Greece was on the verge of food shortages. It already was having petrol shortages. Fish were rotting on the docks due to not enough trucks having fuel to haul them in. There were also shortages of non-critical pharmaceuticals.

              Italy would be in a similar boat if it tried adopting a new currency. People would want to hoard euros as of higher value than the non-existantt lira (non-existant due to taking a year to create and distribute enough currency, much more to do IT work to enable banks to handle it), yet they’d be forced to deplete them to make imports. And no one outside Italy would accept government IOUs as payment either.

              1. Anonimo2

                Well, then the question is: where is the breaking point? Because there IS a breaking point.

      4. Odysseus

        It took eight years of planning and three years of execution for the Euro to be introduced without a hitch.

        Which is ridiculously long. One year for each should be plenty.

        Everyone knows the checklist, and everyone knows the players. So lead, follow, or get out of the way.

        While changing currency is not a common event, it is a well understood event.

          1. MyLessThanPrimeBeef

            That’s a great factoid.

            Why do they drive on the left side in some countries? That’s a question I have wanted to look into.

            “Because we say so.”

            1. Eustache De Saint Pierre

              The story goes or so I have been told,
              in days of old, when knights were bold,
              on seeing a foe on a lonely road,
              ride left for better use of your sword..

                1. Wukchumni

                  Not many left handers back in the day of swords & sandals…

                  Latin for left handed is sinistra, which became the word ‘sinister’.

        1. Yves Smith Post author

          Wowsers, you really don’t understand IT, let alone bank IT, where you have legacy code sitting underneath and layers of not documented systems sitting on top of that, all very breakage prone. I assume you think magic gnomes make your ATM work.

          I suggest you start with reading how the UK updating its customs system, a much simpler project, which is now IIRC pushing three years old, is not going to get done on time (early 2019). Or familiarize yourself with the history of large IT projects. Over 50% are admitted to fail (as in not get done) and insiders say the failure rate is more like approaching 80%.

          And this would be an extremely large IT project.

          1. Ape

            Why would any code have to change? As long as you treat the system as referencing some currency the code is identical.

            You do have to write new interfaces for converting with the rest of the world which should if properly written be trivial but probably weren’t properly written.

        2. Lambert Strether

          > Which is ridiculously long. One year for each should be plenty.

          [image of waving hands, flying kites].

          We went through all this with the Greece saga, and exhaustive length, as anybody claiming the name Odysseus should know. I don’t know why this topic brings out the stupid, but it does.

          Material conditions, dude. Material conditions. They really count for something.

    2. Clive

      Oh, heck, where do you start?

      Take physical notes and coins. Who prints or mints them? How are they warehoused and then distributed? Jerri-Lynn here provided first-hand coverage from India during demonetisation and the economic shock and disruption was very significant.

      Most bank core it systems do not support multi currency products. Any bank IT system change is fraught with risk (as TSB demonstrated and continues to demonstrate).

      Cash registers, ATMs, self-service checkouts — anything thst needs to count cash needs to be redesigned and retooled. Here in the U.K. a well-planned and well-communicated switch out of £1 coins caused not trivial costs and led to a prolonged and not entirely smooth transition. That was just one coin type. Try doing that with an entire currency base.

      There’s a huge dichotomy between what theoretical types like economists, politicians and journalists think they’d know about a subject and what operations and technical specialists such as I really know. You do see a lot of arrogance and intellectual snobby in the credentialed classes who do unfortunately sincerely believe that they think they understand how the complex modern world works but are in reality out of their depth in some of their rather idealised views.

      1. nyen

        The only realistic scenario I see is to just continue to use existing EUR and start printing it as if it were own currency.

        1. Yves Smith Post author

          We discussed that re Greece. Each mint has specific numbers and designators, so any effort to print more currency will be noticed pretty pronto. Plus the actual stock to print notes is controlled by the ECB. Printing what you aren’t allowed to print, even if Italy could figure out a way to do that, would be treated as counterfeiting. The ECB basically shut down the Greek banking system and had the country on its knees in three weeks, Stunt like that will invite similar treatment.

          Plus what Italy wants to do is deficit spend and using currency to do that isn’t very efficient. A more straightforward way would be to use government IOUs and hope they get used as currency. That of course would also invite creative retaliation, but contagion risk could constrain what would happen next. If things go down that path, the possible next moves by each party would be more gameable than they are this far out.

          1. Luxy

            [Printing what you aren’t allowed to print, even if Italy could figure out a way to do that, would be treated as counterfeiting].

            Correct me if I’m mistaken, but it seems to me the European system of central banks allows Italy to print bank notes in Euro. The printing is done by the Banca d’Italia.

            According to Wikipedia,

            “The ECB has the exclusive right to authorise the issue of notes within the Eurozone, but most notes are actually issued by the National Central Banks (NCBs) of the Eurozone. As of 2004, 8% of banknotes were issued by the European Central Bank and 92% were issued by Eurozone NCBs. The issuing central bank can be seen from the serial number. Each NCB is now responsible for the production of certain denominations, as assigned by the ECB”.

            [The ECB basically shut down the Greek banking system and had the country on its knees in three weeks].

            Question : can the Italian government requisition the Italian central bank ? Unless I am mistaken, it is the Italian central bank that manages the liquidity of Italian banks under the control of the ECB. The Banca d’Italia, under control of the Italian government, could then sustain indefinitely its own banks. Of course, the ECB would cut the monetary ties between Italy and the rest of the eurozone, but this mean the ties between the eurozone and the rest of the world should also be cut. This would harm the Eurozone as much as Italy…

            1. Yves Smith Post author

              We discussed this at length during the Greek crisis. The fact that the Italy has its own press does not give it unlimited right to print currency. As you can see from your own note, the authority to print physical notes is under the direction of the ECB. As important, I strongly suspect the actual stock for the notes is created entirely outside the control of Italy and is shipped to the press. So the Italians can’t print more than what they get in the way of currency stock.

              And your own excerpt further shows they have the plates for only one denomination…what if Italy prints 5 euro notes?

              Regarding the Italian central bank, it did not intervene to support wobbly Italian central banks when they were on the ropes in 2016. The Italian central bank is also staffed with ECB friendly and often actual ECB personnel.

  3. Ignacio

    If you read pro-stablishment press in Spain they favour Mattarella’s decision on Cottarelli (pro-austerity, called Mr.Scissors). The crisis is already hurting Spain’s debt. The BIG problem with Mattarella’s decision is that, as many comment, it could trigger an eurosceptic wave. It has been said that next snap elections could result in a pro-euro/anti-euro plebiscit if M5S and Liga Nord concur in coalition. I really don’t know if this can really happen, but if so, it could trigger a major EU crisis.

    1. Ignacio

      Others speculate that Liga Nord is forcing the crisis because polls are showing they will obtain better results.

      I think this is more likely the case. My opinion is that new and traditional parties have removed their “national interest” masks and just play with their particular interest, in Italy, Spain, everywhere.

      In Spain there is another government crisis rigth now and you can see the same phenomenon.

  4. Alex

    My partial – albeit local – view is that neither Lega nor M5S really want Italy to leave Euro or Europe (as mentioned by PK, older italians well know how it was back in lira times, and younger ones are used to travel across europe freely – the easyjet generation; and nobody trusts italian politicians – see the mister nobodies who are winning these elections). On the other hand economy is clearly fractured, with a north of italy close to full employment, but whose growth is suffering from political and administrative hurdles (rome AND brussels); a south of italy where economy is still years away from recovery, and no positive change is seen ahead. Lega and M5S are riding these issues (and the poor- not to say terrible – image of traditional italian politiciand and european bureaucrats do help). M5S is harder to read for me – personally my impression is that they are following the tide with their idea of “bottom up direct democracy” which makes it almpst impossible to understand their next steps – while Lega aims to fight hard Europe (and Rome’s political and admin structure) to change how it works; and to fight it hard means being able to show that there is an apparently actionable plan B (which is where Mr Savona could fit in). Of course as soon as you start talking of more or less actionable Plan B well… reaction cannot be much different from what we are seeing. Lega’s view is – IMO – that it is just a negotiation tool; and that short term market crisis can be the way to put more pressure on “northern europe” to get some opening. Problem is, quoting PK “a crisis may simply be too big and too fast to allow the changes to be made” and the market would make plan B becoming the undesired reality. Next elections, if these two parties make it clear that they do not want to leave Euro/Europe but just change them, will see a sweeping victory on their side, especially if the “older” parties/politicians try to get together to “save italy from the barbarians”, regardless of the market reactions. I see potentially different results only if they aim clearly for an italexit (but I consider them both to be way smarter than that) or ,maybe, if an “enMarche”-like proposal comes in (although we alredy had in in 1994, it was called Forza Italia). This latter solution looks less likely to me as any solution from the top/rich today would likely go nowhere in the next elections in oct/nov (see Mr. Monti’s Scelta Civica few years ago).

    1. BillC

      Just a couple nits to pick regarding discussion to this point:

      1. “with a north of italy close to full employment” — I’m retired and live in Emilia. I don’t think anyone under 40 — nor anyone one who has children under 40 — would agree with the spirit of that statement, though it may be statistically accurate. Even younger folks with good University degrees can rarely get what those of us over 50 would consider “good jobs,” let alone the run-of-the mill high school graduate. While the few examples I know personally do not evidence any political response to their unfortunate situation (at least not to an old non-Italian codger like me), I cannot imagine that there is not a huge cohort of potential voters who are more worried about their (nonexistent) careers than their parents’ and grandparents’ savings, which are often heavily in BOT (government bonds). If the Lega and 5 Stelle can turn most of the under 40’s into voters, I think there may be a large and durable cohort in opposition to anyone who does not seriously promise to change EU austerity policy (i.e., “whatever it takes,” including serious development of Plan B).

      2. Regarding Plan B IT challenges, as a lifelong IT guy (but nowhere near Clive’s chops), I have listened for the awareness of Prof. and ex-Minister Savona that, as NC has been saying for years, it would take at least 3 years of moon-shot level of planning and commitment to effect a Eurexit (I am pretty fluent in Italian). I have not heard or read Savona explicitly addressing this particular aspect of his Plan B, but the general tenor of his approach and his practical experience outside of academia would suggest to me that he would not be blind-sided by the IT hurdles. Listening to and reading a bit of what he’s said in the past, he seems like the most level-headed player available to Italy to either force major revisions in EU monetary and economic policy or credibly exit the Euro.

      Bottom line for me: if Italy cannot obtain the kind of stimulative flexibility and continuing fiscal transfers from the haves to the have-nots that, for example, the US has, its only hope to avoid becoming an impoverished colony is to restore its monetary sovereignty. Yeah, we all remember the flaws and inconveniences of the Lira, but Italy thrived nonetheless. It may not appeal to our Anglo-Saxon and Germanic senses of organization and (apparent) political correctness, but, together with controls on mobility of capital, it worked well for at least 3 decades.

      1. Oregoncharles

        How did mis-managed Italy become the 3rd largest economy in the richest continent?

        That graph Yves posted in Links yesterday still rules: in 2006, BEFORE the financial crisis, Italy fell off the escalator. I still wonder how that happened. In any case, they did OK until then – and the Euro is clearly to blame. SOMETHING is going to have to give.

        Could either the EU or EZ survive Italexit? From here, I doubt it; or it might be reduced to a German-French-Benelux axis. The centrifugal forces appear to be increasing.

      2. Ape

        But its just changing the nominal units for a set of accounts. If its all accounts its not even changing units but just declaring an exchange rate.

        Seems codewise trivial. What am I missing?

  5. Mark

    The EU already has a politicly motivated bank, the European Investment Bank in Luxembourg as well as the possibility of establishing banks on national or even state level. In the case of Germany that would be the KfW, L-Bank, LfA Bayern, IBB etc.. If Italy is missing such institutions that would be a task for national or state actors, not the EU.
    Given the extent of political dysfunction and organised crime in Italy since at least the Berlusconi years and probably a lot longer it seems rather easy to ask for more deficit spending to fix everything. What is more corrupted spending going to achieve to break up the mafia clans who keep the south in poverty or change incompent bureaucrats? Altough I was still quite young I also remember the times before the Euro when the Italian Lira was a bad joke and know that the Euro certainly wasn’t the beginning of everything bad like it is sometimes made out to be. One issue the rest of Europe could certainly do a lot is migration, distributing refugees to the rest of Europe would likely be a far more effective boost to opinions than another one or two percent of deficit spending.
    As to the reaction of the markets, political chaos and slow growth have been a constant for the last 20 years and things keep on going so without very good evidence any talk of a crisis sounds like hyperbole to me.

  6. Eustache De Saint Pierre

    All I see is a huge tangled mess with the Italian people stuck in the middle of it, with the almost certain likelihood of the situation for them only worsening unless something changes. With a possible recession on the horizon coupled with an ever tightening screw, how long will it be before the general positive for the Euro turns into a negative ?

    I cannot understand the inflexibility & the batten down the hatches attitude coming from Brussels except in a short term survival sense, particularly as there does not appear to be any visible light at the end of the tunnel, unless it is an oncoming train. It appears to me that if the EZ does not adopt at least some flexibility, ever accumulating stresses will eventually result in an almighty fracture.

    1. Ignacio

      I cannot understand the inflexibility & the batten down the hatches attitude coming from Brussels except in a short term survival sense, particularly as there does not appear to be any visible light at the end of the tunnel, unless it is an oncoming train. It appears to me that if the EZ does not adopt at least some flexibility, ever accumulating stresses will eventually result in an almighty fracture.

      Neither do I. Italy is placed in 4th position after Greece, UK and France amongst the countries with lower trust in the EU and the population is equally divided in 37% considering the EU “positive” and 36% “negative”(Eurobarometer). Do eurocrats live in a bubble or will they somehow react?

      1. Eustache De Saint Pierre

        Perhaps the position stems from one of the faults within the construct, as in one size has to fit all, even though that often means banging square pegs into round holes. Another aspect is the fact that the elderly in Italy ( & likely elsewhere ) are not doing so bad in comparison to the young, which will of course as time passes, increase the demographic of those at the sharp end who don’t remember the Lira.

        Or maybe it is simply due to ideological straitjackets, a bit of both or whatever – it just does not strike me as being wise, like ignoring embers.

        1. Clive

          My take is that it’s a much deeper and fundamental worldview issue.

          The EU (and here we should perhaps be careful with language; it’s the Commission and the ECB who are the primary policy makers affecting this dynamic and it is also here where the democratic deficit is most pronounced) proceeds on the basis that its technocratic rule-making and Directive issuance (with the European Parliament as notional approvers thereby giving electoral legitimacy to the policy making process, but that is another snag because that institution is itself flawed) is alone sufficient to ensure the success of the European Project.

          The EU is possessed of unparalleled capability and effectiveness in its ability to define, detail and enforce its various rules and governing principles. Its institutional apparatus is second to none. Administratively, it is unimpeachable.

          Politically, however, it is absolutely hopeless. It doesn’t seem to have a politically attuned bone in its entire body.

          The EU therefore proceeds on the basis that the economics (via its various initiatives, of which the Single Market is probably the most pivotal) will always trump the politics.

          Which it always does. Until it doesn’t. Hence, regrettably, Brexit.

          I’m in two minds as to whether the lack of political sophistication in the EU is something that will ultimately prove to be immaterial. Perhaps institutional strong-arming of Member States will be sufficient. Perhaps successive and more pronounced crises will cause some unraveling and thereby promote serious revisions. I really, genuinely, do not know.

          1. notabanker

            Really interesting. In many ways though, the lack of political power could be a feature and not a bug.

            1. Eustache De Saint Pierre

              At the end of the day while we talk of possible scenarios & consequences, if allowed the outcome will come down to mainly gut feeling from those who have little understanding of the financial spaghetti that has tied us up in knots. A type of revolt which we have seen throughout history ( particularly recently ) which does not usually work out well for those who will it.

              Desperate people do desperate things.

              1. Ignacio

                A tweet in a German media based on an interview with Gunther Oettinger adds fuel to the fire. Something like “markets will show the italians what to vote next time”

                1. Eustache De Saint Pierre

                  Yes I saw that – quite the diplomat.

                  Tusk & Junker followed frantically with No, No , No !!!
                  Italians can of course vote how they like.

                  You gotta laugh.

          2. fajensen

            Politically, however, it is absolutely hopeless. It doesn’t seem to have a politically attuned bone in its entire body.

            The EU is deliberately designed and configured that way. The national governments does all the politicking – about little things. When something is important enough, they feed that something to the “EU-Machine” that legislates EU-wide, et cetera, then the national governments can whine a bit about “EU making them do this or that or the other”.

            Sometimes the whinging part is way overdone and it buys them a crash-out Brexit.

            Leaving the EU is a pipe-dream, IMO. The legislation process has been outsourced for so long it has been forgotten how to produce good laws and proper enforcement. It will take decades to spin up a local facility and attracting the talent to do this? Hmm????.

            I very much doubt my government (Denmark) is actually capable of governing, all the talent is long gone to Private Enterprise or Bruxelles and only 3’rd grade hacks and the usual deadwood holds the fort, producing scandal upon fiasco without ever stopping to think!

            1. Clive

              An important point. You’ll end up adhering to someone’s rules, somewhere. There are both economies of scale benefit to centralised rule making and also the offsetting of the problem of getting the right skill sets to make the rules in the first place.

              I suppose it comes down to whether there’s anything particularly objectionable about putting your products through an assessment authority following a prescribed standard such as ErP or EPA or JIS (or whatever is demanded as a condition for selling into that market) or the same kinds of agricultural standards for foodstuffs, setting limits on vehicle emissions etc. etc. etc. — and it is really hard to see why that should be — versus what happens when the same regulatory bodies start telling you how to run a railway or whether your government can build a LNG storage facility or bail out your banks.

              The EU’s regulatory theorists say that all these (and more) are indivisible. You can’t have a common market if a Member State is making hidden subsidies by giving fee-free ports access to its exporters or doing sweetheart deals with a state-owned electricity supplier for its aluminium smelters.

              The other school of thought is that this is way too intrusive a means of achieving the end of a level playing field and if consumers want to buy a 1kW vacuum cleaner and a manufacturer wants to make one, then why the hell should this be anyone’s affair but that of the national government, the consumer and the manufacturers.

              That’s the scale of the problem we have and, I suppose, why it is proving so intractable. We’re trying to work out everything from how much pork there should be in a pork sausage to how much deficit spending there can be in a government’s budget deficit.

              I am not convinced the EU’s one-approach-fits-all ideals is workable in practice. But I don’t doubt at all and respect in the upmost the intellectual rigour underpinning it. And as you say, it’s not like the nation states (individually) ever managed the balancing act particularly well, historically.

              1. PlutoniumKun

                Clive, thanks for such a lucid explanation in both your posts – it rings true for me.

                I think an important point about the functioning of the EU (And Eurozone) with regard to ‘core’ and ‘non-core’ countries was the unwritten expectation among citizens that Europe was gaining a specifically northern European technocratic and legalistic system to oversee the highly mixed and chaotic systems around Europe. This was needed to assure Germanic types that they weren’t going to have ‘that sort’ of Italians running things, and by the same token, assure those from peripheral countries that things would be run with the sort of cool efficiency their own governments never quite seemed to achieve*.

                As you suggest, I think this has resulted in a system in which the Brussels bureaucracy actually takes pride in its unresponsiveness to political pressure – or even sensible alternative proposals. It has a set of objectives given to it by its senior political leaders, and it sees them through to the death.

                I think the effect is compounded by the reality that a very many people in the peripheral countries actually like it like this. I don’t mean they are ignorant of the economic realities, or somehow masochistic – it is just that people like certainty, and there is always a certain attraction to the notion that ‘we brought this trouble on ourselves, we need someone to sort it out’. I remember after the crash in Ireland I heard numerous times the comment that ‘ah sure, it was all our fault’, and a weird gratitude to the Troika for coming and telling our politicians what to do – despite the rather obvious point that they were telling them to do the wrong things.

                Consensus and consistency across a wide society can be a good thing – up to the point where you realise that perhaps a little chaos and mind-changing a few years ago might not have been such a bad idea. I fear that the refusal of the Brussels elite to change course may actually made a bad situation much, much worse, the longer it goes on.

                *except at city level – it should be acknowledged that many Italian and Spanish cities and local authorities are very imaginative and competent, certainly in comparison to their national governments.

  7. salvo

    I’m not sure it is not a constitutional matter, quoting Jacques Sapir

    Le Président de la République italienne s’est donc arrogé des droits qu’il n’a pas. Il convient de relire la Constitution italienne. Celle-ci dit, dans son article 92 : « Il Governo della Repubblica è composto del Presidente del Consiglio e dei ministri, che costituiscono insieme il Consiglio dei ministri. Il Presidente della Repubblica nomina il Presidente del Consiglio dei ministri e, su proposta di questo, i ministri. [1]» Les commentaires, en particulier ceux de Constantino Morati, un des rédacteurs de la Constitution italienne, sont très clairs sur ce point : « La proposition des ministres faite par le Premier ministre désigné doit être considérée comme strictement contraignante pour le chef de l’Etat »[2]. Le refus de contresigner une nomination ne pourrait se justifier que dans le cas de condamnations criminelles ou de conflits d’intérêt par trop évident.

    En opposant son véto à la nomination de Paolo Savona, le Président Mattarella a bien outrepassé les pouvoirs qui lui étaient conférés dans le cadre de la Constitution. De ce point de vue, on peut considérer qu’il s’agit d’un « coup d’Etat », un « coup d’Etat » certes légal mais bien un « coup d’Etat ».

    the Italian president does have the right to refuse to accept a minister proposed by the designed Premier, but he has no unlimited power to execute that right. According to the commentary quoted above there must be a compelling reason that makes the execution of that right mandatory, such as criminal convictions or evident conflicts of interests. In the case of Savona there is no such reason, the refusal by Mattarella is based only on his personal opinion that the nomination of Savona would have had a negative impact on the markets and may have so put the savings of the Italian at risk.

  8. salvo

    btw …. the constitutionalist Massinmo Villone writes that while there is no legal basis for an impeachment, the decision of Mattarella was wrong not only because it will have serious negative political repercussions but also institutional

    It seems we must read Mattarella’s opposition to Savona in terms of the president wanting to avoid even the risk that the choice of a particular minister might orient the government’s policies, whatever the program says, in an undesirable direction. It is meant to be an early stopgap to prevent possible dangerous tendencies. But this is, in the end, nothing more than the the president enforcing his own preferred policy line onto the government, which is forbidden to the head of state from the outset.

    1. Loneprotester

      So what you are saying is, the president appropriated powers he should not have in a way that is deleterious to the stated goals, undermines the public trust and the fundamental structures of Italian democracy–and yet, because the Constitution on which it rests was poorly written, there is no legal recourse against him?

      Paging Dario Fo! Ionescu! You are wanted, stat!

      1. Yves Smith Post author

        The problem is the President nixed ministers in the past, most recently in 2014. The fact that there are precedents means saying this time it’s not kosher isn’t going to fly. It would just be treated as an effort at special pleading.

    2. Oregoncharles

      Since it requires only a majority vote in Parliament (if the BBC is telling the truth), impeachment, as in the US, is a political, not a judicial act. It doesn’t have to be justified.

      The trial is before the Constitutional Court, which might well throw it out on the grounds that he had the power – or not. But the political black mark and punitive effect of the impeachment remain, as in the US. In the midst of a poltical crisis, much more so. I suspect that calling for impeachment is a way to force him to dissolve Parliament, to prevent the impeachment.

      The coalition would then campaign against Mattarella’s action. If he dissolves Parliament, the election could be quick, in the midst of the crisis, which is what they have in mind. If the voters double down on their earlier action, as I would expect (but I’m not Italian), the whole thing escalates and the Eurozone is in trouble.

      Again, I read the coalition’s actions as designed to force a renegotiation of the Euro – which was also Varoufakis’ goal. But Italy is a Big Dog in the EU, much more expensive to just crush. And there’d be the risk of them crashing out if treated like Greece – with Greece and maybe Spain going with them. Desparate people do desperate things.

  9. disc_writes

    The dust is still settling. The witnesses of the last days are giving conflicting reports. What exactly happened will be a thing for historians to sort out.

    As to how ugly the crisis will get, the answer is, hopefully, simpler. It will not get very ugly at all.

    We will have elections in a few months. M5S, already struggling, will suffer and will not enter the next government. Given its fractitious nature, I would not be surprised if it split. Whoever wins, maybe a right-wing alliance, will keep Italy subservient in exchange for ECB largesse, and even presents from Brussels.

    The President probably used a heavy-handed interpretation of article 92 to reject Savona, but if push comes to shove, the Constitutional Court will green-light his actions. Mattarella will not be impeached.

    Having said that, I have to disagree with this being only a political crisis, and not a constitutional one. Political crises happen when there is no parliamentary majority. This is clearly not the case: we have a parliamentary majority.

    This is a constitutional crisis, even if it will be silenced and nipped in the bud: some put into question the legitimacy of President Mattarella’s actions and there are calls to rewrite article 92.

    M5S called on its fans to demonstrate against the President on June 2nd, Republic Day. Never before
    has it come to this: all post-war parties have stayed loyal to the Constitution, even neo-fascists, communists and monarchists.

    And this is, I believe, the only takeaway for curious foreigners. The crisis will be contained, but none of its causes have been solved, and one day it will resurface.

    When that happens, the institutional framework of Italy will be even weaker, its finances worse, and Italians even more cynical and divided.

    Please take the time, if you will, to ponder on article 1 of the Italian Constitution, and tell me how 25% unemployment, a majority without government, a government without majority, the fifth unelected prime minister in 5 years and street protests against the Head of State square with this:

    Italy is a democratic Republic founded on labour.
    Sovereignty belongs to the people and is exercised by the people in the forms and within the limits of the Constitution.

    1. lou strong

      By the way this is an unprecedented constitutional crisis, the president abused the powers granted by art. 92 , banned the formation of a gov with parliamentary majority and gave indications about policies to be taken , behaviour forbidden to a president in Italy as well as I guess in the average of parliamentary-based systems.
      That said, as an Italian who has no sympathy for any political group, I don’t know if I’m to be more angry and worried for the violation of the Constitution itself, for the reasons brought to justify this abuse or for the mess we have to face in the next future. It’s clear that , beyond the constitutional crisis, this has its origins in the euro, that euro is bad for my country and that euro is a weapon for a conservative-neoliberal agenda, but, on the other side, there’s quite no way to get out of it.Disaster.

  10. The Rev Kev

    Steven Keen has a good take on this crisis over at RT ( and though a lot of it was way over my pay grade, I was interested when he started talking about, and I quote-

    “- the “mini-BOT.” Named in reference to Italy’s “buoni ordinario del tesoro,” which are short-term government bonds, these would be government-issued notes valued at between €1 and €500, which would be issued to people and companies owed tax refunds by the government. These, in turn, would be valid for paying taxes, buying train tickets, getting petrol at government-owned fuel stations, and so on.
    These sidestep the euro’s monopoly as legal tender in the eurozone because a vendor does not have to accept these if they are tendered in an exchange. But they can be accepted, perhaps at a discount to face value, and thereby become an alternative means of payment to the euro.”

    1. PlutoniumKun

      I’d love to see some future posts on issues like parallel currencies. It seems to me that the only non-chaotic exit strategy for Italy, Spain and Greece from the euro straightjacket is the development of parallel currencies, either on a national or regional basis. These could allow for greater fiscal leeway while also providing an escape route in a euro crisis. If Brussels was sensible, they would encourage this as it would allow for a less catastrophic breakdown if and when the situation becomes unsustainable. But they seem to be very rigid in their thinking.

      Like you, its above my pay grade to know whether this would work in reality, but, in the absence of the will to completely reform the euro, I honestly don’t see any alternative to the gradual breakdown of the southern economies leading to a collapse that will be worse the longer the inevitable is postponed.

        1. Oregoncharles

          But it wouldn’t be legal tender, therefore it would not be a fiat currency – that’s what “fiat” means.

          The proposal has theoretical interest because it illuminates the difference between a tax-based fiat currency and a legal tender currency. Of course, so do the overseas “petro” dollars. They can be used to pay taxes only if repatriated, and they aren’t legal tender outside the US, so they’re really just an alternative currency. Theoretically, it’s the prospect of repatriation that supports their value – but I suspect that, en masse, that would inflate the dollar catastrophically. And it doesn’t happen. They have value because everyone agrees they have value.

          Money isn’t any one thing. It seems to be more of an attitude; certainly it’s a social contract. I can see why the gold bugs don’t like this; it just seems so vaporous.

    2. John Rose

      I recall that Brazil made use of an alternative currency and it went well. Maybe 10-15 years ago.

    3. Oregoncharles

      The ECB will be SO pleased (/sarc). Unless, that is, the crisis is so bad that they’re forced to look the other way.

      Probably hinges on the next election. A caveat: polls have been pretty unreliable lately.

  11. Mirdif

    I have no expertise in this area but have some questions if the panel may oblige.

    Am I correct in my recollection that it was the case when the Italian Lira was still in use that Italian debt was denominated in Deutschmarks?

    If Italy did leave the Euro, am I correct in thinking that it would still issue its debt in Euro’s because nobody will trust the new currency?

    Does this give the ECB a great big stick to hit the Italian government with to prevent it from leaving or to be able to punish it if it did such a thing?

    1. salvo

      as for the first question, if I recall correctly, within the ERM Italy and France had their currency pegged to the Deutsche Mark, but their debt was still denominated in their own currency

    2. nervos belli

      Imho, if a country, especially from the southern members with historically weak currencies and high debt ES,I,GR, leaves the Euro, it basically would have to include a default of sovereign debt as well.

      Otherwise there is no reason to leave, since as you correctly write the debts would still be denominated in Euros. If they’d shuffle their debt into their own currency, they’d have to probably triple or quadruple the interest.

      No one had their currency pegged to the Mark. Afaik only some east european countries (the baltics) did, kinda like south american countries were/are pegged tot he US dollar. Instead the EU had a “currency basket” with pretty much all the western currencies which are now in the Euro. They also had semi fixed exchange rates (+/- 2.5% max variance, +/-6% for Italy) between all currencies. Including mandatory interventions by the central banks if any currency left that corridor. That currency basket defined a virtual currency called “ECU” European Currency Unit. Against that was every national currency pegged. Central banks used it for pretty much all their european trading.
      Later this ECU was changed or renamed 1:1 into the Euro, one former ECU = one new Euro.

      1. Yves Smith Post author

        I need to go dig up commentary, but it will be a factual matter as to what would happen. It depends as to whether the debt is “Italian law” debt and can be redenominated by the government or not.

  12. Michael Morris

    Well not sure about Italy, but here in Spain more and more people question, not the EU itself, but the EURO. Just had a meeting with my lawyer, a very progressive lady, who thinks the UK did right by voting to leave the EU. In her words, better the British than the Germans, who are not popular in Spain.

    the Spanish also resent the fact that Merkel, gives her support to an odious creep like Rajoy simply because he is such a apologist for the EU.

    1. Ignacio

      I think she is an outlier, like me, about the Euro. In Spain very few would openly question the euro. Basically nobody realises why and how austerity was forced –except for the EU excessive debt narrative–, if there was an alternative or just necessary. We usually blame it all to corruption. Regarding popularity of different european nations I wouldn’t conclude anything

      1. nervos belli

        The TINA principle which is used to justify austerity is strange since everybody could look to Portugal. No Euro, no austerity and doing far better than Spain.

        If Rajoy is such a creep, why has he and his party the most seats in the spanish parliament?
        I don’t think he’s a creep, he’s simply a corrupt criminal.

        1. Ignacio

          Are you talking about the same Portugal I know? No euro? No austerity? Or just kidding?

        2. Clive

          Yes, as Ignacio said, where do you get your fact-ettes from? It took me 5 seconds to check the Eurozone members (why I did I don’t know because I knew Portugal was a member) and lo and behold there they are

          A word to the wise, if you can’t even get basic, easily soured, information right, why should we then go on to believe a single word you utter?

          1. Oregoncharles

            Yes; however, Portugal is relevant. IIRC, they elected a left government that did some rule-bending – it was discussed here at the time. Since then, they haven’t been in the news, which is a very good sign.

  13. Livius Drusus

    I’m not sure if it has been posted yet but Thomas Fazi has a good article about the Italian debacle over at American Affairs.

    The piece is particularly scathing with regard to the state of the Italian Left but Fazi is also clear that the populist parties are not offering much substantive change either.

    I don’t see how Italy can move out of its current crisis without at least leaving the eurozone. Fazi points out that the euro regime is not suited to the economies of Southern Europe that are driven by internal demand and wages instead of the export-driven model of countries like Germany and the Netherlands.

    Here is one startling excerpt from the article:

    Since the financial crisis of 2007–9, Italy’s GDP has shrunk by a massive 10 percent, regressing to levels last seen over a decade ago. In terms of per capita GDP, the situation is even more shocking: according to this measure, Italy has regressed back to levels of twenty years ago, before the country became a founding member of the single currency. Italy and Greece are the only industrialized countries that have yet to see economic activity surpass pre–financial crisis levels. As a result, around 20 percent of Italy’s industrial capacity has been destroyed, and 30 percent of the country’s firms have defaulted.

    Can Italy really do worse than this? Might any pain caused by leaving the eurozone be offset by a return to currency sovereignty?

    1. Synoia

      The consensus here is that it almost impossible to return to currency sovereignty in anything less than 3 years, and even then, large IT projects have a very high failure rate.

      The attempt has probably a less than 20% chance of succeeding.

      1. jonhoops

        I’m sure it would be an IT debacle, but life would go on. Witness Obamacare and the TSB IT failures. Didn’t we learn in the last big crisis that “Rules are for Fools”? All sorts of creative shenanigans are possible when push comes to shove. Didn’t they use creative accounting to get in to the Euro, perhaps some creative accounting will get them out (who counts the taxes collected anyway, perhaps we could have tax collections created out of thin air – some might call it fraud – I would call it reverse MMT). Anyway, I find the TINAism, because IT, around these parts a bit depressing.

    2. fajensen

      Can Italy really do worse than this? Might any pain caused by leaving the eurozone be offset by a return to currency sovereignty?

      Yes, Italy can do worse – Compoundedly Worse! With Interest- and Currency- Risks on Top!!

      The “only way out” is for Italy to default on their EUR-denominated debt, otherwise they leave the EUR and now still have to pay off their loans in EUR from exchanging a depreciating currency (the Lira was always depreciating in the Good Olde Days, because Italy being Italy) into EUR – which means increasing effective rates – or no debts left but nobody will lend at less than 20% because of the loss the last time.

      The EUR-Zone comes with a system, whether one likes it or not, one cannot be bucking that system forever.

  14. lou strong

    I just finished my previous post that I have to read this on the medias : Commission member Oettinger declared, in a Deutsche Welle interview, that the markets and a darkened outlook will teach the Italians to vote the right thing. It’s both nice and scary when politicians are sincere about democracy, the european solidarity etc etc.

    1. Synoia

      Yes, “The whipping will stop after morale improves” form of Governance.

      Resentment builds, until it erupts.

      The key measure is, “Revolution happen when the Middle Class have nothing to loose.”

      Because that’s the management group.

  15. Matthew G. Saroff

    I have said, and will continue to say, that the Euro is deeply, and possibly fatally flawed, and that the best chance to fix this is to eject GERMANY from the Euro.

    They are a predatory exporter, China writ small, and their political economy, they are still pursuing the same failed draconian austerity that gave us Hitler, is toxic not just to the Euro zone, but the EU.

    1. nervos belli

      While you could do this since Germany is the biggest malefactor with its 80 million people, there are a few more. NL, FI, AT come to mind. Of course they are dwarves compared to Germany.

      Then if you are rid of Germany, what is left? Another lira more or less, something the actual Italians don’t want either as we know.
      Many eurosceptics have pointed out the Union monétaire latine from 1865 which your proposal eerily equals. If you remove the northern austerity, hard currency champions as you propose from the eurozone you are left atually with almost the same countries again as back then:
      France, Spain, Italy, Belgium, Greece, Romania, Bulgaria. A few differences like Switzerland and Venezuela, etc. too of course.

      Spoiler: it failed abysmally, even without evil Germany.

  16. Synoia

    One underlying issue is the German refusal to have an Euro Zone settling fund between countries with surpluses and countries with deficits.

    Thus the German surpluses are asset stripping the deficit countries.

    Welcome to the new German Empire.

  17. makedoanmend

    Italian attitudes towards EU (2017)

    Quite Favourable: 50%
    Very Favourable: 25%
    Quite Against: 13%
    Definitely Against: 9%


    Original Source I think, but it’s a huge Pdf and I can’t be arsed downloading it is:

    Of course, attitudes may have changed in the last 7-8 months and could be changing today in either direction.

  18. makedoanmend

    After all has been said and done, the big questions still remain:

    Was the US’s unilateral action as much aimed at the EU economically and politically as it was at Iran?

    Is the US foreign policy concerning Russian made with an eye to the EU?

    Keeping the vassals vassalated?

  19. Oregoncharles

    I don’t do IT (mentioned above), but I do politics, albeit not Italian. My understanding, from the BBC last night, is that the parliament can impeach the President with a simple majority vote. That’s just an indictment, sends the case to the “Constitutional Court” for trial. Which court would probably throw it out, because Mattarella was within his rights. But it would still be a black mark on his record, and further nastiness in the politics.

    The coalition parties have a majority, so they can impeach him – if Parliament is in session. The only way Mattarella could prevent that would be to dissolve Parliament, forcing an IMMEDIATE election – July, not September. That’s what 5Stars and Lega want, so that’s likely to be what they do, and precisely the reason for threatening impeachment. That’s assuming they couldn’t impeach him on the way out the door.

    As far as the IT involved in leaving the Euro, and still doing politics, consider it given that they need 3 to 5 years. (1 problem: Italian gov’ts don’t last that long.) So the only way to do it is to announce the intention and visibly start the process. Then you start negotiating with the EU. Both parties now say that’s their real intent – to reform the system.

    The big question then is, what does the ECB do? Do they proceed to wreck the 3rd largest EU economy, the way they did little Greece? We saw how entangled Italy is with, say, the German and French banks. Is Italy TBTF?

    It’s pretty easy to see why the Euro went down once Mr. Market thought about it. Might be a good time for that trip to Europe. It seems to me that Mattarella, in trying to defend the EZ, has provoked a crisis that could end it.

    1. Yves Smith Post author

      It is only 5 Star that has talked about impeachment, and that looks less serious as the Dems impeaching Trump. 5 Star can’t do this on its own even if it wanted to. Plus per the post above, it is languishing in the polls.

        1. Yves Smith Post author

          The Financial Times reported that very late evening in Italy, which would be hours after the pub time of this story, the head of 5 Star was discussing forming a coalition government (again) to avoid elections. This looks awfully Emily Litella-like to me. They wanted to stare down Mattarella, which is a perfectly legitimate thing to do, but they don’t look like they have the stomach for the upheaval. And if they don’t have the nerve to handle this hissy fit by Mr. Market, it’s hard to see how they would be willing to go very far with a “reset the rule of the Eurozone” power struggle.

  20. RBHoughton

    It is my belief that the problem starts and ends with the independence of the ECB. If it were not so, the continent could inflate the currency a little bit to meet the southern states halfway.

    Here in Asia we have seen examples of national recovery achieved on the back of mild (5-8%) annual inflation – e.g. Korea and Indonesia. Austerity is a bank-made problem.

  21. Steven B Smith

    There’s no limit to how much a socialist government can destroy a territory.

    Italy could get uglier than Venezuela.

  22. vidimi

    the migrant crisis is another huge factor in the surge of both M5S and LN and is another thing they both agree on. Italy is one of the countries most impacted by it.

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