Did Italy’s 5 Star-Lega Coalition Blink in Its First Standoff With Eurocrats and Banksters?

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On the one hand, initial skirmishes rarely determine the outcome of war. On the other, they often reveal the predilections of the key players. That in turn can provide a base line for evaluating later moves, for instance, whether the parties have learned from past encounters and are upping their game, or simply reverting to past form.1

In the case of Italy, both of the two major power players, 5 Star and Lega, are new to the game of EU level politics and national leadership. That means they have a lot to learn, and how good they are at learning is likely to matter a great deal in terms of achieving their larger goals, the biggest of which seems to be allowing the Italian government to spend more.

Let’s look briefly at this first test of the upstarts versus the establishment. Despite 5 Star and Lega succeeding in installing a government, one can read what went down as the parties being daunted by negative market reactions that were well short of crisis level upset. And the wee problem that opponents of austerity in the Eurozone face is that they are stuck in a roach hotel. As we discussed at considerable length in our coverage of Greece, even with Italy’s much large economy, it can’t leave the Eurozone without getting the cooperation of many parties outside its control. Merely printing and distributing paper currency would take the better part of a year, and that’s comparatively simple. Payment systems are fragmented, and the payment players in Italy are not the most important part of the equation. In a very best case scenario, numerous experts have guesstimates that the bare minimum time for software development and testing is three years, which given the lousy success rate of large IT projects, means five years is on the optimistic end of a realistic spectrum.

Now Italy can admittedly defy the Eurocrats and the bond gods on a narrower basis, say by introducing a parallel currency or creating government IOUs designed to be tradeable to increase domestic spending. Emerging economies undergoing financial crises have gone this route and those experiments weren’t successful. California issued IOUs in 2009 when the state ran out of cash due to a plunge in tax receipts producing a $26 billion deficit, and then a protracted battle over what to do about it. Despite it being clear that this was a short-term crisis and California giving a 3.75% interest rate on its IOUs, they still traded at a 60% to 70% discount to face value. And let us not forget that California has a bigger GDP than Italy.

In other words, even though Italy can do great damage to the Eurozone, it will almost certainly suffer more than, say, Germany and France. And since the 5 Star’s and Lega’s mandates are not mainly about opposing the Eurozone for nebulous goals like taking back control that resonated in the UK but about adopting specific economic policies that run afoul of Eurozone rules, like running deficits larger than the sacrosanct 3%, the new coalition partner probably don’t think many of their voters would be keen about making a bad economic situation even worse, particularly if the long-term payoff was at best uncertain.

So with that long-winded introduction, for better or worse, 5 Star and Lega appear to be more sensitive to the weakness of their positions than the press coverage might lead you to believe.

Let’s recap the events of the last few days:

1. After considerable wrangling, a reflection of the fact that the two “populist” parties differ a great deal on policy, 5 Star and Lega agree on coalition and seek to form a government.

2. They propose Paolo Savona, an outspoken Eurozone critic, as finance minster. President Sergio Mattarella, not wanting to spook the market horses, nixes the appointment. The coalition raise the ante by abandoning their effort to form a government. And the market gets spooked anyhow, with Italian bond yields staging their biggest one-day increase ever (admittedly from a very low base) as the ECB pointedly stands pat.

3. The next step would normally be new elections, which if the bond gods weren’t breathing down everyone’s neck, would normally take place in the autumn, but some media outlets suggest that the officialdom was working to hold them in July.

4. Even though the coalition members were very likely not to do worse in a snap election, and had good reason to think they could win more seats, they went into Emily Litella mode. 5 Star recanted its call for Mattarella to be impeached. The two parties, whose brinksmanship looked designed to thwart the technocrats’ having overplayed their hand and force new elections, suddenly decided that might not be such a hot idea. They retreated to coming up with a slightly less provocative lineup of ministers.

And in case you think we are overstating amount of fancy footwork, from Politico’s daily newsletter: “The League rushed to erase signs (both physical in their headquarters and digital on their website) that it was ever in favor of exiting the eurozone” to the degree that Politico is archiving evidence otherwise.

5. It is far from clear how much the coalition retreated. Savona, the proposed firebrand economy minister, is the Minister for EU affairs, and chose another Eurozone doubter, Giiovanni Tria, as finance minister. Given that it is the Finance minister that is a member of the Eurogroup, and members of the European Parliament that have some sway with the European Commission, this posting in and of itself looks like a way for Savona to poke a stick in the eye of European officials. His bully pulpit may be more important than his formal influence. But he could also influence other Cabinet members.

6. Most but not enough European officials kept their mouths shut. The European Commission, however, kept up its usual practice of managing simultaneously to play the clown and the thug. Recall that during the 2015 Greece bailout negotiations, European Commission president Jean-Claude Juncker tried to have the Commission be a central actor when, not being one of the lenders, it wasn’t in a position to throw its weight around. Juncker regularly made pronouncements that were undercut by the real principals, and even made a peculiar display of self pity. It’s been remarkable, in the Brexit negotiations, to see him come off at a mature adult by virtue of comparison to UK officials.

One of Juncker’s picks at the Commission, Budget and Human Resources Minister, Günther Oettinger, who as Bill Black points out, is an unrepentant bigot, said, Markets will teach Italians how to vote.” He was scolded which led him to issue an apology.

But far more serious were the remarks from the ECB. The central bank made clear that it didn’t see the sharp increase in Italian borrowing cots as reason to intervene. Everything looked fine on the banking front. From Reuters:

But three officials told Reuters the ECB was not considering taking any action because indicators were not yet showing signs of stress among banks and the central bank did not have the tools or mandate to solve what was essentially a political crisis.

Specifically, Italy’s borrowing costs were still less than half those seen during the 2010-12 euro zone debt crisis, bank deposits were stable and there was no sign of stress in the inter-bank lending market.

Wolf Richer highlighted the show of the ECB’s fist. From his post:

This is not to say the ECB would never step in and aid Italy. In an interview with the Spiegel, published on May 29, outgoing ECB Vice President Vítor Constâncio, when asked if the ECB would intervene again as it had done in 2012, replied: yes, but there would be conditions – namely an “adjustment program” or commonly called austerity:

“I would like to stress that every intervention has to contribute to the fulfilment of our mandate and is also subject to conditionality. The Outright Monetary Transactions program for intervening in national sovereign bond markets of vulnerable countries can only be used if the country in question also agrees to an adjustment program. The rules are very clear on this. Everyone should remember that.”

Spiegel: “So if Italy wants to circumvent the EU’s fiscal rules, it can’t necessarily count on the ECB’s help?”

Constâncio: “I will only say that Italy knows the rules. They should perhaps take another close look at them.”

It’s important to remember that the Eurozone does not need to be an austerity zone, but Germany and its economic fellow travelers won’t have it any other way. Yanis Varoufakis proposed a short list of reforms that would have done the trick, but he called for Eurozone-level infrastructure funding, which the Germans took (not incorrectly) as stealth fiscal transfers. But that is what the Eurozone needs to work, both economically and politically. Germany has also blocked something arguable even more basic, which is a EU deposit guarantee.

7. As many have noted, the Italy revolt-in-the-making is going to lead the EU to be less willing to cut the UK any slack in the Brexit negotiations, not that the EU was inclined to be charitable in the first place. But do not forget, as has even become the basis for many jokes, that the UK’s position has been and remains delusional: It has asked for a divorce, yet want to preserve all the privileges of being married. From Bloomberg:

EU officials say the deal needs to send a message to euroskeptics in Italy and elsewhere that the bloc won’t adapt its rules to suit countries that want to leave.

“One of the greatest challenges the European Union faces today is the fact that the advantages resulting from a country’s membership in the Union are simply taken for granted,” Luxembourg Prime Minister Xavier Bettel told the European Parliament on Wednesday.

While Italy’s populists have scored a significant victory in taking the mantle of power, governing will be a vastly bigger challenge. I wish them well, for the odds are stacked against them.


1 When we covered Greece’s 2015 bailout negotiation in depth, it was painful to see readers, particularly European leftists who had never read NC before, take our reading of the leverage of each side as well as their bargaining position to assess what the likely outcomes were. We were just about the first to see that there was no overlap between the position of the two sides, which meant the talks would fail, and that in a confrontation, the Troika, via the fact that the ECB was propping up the Greek banking system in violation of its own rules, had the means readily at hand to force Greece to take terms. These readers took offense at the notion that the plucky Greeks, who clearly had the correct economic analysis, nevertheless were certain to lose in the game of chicken that both sides had adopted.

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  1. disc_writes

    >Did Italy’s 5 Star-Lega Coalition Blink in Its First Standoff With Eurocrats and Banksters?

    Yes. From here on, it is all posturing and quibbling until the government falls.

    1. jsn

      When you have someone by the balls, the rest tends to follow.

      More like the throat here as in Greece. The ECB can essentially strangle the Italian economy any time it likes.

      One of Lambert ‘s oft repeated Frank Herbert quotes, “the power to destroy something is the power to control it”, captures the spirit. And of course that power must include willingness to use it, which in Spain, Cypress and Greece has been demonstrated.

      1. lou strong

        “When you have someone by the balls, the rest tends to follow…The ECB can essentially strangle the Italian economy any time it likes. ”
        Yes, it’s as simple as this.

      2. disc_writes

        >The ECB can essentially strangle the Italian economy any time it likes.

        While true, this is becoming less and less important: staying in the Euro is strangling the Italian economy as well, only more slowly.

        The reason that Italy will simply stay subservient is that its institutions are too weak to pull out of the Euro.

        And the recent government formation just made things exponentially worse.

        1. lou strong

          By the way you are true about slow death , what I’m very doubtful is about the existence of any institution able to bear the burden of a clash, transition, whatever, and I think this beyond my very poor opinion regarding the new government. My country is in a systemic cul-de-sac, the ruling class of the moment is not irrelevant but probably secondary, and in any case the memory of the kind of ruling class ( from Prodi in the nineties to now ) that both propagandized and materially brought us in the same systemic cul-de-sac is a good vaccine against trust.

          1. Kurt Sperry

            The calling out of Prodi’s election as the beginning of the latest round of rot is interesting and I can’t really disagree much. The alternative that election was, of course, Berlusconi.

            The only way Italy can go toe to toe with the Germans is as part of an alliance of Southern European countries acting in concert. The chemistry is almost alchemy because you need to fuse left and right elements to make the early numbers for momentum to build. If the last French election had turned out Mélenchon vs. Le Pen, we’d be looking at this quite differently.

        2. jsn

          “While true, this is becoming less and less important: staying in the Euro is strangling the Italian economy as well, only more slowly.”

          I don’t understand how it becomes less important until someone offers some alternative path for subject states of the EU to take. The austerity path is essentially a NeoLiberal proposal for populations without money to die in place.

          Social solidarity outside of markets strong enough to create and sustain an autarky that can give the pronounced middle finger to the ECB is the only exit path I can see and the prerequisites for that are as yet not in evidence. Thus the threat of ECB strangulation remains centrally “important.”

          1. jsn

            Although this comment from today’s Wolf Richter post does offer the possibility of some sort of deus ex machina for the Italians by way of blowing up Germany financially and the onset of GFC 2.0:

            Eustache De Saint Pierre
            June 1, 2018 at 8:02 am
            This was passed on to me by a French friend, written by an economist named Steve Ohana who works at ESCP Europe. I am not qualified to judge the validity of this Google translated statement, but it might be of interest as it features Deutsche bank :

            ” The sequence of events that we have been witnessing for a week is a challenge to all azimuths of the German hegemonic system on Europe:

            1) the rise in power of the lega / m5s coalition in Italy reflects the revolt of a majority of the Italian people against:
            – the economic policies of budgetary rigour and competitiveness inspired by Germany in Europe, which have failed in Italy even more than elsewhere.
            – the migration policy unilaterally decided by Merkel and which Italy directly paid the consequences as the main country of arrival of migrants.

            (2) the current financial storm on the Italian debt market (which will lead to contagion in its wake all European mégabanques and, in particular, Deutsche Bank, which will be discussed below) is the direct result of the German will to force the Purchases by the ecb of public debt securities on markets (l’ as qe being restricted by certain conditionalities – see my previous status).

            (3) the trade crisis between the United States and the EU is the result:
            – the inadequacy of German military expenditure (fruit of the German fétichisme of budgetary surpluses) in relation to NATO commitments
            – German mercantiliste policy since the mid-2000 s, but also the disappearance imposed by Germany-current peripheral deficits (Spain, Italy, Greece etc.). ), which were “Twins” of current German surpluses until 2010. With A German trade surplus of more than $ 60 billion and a European trade surplus of about $ 150 billion in United States.

            (4) the ongoing collapse of the Deutsche Bank Action (which led to the fact that the United States Bank for banking resolution, LA, officially its American subsidiary as a “in difficulty” Bank) is a reflection:
            – an overall bankruptcy of the gouvernance governance (with their extreme interconnection due to their market activities, their obsession with the minimisation of own funds and the maximization of short-term profitability, on which the wages of their Leaders)
            – the structural problem of recycling German surpluses (which are invested in assets whose risk is poorly controlled abroad).
            – the ban imposed by Germany on member states to recapitaliser European banks in bankruptcy without imposing losses on their creditors (which in the case of Deutsche Bank would not fail to trigger a global systemic crisis). This prohibition has led to the continued existence of zombie banks (Italian, German, Spanish) which should have already been restructured or recapitalisées for several years.

            There is therefore great consistency behind the series of seemingly disjointed scourges that seem to have been falling on Europe for a week.
            The German hegemonic order is under attack. Merkel has so far responded to the crises by what ulrich beck calls the “merkiavelisme”, that is, the non-choice allowing him to maintain the German éclectorat in the illusion that we could have butter and money from butter. (maintenance of the euro, maintenance of public and current surpluses in Germany, lack of transfers, protection of German savings, controlled German inflation etc.). .
            It is this illusion that is coming to an end. And landing may be particularly painful “.

            1. Chauncey Gardiner

              Interesting comment, thanks. The Banksters and Eurocrats have already damaged Italian industry and society. But “The Rules” apply equally to everyone, no?… and with Deutschebank quietly bleeding on the Street, who knows where derivatives contagion might take members of those two groups? Whether it’s too late for the financial colonialists to play nice is a question. What cannot be sustained, won’t be.

              New Italian Economic Minister Tria’s reported call for a change in the EU’s fiscal rules to allow public investments, end austerity policies, and implement measures to moderate Germany’s persistently large current account surplus seem quite reasonable to me, although if I were Italian I would agree with economist Paolo Savona about the importance of a very public Plan B.

              1. Oregoncharles

                No, “the Rules” do not apply equally to everyone. It isn’t that long ago that both Germany and France were defying the rules on deficits.

                So why not Italy?

                In fact, this is the approach the EU and EZ have the most trouble with, as Poland et al. have been demonstrating, because they appear to have no real enforcement mechanism short of a wrecking ball. If the resulting damage would extend to Big Dogs (which Italy is one of, remember, in a qualified way), they’re paralyzed.

                With Deutsche Bank and Merkel’s government both wobbling, silent defiance might be a very successful approach. But it won’t reform the system, merely dodge it.

          2. disc_writes

            What I meant is that the cost-benefit analysis of the Euro justifies leaving once Italy has little left to lose.

            But the weak political system cannot lead the country through an Italexit, and poverty and turmoil will make it even weaker.

            I do not think any sane person would advocate autarchy, and there is little scope for social solidarity when you cannot feed your children.

            1. Oregoncharles

              If an exit would take at least 5 years, the problem is that Italian governments don’t last that long – probably especially if there’s economic turmoil, which there would be.

              Again: the Transition Towns program is designed specifically to provide for situations like that by developing local autarky. Italy is probably in a good position to do that, given a mild climate. Not sure about its ability to grow enough food. If you live there, it might be a good idea to look into it.

              1. jsn

                I’m with you on this! Maybe as d_w suggests, no sane person would advocate autarky, but given the institutional multi-car pile up that appears to be taking shape, a sane person would want to prepare for it: can the EU/ECB do for Italy what Maria did for Puerto Rico? They did for Greece.

          3. djrichard

            Why would autarky be required if Italy exited? I understand Italy would be at the end of the line (behind England?) when it comes to trade agreements. But does that mean there is absolutely no trade in the mean time? I would think it would instead revert to trade where tariffs are at the most onerous, where agreements would be required to make it less onerous.

            Besides, it would be to the EZ’s interest to engage in trade with Italy after an exit. That way, Italy can buy a trade surplus by pegging their currency (and inflating theirs along the way) to the euro, and then use the surplus euros they hoover up from trade to pay off whatever debts need to be paid off. [Contrast that by the way with what EZ states have to do now to pay off their state loans – they have to lower wages so that there’s a) less demand for goods in their states, and b) it hopefully makes them more attractive for other countries in the EZ to outsource their supply chain to.]

            Now if Italexit also means defaulting on euro-based debts, then yes I can see where trade with the EZ would shut down.

            1. jsn

              In order to exit the Euro without having your economy deliberately destroyed by the ECB, see Greece when they tried, you would need to be an autarky, depriving the ECB of the ability to destroy you.

              It is a question of how society survives, physically, not metaphorically, the transition. This reality converted Syriza into neoliberals.

    2. djrichard

      until the government falls

      Syriza is still in power. From the outside, it may look like they failed. But when it comes to ruling Greece, it seems like Syriza reached a stable equilibrium. After all, who else are the people going to turn to?

      If current coalition in Italy play their cards right, they can reach a similar equilibrium.

      1. disc_writes

        Good point, they might as well turn into a pro-Europe government, renege on their electoral promises and stay in power for a while longer.

        However, Italian governments never last long. In this case, the bickering will be about the “contract”.

        The government “contract” contains too much pork barrel: there just is not enough money to do everything. Then once it becomes clear that the flat tax is not going to happen, or the basic income, or whatever, one party will blame the other, and the government will fall.

      2. Oregoncharles

        Syriza is a governing party. This coalition is between extremes; it can’t be stable unless both parties give up most of what their voters wanted. M5S is already accused of that, and likely to lose ground because of it.

        1. djrichard

          Well it took Greece several iterations before Syriza. After which they gave up on more kicks of the can. I’m sure Italy can run through even more permutations before the voters give up.

          Or maybe not. Maybe some day, some party in Italy will actually run on a platform which proposes a mandate to actually exit the euro, and are forthright with the voters, something along the lines of, “let’s not kid ourselves, this will be all out war with the EZ and Germany. And therefore we better have our ducks in a row and get our IT and capital controls established pronto so that we can substitute a new currency for the euro”. And actually get elected and pull the trigger on that platform.

          Still, seems like a risky gambit; pols risk getting themselves painted as an extremist with such a platform. Why take that risk when pols can capture and stay in power with a less extremist platform? When the time comes that the people are finally ready to elect an extremist platform, well I’m sure the current crop of pols can rebrand themselves then. And who knows, the pols may even be able to postpone that day inevitably – look at Greece.

  2. Ignacio

    I am happy you used the term Eurozone critic instead of eurosceptic for Savona. Your analysis is very clever in my opinion. I think that the most important thing uprising parties which are critical to EU austerity have to learn is that taking bold actions inmediately is not good politics. There are to options: prepare the way for eurozone exit or alternative currency issuing or/and prepare the way for EU reform. Varoufakis was in a hurry to implement EU reform but met deaf ears. The lesson is that there is a lot of work to be done before you can try to introduce important reforms in the institutional framework of the EU.

    I believe that a creative approach of issuing some kind of IOU’s or whatever would give Italian government some margin for maneuver although it looks unworkable under a LN-M5S coalition unless they agree on some particular spending, for instance, pensions. If they could secure decent pensions through such creative scheme it would be an important lesson in Italy and for the rest of EU members (at least Spain). Another political issue that could conceive creative and consensual monetary/financial solutions could be figthing climate change.

    Regarding Spain, Rajoy is no longer president (alleluyah!) since a motion of censure has succeeded in the parliament and we have Pedro Sánchez (“socialist”, PSOE) as new interim president until elections, most probably in autumn. It is time for state-level (or nation-level) eurocritic political leaders to aknowledge that they no longer can turn a blind eye to other EU-countries leaders and seek alliances.

    1. Eustache De Saint Pierre

      Spot on Ignacio IMO – Buena Suerte & perhaps also In bocca al lupo !

    2. PlutoniumKun

      I agree entirely. I think there has been a terrible intellectual failure the last few years – among the centre left in particular – to consistently set out coherent arguments against the way the Eurozone works and to agree that when in power it is the responsibility of governments to develop a ‘Plan B’ for Eurozone failure – in other words, some sort of alternative currency system that could be a fall back for a country in which the Euro is not working (or if the Euro itself collapses). It is only if it is a general movement across countries that it can gain traction. There is no point in threatening to leave the Euro without an alternative system in place, that makes it easy for those arguing for this to be painted as irresponsible.

      1. vlade

        Absolutely agree. The left basically first handed over the eurozone agenda (and the EU, to an extent) to the neo/ortholibs, and then failed to articulate any alternatives, so we get the TINA – because the only long-term agenda pushed in EU is by the neo or ortholibs.

        Yes, you may get to power by saying “this doesn’t work”, but once there, that’s not enough anymore.

    3. liam

      Regarding a creative approach, there is a precedence of sorts.

      At the height of the Irish financial crisis, the Irish state issued about 30 billion euro’s in ‘promissory notes’ to account for the transfer of developer loans from the banks to a National Asset Management Agency.

      I think there were a few points to its success:

      1. It happened at the height of the crisis and was done with neither indication or warning. i.e. timing is everything.
      2. It was done by the mainstream of Irish politics, which were connected with other EU pols.
      3. As a defacto solution, it solved a bunch of problems that would otherwise have fallen back on the Eurozone in one fashion or another. To borrow a phrase, it’s easier to get forgiveness than permission.
      4. It was fixed in both time and volume.
      5. Ultimately, the institutions and other governments were willing to fudge the issue. They ruled on it a couple of years later, (if I recall correctly).

      There might have been other issues that affected its success.

      I’m not sure the applicability of it as a precedence. I’ll let others judge that. I think, the key requirement is that the cost of unwinding a measure, once implemented, must be the dish of utter chaos with a side salad of contagion.

      With all that said. My understanding of this was purely a laymans, so I could have misread what happened.

      1. Ignacio

        Probably the EU-Establishment saw the rescue of developers with better eyes than would see the rescue of pensioners, such is the “social” view in the apparatchik it seems. If anything, your example illustrates that when there is the will, there is an alternative. I think that you are rigth. If there is no menace of chaos and disorder it cannot occur. This is what makes Italy so important now. They migth force a change in the “social” view of eurocrats if they show them that chaos is the alternative.

        1. liam

          Whilst I agree, I think if they had to have checked in advance it never would have happened. I think the EU was handed a fait accompli by what was more or less one of their own, and the cost of not going along with it would have been disastrous, (from their perspective at least). It allowed us to remain a firewall. The alternative was the Icelandic model for dealing with things being imported into the eurozone.

          Of course, as I stated above, my understanding of this may well stand corrected. In any case, it is one standout example of IOUs being issued within the eurozone, and I think it worked because they never saw it coming.

      2. liam

        Since I brought this up, I should probably do a large correction and add some additional information.

        The promissory notes were extended to the already nationalised Anglo Irish Bank which was hopelessly bust. With this they would go to the Central bank and exchange them for access to emergency liquidity. At that point, the negotiations started and ultimately we settled for the transfer of the notes into long term bonds of between 27 and 40 years.

      3. djrichard

        If by successful you mean that all the players (including the central bank of ireland) were able to get the state of ireland to step into the lurch to take on debt to back private banking institutions, then yes it was successful.

        1. liam

          I was thinking about it only in terms of the printing of IOU’s. My preference, by far, would have been the icelandic route. Maybe I should have made that clear.

          1. djrichard

            Just me venting. The way that deal went down left was “clarifying” as NC is wont of saying. Anyways apologies for venting on you.

            1. liam

              Nay bother. It’s worth getting the clarification on. To say I found the whole thing distasteful would be to put it mildly. Ten years later, it leaves me feeling a bit jaundiced about it all as opposed to bloody fuming. Iceland has my respect.

    4. RabidGandhi

      A major but underplayed aspect of Syriza’s quixotic belly flop was the fact that, when push came to shove with the Troika, there was a deafening silence from their natural allies (Podemos, Die Linke, 5 Stelle, etc.) who were unready (and perhaps unwilling) to make the slightest effort to toss Varoufakis a life preserver.

      By contrast, Argentina’s* 2003 resurrection from the dead came with major help from Venezuela and Brazil, where there were already Keynesian-minded governments in place with an interest in promoting regional solidarity and defiance.

      I see no prospects for any such situation in Europe on the horizon. You would know better than I do, but will the PP-to-PSOE transition make any substantial difference in Spain’s position as Brussels’ teacher’s pet? With Ciudadanos surging in the polls (and being slobbered over by the Spanish press), I very much expect Sánchez to tack well to the right (as PSOE always has done in the past).

      * Yes, Argentina had its own currency, but the example of needing international allies still applies nonetheless.

      1. Ignacio

        I think that Sánchez cannot predate votes to his rigth and will try to predate to his left while ciudadanos will try to predate to their rigth even far-rigth. There has been tactical positioning before the final vote. Finally PdeCat (independentists) contraried Puigdemont’s position and voted to oust Rajoy as well as vasque nationalists. For this very same reason Ciudadanos did not favour the motion and now will have to sell their ambiguity: their leit motif was anti-corruption and had not sided with a motion set in place because of corruption. Instead, they have decided to set anti-independentism as their major option.

        How will this result in electoral results? I don’t know. is quite unpredictable rigth now. It migth occur that PSOE revives like the phoenix, or not. To be sure, there are lots of people who are pissed off with PP and lots who are pissed off with independentists. I don’t think anyone can predict the results of these tactical games.

        1. Eustache De Saint Pierre

          I wonder whether the best situation for Europe would be if somehow the Northern states who largely do well within the EZ, could revert to something like the once Hanseatic League, which i believe was largely a success. The Southern countries could perhaps also form some sort of league with perhaps a shared currency, although with modern advancements in technology, I wonder if there is now in comparison with when the EZ was formed, whether it is really needed.

          After all Greece only got in with the help of Goldman fiddling the books & I did hear that some Germans in authority did not want Italy to join & the rest of the Club Med could possibly be best described as the walking wounded , who get little in the way of TLC from their Northern associates. I’m not sure how France would fit in, but I’m fairly sure that they would want to stay North.

          Dream on I suppose.

          1. John k

            A north south split makes sense, but there are the South debts to ecb… who pays that?
            Need a debt holiday, just as they used to do every thirty years or so. Banks are the creditors, don’t like that.
            Chaos and pitchforks can focus the mind…
            Or solidarity. Eu now operates on divide and conquer. Need the latins to get desperate at the same time. The next recession might be more interesting than the last… and Eu is surplus zone, like China they would be hurt the most in a trade war. The trump bull is fidgeting in the China and Eu cabinet…

        2. RabidGandhi

          Yes Sánchez should not expect to poach votes from the right, but that does not mean he will not try. Punching the left is the basic programming of PSOE and every other centre-left party. Just as 5 Stelle, now with power, is gradually moving its platform to the right.

      2. Older & Wiser

        RabidGandhi, please check out your facts, pronto.

        Neither Venezuela nor Brazil helped out “Argentina´s 2003 resurrection”.
        China needs, record soy bean prices and 5 extrordinary bump crops did, plus Argentina´s foreign debt default (sort of) meaning paying out approx. 20% of its foreign debt at that time.

        Venezuela did loan $ 1billion dollars at 17% p.a. interest rate, a world record financial scandal.
        So that wasn´t much help, was it ?

  3. MisterMr

    “I wish them well, for the odds are stacked against them”

    I personally don’t wish them well, and specifically not to the Lega, because they are a group of cryptofascist (not even all that crypto) whose main purpose is to cut taxes for the rich.

    A pair of day ago I was speaking with a colleague who is very pro Lega and very right leaning, in the same discourse she said that governments shouldn’t print money because this can only lead to inflation (she’s an Hayeck fan) and that the EU should let the Lega government do as it wishes, without realising that the Lega wants to actually be able to print more money.

    Point is that their main way of thinking is:

    1) everything is produced by salt of the earth job creators in Lombardy;
    2) if the economy goers bad it’s becvause someone is stealing the lunch of salt of the earth lombard job creators (henceforth SOFELJCs);
    3) As a consequence taxes (that are a way to steal SOFELJCs’ lunch) shold be lower, no matter what;
    4) The same however applies to savings of SOFELJCs, so inflation is ultra-evil;
    5) Also government debt is a danger for SOFELJCs because they might be called to pay for it in the future.

    So their politics (common to many right leaning parties in the world) are:

    1) cut taxes;
    2) this causes deficits (that pull up the economy) but also an increasing public debts;
    3) cut services to stop the increase in public debt and perhaps inflation;
    4) thus a crisis ensues as deficits fall, hence cut taxes again and back to 1.

    They don’t see that their economic theories are contradictory, mainly because those theories are designed to be contradictory so to hide the inherent “class war, starve the poor” nature of their interests.
    It just happens that they found someone who has their same exact policies in the current crop of eurocrats, but from the point of view of the eurocrats SOFELJCs happen to be on the group that is supposed to be squeezed, whereas the SOFELJCs expect to be the one who squeeze the others:
    they expect the germans to foot their bills, but they don’t want to foot the bills of southern italians or of immigrants.

    This leads to very nasty international politics, because since in reality the Lega has more or less the same ideology of the current eurocrats with the only difference being wether it’s german or italian salth of the earth job creators who have the right to squeeze everybody else, the only difference in the two is their regional basis, so all politics become nationalistic and the “class” aspect disappears.

    Also incidentially note that the satandard Lega voter thinks that Italy should get out of the Euro because he sees the Euro as some vague ploy of “globalist” powers, but then if you explain to them that thei’r bank accounts are supposed to be riconverted in New Liras and therefore will fall in value, they don’t like it at all (it’s only someone else who is supposed to be stuck with devalued currency), which is the reason I think the Lega will not actually try to leave the Euro in the end.

    1. DJG

      MisterMr: Thanks for the witty analysis. And yet many of those salt-of-the-earth Lombard job creators live in palazzi in the Brianza. Very humble giant palazzi, to be sure, with only one or two Filippine in residence to run the place.

      My take on the Lega is that the politics of the Lega are the politics of a nation going into retirement. Much like Austria or Hungary, Padania would be a cut-off remnant of a viable nation, living on pensions and tourism. Salvini most likely has no coherent economic policies because the Lega’s plan is to live on green neckerchiefs and retirement accounts.

      And you forgot: Those lovely Lega supporters in the Veneto, salt-of-the-earth job creators in such metropolises as Verona worried about past glory and the invading refugees who likely will end up working at job-created jobs for less than minimum wage.

      The politics of resentment: And here we are.

    2. Buckeye

      Thank you! Your assessment is just like mine when I look at ANY of these “populist” groups, in Europe and the U.S. None of them are actually against the policies they whine about; they are fully in favor of austerity, wage destruction, political tyranny, and social oppression. They are like Saruman to Sauron: two forms of the same evil.

      1. djrichard

        Obama had an opportunity to nip extremism in the bud when he came into power, e.g. to do something about the economy. Instead, we got obamacare and bail out of the banks. And then an intense focus on needing to do something about the deficit with sequestration as the plan B.

        Now admittedly a lot of the yammering about the deficit was by voices on the right. But Obama wasn’t taking his ques from them. He was taking his ques from third-way, WaPo and the sort. And they were telling him the same thing.

        So now the voters are saying “can you hear me now?” Should we be surprised?

  4. José

    It’s always a question of the balance of forces. If the French electorate had chosen Mélénchon instead of Macron there would now be a Franco-Italian anti-austerity block that might just be strong enough to sway the EU into a different direction. In any case such a block would create lots of havoc in the smooth workings of the EU Institutions.

    An isolated Italy will have a more difficult task – but due the size of its economy it may be a much harder nut to crack for the ECB (the key player here) than Greece.

  5. Marshall Auerback

    Mattarella achieved what we consider a victory of appearances. And he got himself out of the disastrous mess he got himself into over the interim appointment of Carlo Cottarelli. The face-saving compromise is that Mattarella was able to get moderates appointed to the three high offices of state – prime minister, foreign and finance – but these people are not the main decision-makers in the new government. They are the friendly faces to sell decisions to the outside world, and to act as scapegoats if something goes wrong.

    The politics of this administration will remain unchanged from what we were told a week ago. The policy is to produce a large fiscal boost by introduction of a two-tier income-tax system, with rates of 15% and 20% making Italy one of the lowest-taxed countries in the EU. This will be Tria’s immediate political priority. Again, he has no real independent base and will act to execute the policies. A basic minimum income of €780 is the main project of Five Star and, with Di Maio in the relevant ministry, they have the power to implement the policy. And they will undo the pension reforms. There is no way this government can do what it says and remain compliant with EU fiscal rules. Something will have to give. Following the experience of Donald Trump in the US, we would not jump to the comforting conclusion that the populists are easily contained once exposed to reality. On the contrary, we expect at least one parallel development. The fiscal boost will be popular, will lead to a rise in growth in the short-term, and good performances by the two government parties at the upcoming European elections. The conflict between Italy and the EU establishment will start in earnest at that point.
    Oh, and by the way, right behind these two parties is the neo-fascist Brothers of Italy. If this coalition falls apart, don’t be surprised to see the League work with the Brothers in the event of a new election. If Brussels doesn’t like these guys, they are going to really worry about the next government. And Italy will not play Quisling to Germany the way that the Greeks have been forced to do

    1. MisterMr

      In my opinion the League is way more fascist than the Brothers of Italy, to be honest.

      They’ve been in government together with Berluconi for a long time and, in my opinion, the Brothers of Italy were the less extremist group.

      I agree with the rest of the comment.

  6. Keith Newman

    Unless Germany relents the Eurozone will force more and more people into very difficult economic circumstances and poverty. Eventually this will result in an untenable situation and the Eurozone will break apart, somehow.
    While Italian political parties channeling discontent have not yet fully thought through how to counter Eurozone spending constraints and the power of Germany and its ECB, a proposal was made to issue a parallel currency as Warren Mosler proposed several years ago. Clearly this rattled the Eurozone status quo who had the proposed finance minster disallowed.
    It seems political posturing will not be enough due to the power of the Eurozone status quo. Will Italy stumble along and perhaps get some kind of temporary fix or fall into a crisis. Who knows?
    Ideally a longer term multi-pronged strategy would be required incorporating economic, political and class elements. I imagine this would take some time to develop. Whether Italy is able to do this remains to be seen. One challenge would be to overcome opposing class interests. If I had large holdings of Euro bonds I would not be enthusiastic for a return to the Lira (or French Franc or Drachma, etc.). On the contrary I would be quite happy to continue holding financial assets in German Deutsche Marks lite (the Euro) given the other options. However if I had an insecure job, or low wages, or was unemployed or underemployed and/or youngish with no prospects for a better future I wouldn’t care about Euro bond holders.
    Italy has the third largest economy in the Eurozone. If its government had a clear mandate to overcome austerity and the nerve to implement it (it seems the current coalition has neither) it would be a dangerous game for the ECB to deliberately sabotage it.

    1. John k

      Things must get worse before they can get better. Italians as a whole are not ready to give up on the euro. Need a larger group of disparate voters than yet exists.
      The next recession may change minds.
      And may bring solidarity with desperate sin neighboring countries.

  7. John k

    I suppose people have been thinking of alternates…
    Seems you don’t need new paper to expand the money supply. Issue every taxpayer 1000E, credit in their bank accounts, good for taxes. Citizens can trade amongst themselves. Presumably it’s just like here, treasury just marks up their accounts, just marks down their own. Maybe requires a change of staff at the central bank…

  8. Scott1

    The German Company Fraport has control of 14 Greek airports now, for at least 40 years.
    What does Italy have that Germany wants?
    Looks like Econ Warfare to me, with Germany or at least German companies winning.
    John Steinbeck in “Travels With Charley” tells a story about getting the car stuck when there is a deadline. He sees how stuck he is and calls a tow truck instead of making sure he is more stuck.
    He makes his deadline.
    Lesson was if it is an obvious mistake fix it without wasting time, making it worse.
    The way the world’s banking rules are set up now appears to enable Econ war ending in privatization of nationstate assets.
    For a nation dependent on tourism as much as Greece loss of their ports is a very significant loss.
    Will German bankers and their favored companies end up owning whatever money Rome makes?
    I’ve theorized that for the UK Brexit could be made to work if instead of Finance Banking, what Michael Hudson details as parasitical, London adopted Industrial Service Banking. Believing that Marx is right about the proper role and aims of banking, UK Industrial Service banking would draw towards themselves EU nationstate industry loans, and end up as Industry destination of companies worth investment.
    I am also saying that while it is clear that the US Treasury could be used to create prosperity through spending internally for the needs of the nation, it is a power denied to the the states since creditors of Puerto Rico stand to privatize its assets and however Finance can continue to get their way and deny Treasury power to the States will lead inexorably to more Bond money going into Finite State Treasuries, leading to more privatization of State assets and systems.
    Of course Finance likes this situation where it sells debt, imposes austerity, that further weakens target economies, and targets forfeit their most desirable assets.

    “States will have to get used to getting along without the help of the US Treasury.” -Steve Minuchin


  9. Susan the other

    “Oh, nevermind,” seems to be the name of the game. I keeps occurring to me that the EU constitution is a unilateral contract lacking all mutuality. Merkel doesn’t understand sovereignty when she says “We all share sovereignty,” and at the same time the EU imposes “sovereign debt” individually – as if it were an indictment. But, oh nevermind. ;-)

  10. Luciano Moffatt

    I am a little skeptic about the impossibility of having parallel currencies.
    In times of shortage of funds many provinces of Argentina emitted quasi monedas(*). They were, off course, highly criticized, but they were accepted nonetheless and they helped move the economy. One of IMF priorities was to remove those quasi-money papers.

    So you can start emitting those papers in parallel with the Euro and that would be much better than the slow death by ECB strangling.

    (*)They were backed by generous discounts for provinces local taxes. I guess our MMT friends would love to study them.

    1. MisterMr

      But the problem is: if Italy’s gevernment emits “new liras”, then italians will try to pay taxes with “new liras”.

      How does the government pay debts in euros if they collect taxes in new liras?

      And if the government doesn’t accept taxes in new liras, nobody will accept new liras at all.

      If the government creates “italian euroes”, meaning something like a minibond that is denominated in euroes but is printed by the italian central bank, people will again try to pay taxes with “italian euroes”, but then can the italian government settle its debts in normal euroes with italian euroes? presumably it can, but only within the borders of italy, thus stuffing italian savers and workers with italian euroes while paying normal euroes outside.
      How many people would like it in Italy?

      Point is that, while a government may print its own currency and make it legal within its borders, it cannot make it legal outside its borders. If the ECB doesn’t accept new liras or italian euroes, the italian government’s ability to print a new currency is limited, unless they seriously want to go autarkic for a few years, have a war-level destruction of the economy, and then start anew.

      At this point, a good old fashioned bankruptcy would be more effective and simplier, IMHO.

      1. Older & Wiser

        No MrMister, no.
        No “government may print its own currency and make it legal within its borders” (or outside its borders for that matter). Not EU members, neither any state of the USA. The difference is that in America they estabished (which the EU did not) a fiscal union, a banking union and a political union, armed forces included. The EU founders did not want to include any of that and had Europeans vote its approval as many times as needed, despite rejections, and by simple majority, including 49% AGAINST it.

        So welcome to “Roach Motel Californiayou can check out any time, but you can never leave.

        The dirty little secret about the EU is that (on purpose) it did not provide for any exit procedure. Renting a one-bedroom apartment requires a termination clause, but not EU membership. The UK avoided the Euro Trap, but not the current divorce mess, with no end in sight mind you.

        Both an “Italian Euro” and “New Liras” are forbidden by the EU precisely because either would mean independence. So Italy and all other Club Med EU members are stuck with the euro as is with current rules. Thus, in absence of any civilized solution, sorry to say that outward revolt is in the cards.

        Till then, pussyfooting around theoretical non-solutions is worthless.

        1. MisterMr

          Italy could print “new liras” if it exited the euro, at which point the EU would probably find a way to kick Italy out of ther EU (although said way doesn’t exist legally, as you point out).

          The problòem is that even if Italy printed new liras, they would be worthless if the ECB or other member states didn’t accept it.
          if at least another country, say the USA, accapted new liras, Italy could buy dollars with new liras, then buy euroes with dollars, then use said euroes to pay its debts, but then, why would the USA accept new liras?

          The point is that money is “legal tender”, so Italy could certainly pass a law that says that one new lira is equivalent to an euro by fiat, but then italian couldn’t use new liras to buy stuff abroad, and the government would be forced to accept new liras instead of euroes for tax payment, so it couldn’t buy stuff abroad either.

          I think that in Fidel’s times Cuban economy worked this way. But of course nobody in Italy would seriously accept a fall in living standards equivalent to that suffered by Cubans.

        2. Older & Wiser

          Please let´s cordially disagree, something that Italy and the EU will never ever do.
          Dear Sir, what you are saying was NOT and is NOT the driving idea behind the EU.
          All of this was foreseen and still pushed down Europeans´ throats, on purpose.
          There is no innocent explanation, and the EU doesn´t even try to have one.

          No MrMister, no again.
          True enough, Italy “could” print New Liras (with very limited validity and application possibilities, mind you) if it ever exited the euro, but as discussed and explained herein to death, ITALY CANNOT EXIT THE EURO for unsolvable technical IT reasons which require YEARS to solve and implement with no political cover or financial slack to allow waiting through such a prolonged interim limbo period.

          The ONLY “legal tender” for cancelling all transactions and obligations in Italy is the euro as per definition of a EU member state, with NO termination clause in such supranational contract as per sovereign treaties entered into from the getgo. The instant that Italy entered into the EU it waivered (surrendered ?) Italian money accepting European money (the euro) instead with no prior fiscal union + banking union + political union to support it. Besides the technical IT terrible difficulties behind attempting to leave the euro, anything else is either counterfeit or fake funny money.

          The current world financial lords would never ever accept New Liras anywhere (the US or elsewhere) only Italians would and to a very limited extent and value, thus, like you correctly say, turning Italy into Cuba, something that no New Lira proponent is envisioning.
          Yanis Vourfakis where are you ?

          Welcome to Euroland, the huge Roach Motel California
          No group of Think Tanks could have ever designed such an unsolvable MESS even if they tried to.
          Breakfast served till 10 am, no tips needed.

  11. George Phillies

    Assuredly you were right that the Greek and European positions were not compatible, and you said so very early.

    One might suggest that it had become apparent that the Italian President’s technocratic government proposal would be challenged either to win a vote of confidence or to pass a budget, the latter being of some importance because it would tie for a bit the hands of the next government. The now-governing alliance shifted the 81-year-old Savona from one European-oriented position to another, and replaced him with the iirc 69-year old Tria, when is also according to some sources a Eurozone skeptic. Tria may be less skeptical than Savona, but he is likely younger and more energetic. The shift of Savona allows the Italian President to save a little face, though his schemes for Italian government failed. The Italian President tried to block Savona from entering the government, but the coalition effectively called his hand by refusing to form a government without Savona.

    The German position that the market will force Italian voters to obey may be contrasted with a feature of Italian labor relations, this being the point at which the workers shout Basta! and use a classic gesture involving both arms rather than one finger.

    The Greeks had a prolonged period in which they could have prepared to replace the Euro with the Drachma, and did absolutely nothing to prepare for such a change. The Italians apparently already have a moderately detailed plan in place. The interesting question is how they manage to get the needed Lira printed.without creating a great disturbance, but rumor has it that the arcane art of mechanical printing has reached both Moscow and Beijing. One also notes that the Chinese keep saying they want the RMB to be an international currency, but to do so they must put large number of RMB in foreign hands, hard to do when they run a trade surplus. They have other possible options here.

  12. José

    There is another possibility – a coordinated (not unilateral) exit from the euro with debt restructuring, along the lines of the proposal submitted by Schäuble during the negotiations with Greece (on July 10, 2015).

    But the ideal solution (alas, unreachable within the context of the present balance of forces in the EU) would be for the euro to be managed according to functional finance (as opposed to “sound finance”) principles.

    1. Older & Wiser


      Printing functional cash re ATMs etc., is (maybe) 5% of the problem and would still take many months.


      For starters, Schäuble´s July 2015 ´Treuhand plan´ for Greece was impossible anywhere (East Germany included as you surely know) let alone in today´s Italy. Such proposal would mean civil war smack in the middle of Europe that, as Yanis Varoufakis correctly warned, would instill “the fear of God”.

      And José, mind you, Italy is not Greece so French and German banks have their own skin in the game this time around, probably risking survival. Mario Draghi is there so that such would never happen.

      1. José

        The point is that an eventual exit from the euro doesn’t have to be unilateral and chaotic – it can be negotiated. That was the key idea behind the Schäuble proposal to Greece and we don’t know how that might have turned out since it was nipped in the bud and never explored.

        Of course it would be much simpler and more desirable to have the euro working under functional finance rules. That would mean the end of austerity, of debt and deficit criteria etc. But it would likely require a change to the treaties and Italy alone doesn’t have enough weight to push for that.

        However, due to the size of the Italian economy and banking sector, any retaliatory measures by the ECB against Italy would also damage the French and German economies. That was certainly not the case with Greece. So who knows – maybe the Italians will in the end manage to flout the EU spending limits without being punished for that.

        1. Older & Wiser


          You say…” exit from the euro doesn’t have to be unilateral and chaotic – it can be negotiated
          No José, no, it can´t be negotiated because (on purpose) the EU membership contract does not have a termination / exit clause. Please read my comments above ( June 1, 6:45 pm).
          ” The dirty little secret about the EU is that (on purpose) it did not provide for any exit procedure. Renting a one-bedroom apartment requires a termination clause, but not EU membership” . As you surely foresee José, changing that ´would likely require a change to the treaties and Italy alone doesn’t have enough weight to push for that´. So welcome to “Roach Motel California” where ´you can check out any time, but you can never leave´.

          So, in a nutshell, believe it or not, exiting the euro DOES have to be unilateral and chaotic.
          It was designed that way (on purpose) for “deterrence” purposes so that any EU member with exit ideas better have strong enough political will to become an instant pariah in the midst of Europe.

          The Schäuble proposal to Greece was 99% sell-out for dirt-cheap prices. No way that would fly. Italy now is warning all involved that chicken gaming will eventually implode not only Italy but the EU itself as the UK (and Russia) watch the regrettable show.

          So as Yanis Varoufakis´ ideas were smashed away for good, the probable outcome is the worst of all possible nightmares, i.e., Italian + subsequent European implosion which would make H. Kohl and F. Mitterand take a couple of violent spins in their graves.

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