Italy’s New Prime Minister Conte Says Euro Exit Off the Table, But Mr. Market Pouts About Spending Talk

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In his inaugural speech before Parliament, Italy’s new prime minister, Guiseppe Conte, stressed his populist bona fides while moderating some of the positions that ruling coalition members 5 Star and Lega, had adopted during their campaign. The most striking was that Conte walked back the idea of a possible Euro exit, as well as delaying and diluting a key 5 Star promise, that of an income guarantee.

However, a more measured populist stance wasn’t enough to satisfy Mr. Market, since Conte stressed that Italy wants to renegotiate some of the Eurozone economic rules of the road, with getting more spending wriggle room a key demand. Interest rates on Italy’s two year government bond rose 22 basis points after Conte’s speech, to 1.02%.

From Il Sole 24 Ore, via Google Translate, is a recap of Conte’s remarks on his government’s position on the idea of leaving the currency union (emphasis original):

Noteworthy – in addition to what has been illustrated in the planning speech at the beginning of the session – also some issues on which Conte returned mid-afternoon, at the time of the reply, at the end of the debate. “The exit from the Euro is not in question, and it is not a goal we want to pursue,” the prime minister reiterated, once again emphasizing his government’s distance from market fears, which emerged even today from the spread trend. “The theme – he clarified – is another: is it legitimate or not for a government, a country, renegotiating economic policies? Do we have to give up discussing economic policies? We are talking about this. If there is any margin or not we will find out. We are determined to do it ».

However, this was not part of the prepared speech. Indeed, as Il Sole pointed out:

Among the key words of the government contract, which do not appear in the debut speech, we also note the absence of “fiscal peace”, “Euro”, “Tav”, even if different topics, from the tax authorities to Europe, to public tenders and works, he has dedicated specific steps.

Investors wanted to hear a firm promise of Euro loyalty. The Financial Times noted the absence of any statement that Italy was “inextricably bound to the single currency.” But given that the two parties had wanted to appoint a strident Eurozone critic as finance minister, Conte’s stance in his debut represents a marked shift in a short period of time.

Conte stressed that his government would seek Eurozon-EU level reforms on many fronts. As Politico noted:

He said the two governing parties have been “accused of being populists and anti-system, well … if populism is the ruling class listening to people’s needs … if anti-system means aiming at introducing a new system … then both political forces deserve both these qualifications,” he said.

The Financial Times highlighted this section:

“Monetary union must be oriented towards the needs of citizens and must balance the principles of responsibility and solidarity more effectively,” Mr Conte said.

Conte positioned the coalition’s spending plans as fiscally responsible because it would reduce Italy’s debt by increasing growth. However, he appeared to be trying to combat the image that Italy would go on a spending spree. 5 Stars’ key promise, of instituting a basic income, will not be implemented until the government has expanded and improved its job centers, and only those who participate in them will be eligible. From the Il Sole Google translation:

“I am sorry that the income of citizenship has been represented as a measure of welfareism. If you read the contract carefully you can see that it is a measure aimed at job placement. Let’s talk about active labor policies otherwise, we recognize it ourselves, it will not work,” underlined Conte again, defending the Government’s program on measures related to the income of citizenship.

He also pledged to end “golden” pensions of over €5000 a month and rejected a VAT increase in favor of tax reform. Again from Il Sole:

In the enunciation of the programmatic line of the new executive, Conte has not established a timetable for the measures to be taken. But he reiterated the priority of the flat tax . “We are promising a complete revision of the tax system of income for individuals and businesses”, said Conte reiterating that “the goal is the” flat tax “, a tax reform characterized by the introduction of fixed rates, with a system of deductions that can guarantee the progressivity of the tax, in full harmony with the constitutional principles “. With a corollary of no small importance: “It is necessary to tighten up the existing administrative and penal sanctions framework, in order to ensure the true prison for the great evaders “.

Ahem, if you think a flat tax will wind up being progressive, I have a bridge I’d like to sell you. Yanis Varoufakis is skeptical too, particularly since this is a Lega idea, and hence no reason to think it will morph to being left wing in its design.

While Conte said that Italy would remain allied with NATO and the US, but he wants to reduce Italian troops deployed in Afghanistan, and opening relations with Russia, which among other things, would require the US to relax its sanctions.

On immigration, Conte appeared not to say anything new. He criticized the EU for its failure to reduce arrivals in Italy but also maintained that citizens “are not and will never be racist” in how they handle matters going forward.

The government has promised to fight a good fight with the Eurozone overlords to get more spending and growth for the benefit of ordinary Italians and Europeans generally. As numerous commentators have pointed out, Italy’s weak spot is its wobbly banks, which would become even more wobbly if Italian bond prices were to fall because Mr. Market disapproved of the government’s economic plans. I’m not sure how the coalition can square this circle, since even introducing a parallel currency designed only for domestic use, to allow for more spending, could spook the horses. But Conte also appears to be signaling that the coalition will proceed in a deliberate manner, and steady pressure is probably the only way to force the Germany and its allied to relent on some of their deeply held but sorely misguided ideas.

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  1. Ignacio

    I wonder if taxing capital flows could also do the trick. To my knowledge national governments keep full fiscal authority.
    May be Mr. Market does not approve Conte’s position but there is an arguable case for reform, it is not anti-system and in fact it migth render a more resilient EU and euro. I very much agree with his comments on populism/citizen’ needs. I wonder if he realises he needs to search for allies in the European Council and in the Europarliament.

    1. disc_writes

      Freedom of movement of capital is one of the three pillars of the EU. Just not going to happen.

      National governments have full authority to tax labour income and all the things you can buy with a salary (VAT). All the rest, forget it.

      1. Ignacio

        Free is not the same as untaxed. There is also free trade of taxed goods. See within the legal basis for free movement of capital:

        Tax differentiation Art. 65(1)
        TFEU allows for different tax treatment of non residents and foreign investment, but with the reservation that this must not represent a means of arbitrary discrimination or a distinguished restriction in the sense of Art. 65(3) TFEU


        The CJEU has established that the free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Art.65(1) TFEU or by overriding requirements of the general interest
        (see e.g. cases)

        Can pensions be considered an overriding requirement?

  2. disc_writes

    >the two parties had wanted to appoint a strident Eurozone critic as finance minister,

    I wonder if the journalist even bothered to read anything Savona has written over the years. Or even watched an interview.

    1. DJG

      Yes, our esteemed Yves Smith may have stumbled a bit on Savona, but the fault is panic in the English-languge press. There are a couple of articles in La Stampa in Italian in which Savona explains his views. He is hardly a euro-skeptic. He is for a redistribution of power, given that he thinks some EU institutions have been captured by the Northern Europeans and don’t function well.

      And his c.v. includes a term in the council of ministers under Ciampi, who was the ultimate moderate Italian prime minister, Signor Super-Responsible.

      So Savona is no Beppe Grillo. He has good reasons for his criticisms.

    2. Yves Smith Post author

      Savona has called on Italy to get out of the EU “if necessary” and he is sufficiently anti-austerity and outspoken that he would likely deem it to be necessary. His Plan B is totally unrealistic, it’s a fantasy of going over to a new currency over a weekend. So I don’t see the basis for the objection here. He has called the Eurozone a “German cage” in his book Like a Nightmare and a Dream.

      So please tell me how Savona is not a “Eurozone critic”? The label fits. All you’ve given is an unsubstantiated assertion.

      1. disc_writes

        Ms. Smith, the comment was not directed to you, but to the journalist at the Il Sole-24 Ore.

        Savona is everything but “strident”: he has been part of the establishment since the 1960s, befriended Padoa-Schioppa (the “intellectual impetus” behind the Euro), has been on speaking terms on pretty much all Italian and European finance ministers of the past decades, and has been a minister himself.

        He is not the financial terrorist newspapers make him out to be. Sure he criticizes the Euro: we have long known that the Euro is not viable. But he is more of a compromise figure than people think.

        As Varoufakis before him, Savona wants to complete the Euro and provide it with a surplus recycling mechanism and, possibly, direct fiscal transfers. He wants to implement his own version, if you wish, of Varoufakis’ Modest Proposal of a few years back.

        As for my assertion being unsubstantiated: Mr. Savona has a long list of published books and articles and concedes interviews often.

        Note that I am not an apologist: Savona wants to make Italy even more statist that it already is, and resurrect the deceased IRI.

        But to be called “strident critic” for repeating things that were already evident on the eve of the Maastricht treaty in 1992, and for pointing out that Southern Europe is an economic wasteland, is ridiculous.

      2. disc_writes

        Ms. Smith, I had typed a longer reply, but that got lost in the interwebs.

        It boiled down to:

        – The assertion was not directed to you, but to the journalist of the Il Sole-24 Ore
        – Savona is not a strident critic, but more of a compromise figure, and I believe that is evident from his writings and interviews
        – Savona’s plan and course of action are not different from Varoufakis’ a few years ago
        – I have criticisms of different nature of Savona’s way of thinking (too much in favor of the State propping up failing companies).

        Having said that, Savona and Varoufakis both claim that national central banks all have a plan B, and Savona reported a conversation with Berlusconi’s finance minister Tremonti, who assured him that such a plan indeed exists. Tremonti never denied the story.

        1. Yves Smith Post author

          Savrona has become more critical over time. And he said that Germany should leave the Eurozone. That is yet another way to call for a Eurozone breakup. It’s one thing to say that as a working economist, quite another as a government official, where one is required to be more circumspect, since anything you say is now an official pronouncement.

          I don’t know why you are arguing this point when Savona’s own fresh statements are consistent with what I have been saying.

          1. disc_writes

            Ms. Smith, such comments from a government official would be indeed irresponsible or, as someone else wrote, “suicidally anti-German”.

            I would like to make it clear that I support a compromise solution between the North and the South, and not a financial war. I support Savona as an experienced and cunning negotiator, not a chauvinist revolutionary.

            Having said that, the article does not quote or link to any sources, nor shows a date or place when the declaration should have taken place.

            And neither do similar articles in The Express and elsewhere. I could not find it in the Italian press. On, Tria’s last article dates from before he became a minister. The Express accompanies the article with a video that has nothing to do with the Savona/Tria exchange.

            The exchange looks like what was published on the Corriere in 2016, an exchange consisting of:
            a) An article by the German economist Clemens Fuest claiming that Italy is bound to leave the Europe (16 December 2016)
            b) A reply by Savona and La Malfa claiming that Germany should leave instead (27 December)
            c) A comment on by Tria where he says that he supports Savona (30 December).

            I do not know if this is the exchange the Sputnik article refers to, but I suspect it is. If it is, then it is not “in the last few days”, and neither Savona nor Tria were ministers at the time.

              1. disc_writes

                Again: I want to read the original in Italian before I believe it, and no sources are mentioned.

                Also, Sputnik and the Express are not exactly known for their balanced and honest reporting.

            1. Yves Smith Post author

              It appears that Savona has indeed made some caustic statements in his new book, which therefore can be depicted accurately as representing his current views and can’t possibly be depicted as off the cuff overstatements for effect.

              That approach is consistent with the intention to appoint 81-year-old economics professor Paolo Savona as economics and finance minister, a man who is considered a fierce critic of the euro. Savona’s new book, “Like a Nightmare, Like a Dream,” will soon be hitting the shelves. In it, he writes: “The euro is a straightjacket produced in Germany.” Berlin, he continues, “hasn’t changed its view of its role in Europe since the Nazi era.” Membership in the common currency area, Savona writes, “involves fascism without dictatorship and, from an economic perspective, a form of Nazism without militarism.”


          2. disc_writes

            The article from 16 December by Fuest:


            I could not find the link to the 27 December article, but here a link to La Malfa’s personal blog:

            Tria’s comment:


            Google Translate should do a decent job.

            Note that this a frank, but generally respectful, conversation among economists. My perception is still that Savona wants to push for a reform of the Eurozone, not a breakup.
            But he is contantly being framed as doing the opposite.

            1. Yves Smith Post author

              I suggest you read the comments I just posted from his new book. Going on about the Eurozone being a form of Naziism is pretty out there. I don’t see how you can depict him as moderate and measured in light of that.

  3. DJG

    On the other hand, Matteo Salvini, the Ted Cruz of Italy, who will say anything to gain power, is now claiming that the flat tax will help “job creators.” Sheesh. Undoubtedly, the Republican Party of the U.S. has been a bad influence on Italian conservatives (Berlusconi seems to fancy himself as a part of the Bush family). Yet Salvini can’t even come up with something better than rotten economic policies from neocons.

  4. Marshall Auerback

    I suspect that if the new government quietly went out their business in a non-confrontational way, they might well get a lot of their fiscal package passed Much like Spain did a few years ago. But it is almost as if they are steeling for a fight with Brussels and Berlin. That way takes us to something much more explosive.

  5. Tony of CA

    My I ask who Mr. Market is? I’m assuming you are referring to Mr. Dragni. Does Europe even have a functioning bond market anymore without ECB interference?

        1. Yves Smith Post author

          The ECB is no longer managing bond spreads as it did in the crisis. It is managing the wind-down of its program. So your insinuation is incorrect.

  6. MisterMr

    “5 Stars’ key promise, of instituting a basic income, will not be implemented until the government has expanded and improved its job centers”


    “…he reiterated the priority of the flat tax . “

    I’m not entirely surprised but it’s very sad, the M5s got much more votes than the Lega, and the so called “basic income” is much less expensive than Legta’s “flat tax”, but still the flax tax is going to happen and the “basic income” probably not.

    I really, really dislike this government.

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