by Ambrose Evans-Pritchard
May 30, 2018
Italy’s pro-euro elites have overreached disastrously. President Sergio Mattarella has asserted the extraordinary precedent that no political movement or constellation of parties can ever take power if they challenge the orthodoxy of European monetary union.
He has inadvertently framed events as a battle between the Italian people and an eternal ‘casta’ with foreign loyalties, playing straight into the hands of the insurgent Five Star ‘Grillini’ and anti-euro Lega nationalists. He unwisely invoked the specter of financial markets to justify his veto of euroskepticism.
Taken together, his actions have made matters infinitely worse. First the background, then what’s happening right now. Italy has had 65 governments since WWII, so political chaos is almost the norm – but this is bizarre even by Italian standards.
Almost three months ago on March 4 parliamentary elections were held, which threw the ruling establishment Democratic Party out on its ear, and gave 70% split almost evenly between the anti-euro/anti-illegal immigration right-wing Lega (League) led by Matteo Salvini, and the anti-establishment left-wing Movimento 5 Stelle (M5S, Five Star Movement) led by Luigi Di Maio.
It’s taken all this time for Salvini and Di Maio to agree to disagree on their vast differences. On May 17 they announced the formation of a coalition government with neither of them being Prime Minister. On May 23, they sent their compromise, law professor Giuseppe Conte, to be ratified as Prime Minister and given a mandate to form a Cabinet by Italy’s president as official protocol requires.
The current president is Sergio Mattarella, a founder of the Democratic Party and elected by the previous parliament controlled by his party. When Conte announced the distinguished economist and international banker Paolo Savona be his Minister of Economy and Finances, Mattarella wouldn’t allow it, saying Savona was too “Anti-Euro, Anti-EU, and Anti-German.” With that, Conte on Sunday May 27, resigned.
Yesterday, May 28, Mattarella took it upon himself, without any consultation with Salvini or Di Maio to appoint as Prime Minister a pro-establishment, pro-EU bureaucrat who has worked for the IMF for 20 years, Carlo Cottarelli.
Calling this an outrageous “coup d’état,” both Salvini and Di Maio are demanding Mattarella be impeached by parliament which they jointly control. No wonder the New York Times headline this morning (5/29) is: “Italian President’s Loyalty to Euro Creates Crisis.”
Risk spreads on 10-year Italian bonds jumped almost 30 basis points to a four-year high of 235 yesterday (5/28), as investors woke up the horrible implications of constitutional convulsion: a rolling crisis through the summer that can only end in fresh elections that resolve nothing.
Much had been been made of falling bank equities over recent days. They are falling even harder now. Banca Generali was down 7.2%, and Unicredit down 5%.
Whether or not it is a ‘coup,’ it is certainly dangerous territory. President Mattarella stated openly that he could not accept the Lega-Gillini finance minister – Paulo Savona – because his past criticisms of the euro “could provoke Italy’s exit from the euro” and lead to a financial crisis.
In one sense, this veto should have been expected. The Berlusconi government was toppled in 2011 by Brussels and the European Central Bank. Whistleblowers have since revealed that they manipulated bond spreads to exert maximum pressure.
The EU even tried to recruit Washington. The US refused to help. “We can’t have blood on our hands,” said then-US Treasury Secretary, Tim Geithner. What is new today is that euro sanctity should be formalized as an Italian constitutional imperative.
“We have a problem with democracy because the Italian people are sovereign and they cannot be ruled by spreads,” said Matteo Salvini, the strongman of the ascendant Lega. “ It is a very serious matter than Mattarella chose the markets and EU rules over and above the interests of the Italian people.”
“Why don’t we just say that in this country it’s pointless voting, since it is the ratings agencies and the financial lobbies who decide the governments?” Luigi di Maio, the leader of the Five Star Movement.
President Mattarella has certain powers under the Italian constitution but they are mostly untested and in a grey area. He can make a case that the Lega-Grillini fiscal blitz violates Article 80, and that he has a duty to safeguard the EU treaties.
Yet he has no direct mandate from the people. He was picked as low-profile compromise in a backroom deal. He has no blanket authority to lock Italy into the euro in perpetuity.
Mr. di Maio is now leading calls for his impeachment under Article 90. “I want the president to be put on trial. I want this institutional crisis to be settled by parliament to avoid popular discontent getting out of hand,” he said.
The insurgents have the votes to remove him.
What is remarkable is that pro-EMU elites have acted so crudely and pushed matters to such a dangerous impasse. The proposed finance minister was not a hot-head. Mr. Savona was a former official at the Bank of Italy, a former minister, and a former chief of the industry lobby Confindustria, as well as directing a London hedge fund.
He had made conciliatory noises, dropping past suggestions that the euro was a “German cage.” He insisted that his 2015 ‘Plan B’ to leave the euro was no longer operative and that his real objective was to return to a fairer euro, rooted in Article 3 of the Lisbon Treaty calling for economic growth, jobs, and solidarity. His legal arguments were impeccable.
With a little subtlety, Italy’s ‘poteri forti’ (powers that be) and their mandarins could have worked with Mr. Savona and found a way to soften the hardline agenda of the Lega-Grillini. That was almost certainly their instinct.
The push to exclude him altogether – and in doing so to try to smother of the euroskeptic rebellion, as they smothered Syriza in Greece – came from Berlin, Brussels, and the EU power structure. Time will tell whether they blundered into a trap.
Claudio Borghi, the Lega’s economics spokesman, puts it this way:
“In a way I am very happy because we have finally wiped the manure off the table. We now know that it is a choice between democracy or comfortable bond spreads. You have to swear allegiance to the god of the euro in order to be allowed to have a political life in Italy. It worse than a religion.
What we are seeing is the fundamental problem with the eurozone construction; You can’t have a government that displeases the markets or the spread club. The ECB and the Eurogroup will use this to crush your economy.”
President Mattarella picked Carlo Cottarelli – an IMF-veteran and a symbol of austerity – to form a technocrat government. This desperate venture has no chance of winning a vote of confidence in the Italian parliament. It will exist in constitutional limbo.
“It is incredible that they are even trying to do this. It is going to lead to riots and mass political protest. The vast majority of Italians don’t give a damn about spreads any longer,” Mr. Borghi told me.
The calculus of those around the president is that chastened Italians may change their minds as they look into the financial and political abyss and recoil from insurgency. The bet is that political attrition will reshape the landscape by October, deemed the mostly month for a fresh vote.
This may succeed but it is a dangerous assumption.
The Lega’s Matteo Salvini has already gained eight points in the polls since the last election. He has seized on events of the last 24 hours to capitalize on the heady nationalist mood, like Gabriele d’Annunzio at Fiume in 1919.
“We will never be serfs and slaves of Europe,” Mr. Salvini announced.
He has already proclaimed that the next vote will be a plebiscite on Italian sovereignty, and an act of national resistance against “Merkel, Macron, and Mattarella.”
But there is another danger. Capital flight has its own relentless logic. It visible in the surging exchange rate of the Swiss franc. There is a risk that outflows will accelerate and push the internal Target2 payment imbalances of the European Central Bank towards breaking point.
The Target2 credits of the German Bundesbank are already €923bn. They are likely to blow through €1 trillion in short order, prompting loud demands from Berlin for a freeze.
The IFO Institute in Germany has already warned that there must be limits. Any move to restrict liquidity flows would signal that Germany is close to pulling the plug on monetary union and would set off an unstoppable chain-reaction.
Mr. Mattarella faces a grueling summer. He risks ending with exactly the same Lega-Grillini alliance in four months, with an even bigger majority and a thunderous mandate for their “government of change.”
He may go the way of France’s legitimist president Patrice de MacMahon, who tried to impose his government “Moral Order” on a hostile Chambre des Deputies in the 1870s by invoking his theoretical powers under the Third Republic. The bid failed. Parliament confronted him with an ultimatum: “submit or resign.” Democracy prevailed.