Tuesday, May 29, 2018

Italy, the euro, and the democracy deficit

Former German Finance Minister Wolfgang Schäauble during the 2015 Greek crisis delivered a succinct statement of the conflict between neoliberal Herbert Hoover/Heinrich Brüning economic policy: "Elections cannot be allowed to change economic policy."

His then Greek counterpart Yanis Varoufakis rightly called that attitude "a great gift to those who don't believe in democracy."

Unfortunately, the European establishment is still singing from the same hymnbook:
European Budget Commissioner Günther Oettinger apologized on Tuesday after facing criticism for suggesting that financial markets would show Italians how to vote.

Oettinger told broadcaster Deutsche Welle in an interview conducted in German that the reaction of financial markets would give Italian voters a signal not to vote for populists.

“My concern and expectation is that the coming weeks will show that the development of the markets, government bonds and the economy of Italy will be so far-reaching that this will be a possible signal to voters not to vote for populists on the right or left,” Oettinger said.

“Already the developments of the government bonds, the market value of banks, the general course of the Italian economy is clearly overcast, is negative. This has to do with the possible government formation.” (Emma Anderson, Oettinger apologizes after Italy remarks spark storm Politico EU 05/29/2018; my emphasis)
EU Commission President felt compelled to distance himself (publicly) from that comment, saying, "President Jean-Claude Juncker, saying that “Italy’s fate does not lie in the hands of the financial markets."

But in substance, Italian voters have every reason to believe that it's no more than lip service. The article quoted doesn't mention any criticism of the Italian President's decision that effectively blocked the seating of the duly elected national government and instead proposed to install as President a former IMF official who is (of course!) devoted to austerity economics. Anderson also reports:
Juncker’s own comments before the Italian election seemed to impact financial markets in February when he said that the EU should “brace ourselves for the worst scenario and the worst scenario could be no operational government.”

The Commission president later tried to smooth things over, by saying “whatever the outcome, I am confident that we will have a government that makes sure that Italy remains a central player in Europe and in shaping its future.”
But in case there is any doubt that the Schäuble Principle of Eurozone Government remains in effect, Vítor Constâncio, vice president of the European Central Bank (ECB) explained how things are in an interview with Spiegel Online ('Italy Knows the Rules' 05/29/2018):
SPIEGEL ONLINE: These achievements are now hanging in the balance because one country may no longer want to do its part. Even if their attempt to form a government has failed for now, Italy's two dominant parties are both skeptical of the common currency. They want to push through massive tax cuts and increase spending dramatically, despite that fact that, at 132 percent of gross domestic product, Italy has one of the highest levels of sovereign debt in the world.

Constâncio: It is certainly a challenge, first and foremost for Italy itself. When financial markets attacked Italy in 2012, it demonstrated that perceptions on the financial markets can be volatile and the risk assessment of a given debtor can change abruptly, sometimes with severe consequences - and this even though Italy already had a primary surplus at the time. We will have to see what happens now.

SPIEGEL ONLINE: Risk premiums for Italian government bonds have risen sharply again recently. At what point would the ECB intervene again, as it did in 2012?

Constâncio: 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 ONLINE: 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. [my emphasis in italics]
I guess the latter is a sort of Italian version of the stereotypical American-movie German who says, "Ve haf vays of making zis happen."

This is how the EU's Very Serious People see things.

Wolfgang Münchau in his May 29 Eurointelligence public site writes:
But what we found most remarkable about the quality of the [German press'] discussion [about Italy's increasing resistance to austerity economics] is the opening paragraph of this story by Frankfurter Allgemeine. Apparently, the reason why Emmanuel Macron has been pressing for a deal on a European deposit insurance scheme by June this year is so that Germany rescues French banks from their Italian exposure. With such a framing in the paper of record of the largest member state, abandon all hope ye who enter the eurozone debate.

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