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World View: Italy’s ‘Populist’ Government Collapses, Threatening Eurozone Exit

Italy financial markets plunge on political turmoil

This morning’s key headlines from

  • Italy’s ‘populist’ government collapses, threatening eurozone exit
  • Italy’s president Mattarella selects a ‘technocrat’ as prime minister

Italy’s ‘populist’ government collapses, threatening eurozone exit

Italy's parliament building
Italy’s parliament building

Last week, we reported on the formation of a ‘populist’ coalition between the left-wing Five Star Movement (M5S), led by Luigi Di Maio, and the right-wing La Liga (The (Northern) League), led by Matteo Salvini.

Although the two parties differ on many issues, and distrust each other greatly, they decided to form a coalition based on their shared anti-Euro, anti-EU, and anti-immigrant policies, and particularly on the fact that they have no fiscal discipline whatsoever.

Di Maio and Salvini chose Giuseppe Conte, an obscure law professor with no political experience, to serve as prime minister, to be confirmed by the parliament.

But they also chose Paolo Savona to be finance minister, someone who at one time in the past raised objections to Italy joining the eurozone. Following constitutional procedure, Conte submitted Savona’s name to Italy’s president, Sergio Mattarella. Mattarella, who is staunchly pro-Europe, vetoed the choice of Savona, based on his previous statements about the eurozone, even though he says that he no longer believes them. Conte resigned, and the entire proposed government collapsed.

This infuriated Di Maio and Salvini, who claimed that Mattarella was catering to the demands of Brussels and Berlin, rather than to the will of the people of Italy. Di Maio called for the impeachment of Mattarella, something unlikely to be successful under Italy’s constitutional system.

Salvini demanded new elections, believing that his Northern League would gain additional seats in parliament. “In a democracy, if we are still in democracy, there’s only one thing to do, let the Italians have their say,” he said. Deutsche Welle and CNBC and Handelsblatt (Berlin)

Italy’s president Mattarella selects a ‘technocrat’ as prime minister

President Mattarella said he vetoed Savona’s appointment as that would have “alarmed markets and investors, Italians and foreigners.” He pointed out that the threat of leaving the eurozone was causing investors to increase the bond spread. (This means that investors are losing faith in Italy’s ability to repay its debt, and so investors are forcing Italy to pay higher interest rates when it borrows money.)

Indeed, Italy’s economy is at crisis levels. Today, Italian debt stands at around €2.17 trillion, or 133 percent of gross domestic product (GDP). That is worse than Greece’s situation when it was being bailed out in 2010. At that time, Greece’s debt as “only” 127 percent of GDP.

The Di Maio-Salvini plan was to simply ignore Italy’s crushing debt, and spend a lot more money, give away a lot of free stuff such as a guaranteed income, and reduce taxes.

Even more ominous was a hare-brained plan to issue a new kind of government bond, called a mini-Bot. (Bots are Buoni Ordinari del Tesoro, a common Italian Treasury bill or short-term credit note.) The mini-Bots would be backed by expected tax receipts in the future, meaning that the government would be spending future income before they even had it. Furthermore, the mini-Bots could be used to pay for taxes or other payments to the government, giving the feeling that mini-Bots were a new Italian currency. There would be nothing to prevent stores from accepting mini-Bots as payment, or to prevent brokers from establishing a black market exchange rate between the mini-Bot and the euro.

The mini-Bot proposal means that the Di Maio-Salvini government could, at some time in the future, repudiate its euro-based debt, leave the eurozone, and use the mini-Bots as currency.

This was all apparently too much for president Mattarella, and he vetoed the selection of Paolo Savona as finance minister, causing the entire government to collapse.

In order to stabilize the markets, Mattarella decided to make Carlo Cottarelli the new prime minister. Cottarelli will be a “technocrat,” meaning that he will not be implementing any political policies, but will only do the bare minimum to keep the government running until there can be new elections at the beginning of next year.

Carlo Cottarelli is a former official from the International Monetary Fund (IMF), and he is known as “Mr. Scissors” because of his cost-cutting policies. So investors’ concerns should be soothed, provided Cottarelli is able to govern. But it is not clear that he can govern. He will receive no support from Di Maio or Salvini, and little or no support in parliament from MPs for the Five-Star Movement or The League. That means that Cottarelli will be unable to get the parliament to pass his proposed budget, and that will cause Cottarelli’s government to collapse just as quickly as Conte’s government collapsed.

In that case, there will be an emergency election in August or September. If Matteo Salvini is right, then the furious voters will elect even more MPs from the two populist parties, to get revenge for what they see as foreign interference from Brussels or Berlin. The next election will be seen as a referendum on whether Italy should stay in the eurozone, so president Mattarella’s move to force the Di Maio-Salvini government to collapse may be what causes Italy to leave the eurozone after all. Sputnik News and Guardian (London) and The Street

Related Articles

KEYS: Generational Dynamics, Italy, Five-Star Movement, M5S, Luigi Di Maio, La Liga, The (Northern) League, Matteo Salvini. Giuseppe Conte, Paolo Savona, Sergio Mattarella, mini-Bot, Buoni Ordinari del Tesoro, Carlo Cottarelli, Mr. Scissors, International Monetary Fund, IMF
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