Italy: too big to fail, too big to save

The phrase “too big to fail, too big to save” in this case comes from an essay in Der Spiegel by Henrik Enderlein which says that the time to act is now, but also says that all the options available for action will fail. I take it he’s saying that Italy must take ownership for its debt, but Germans must also stand in solidarity or the speculators on the demise of the euro will have a field day.

The article by Der Spiegel staff Italy’s New Government Is Bad News for the Euro is pessimistic.

For perspective, Italy’s GDP (PPP) is around 7.6 times as much as Greece’s and about a ninth of the EU.

Italy holds 2.3 trillion euros in sovereign debt, the equivalent of 132 per cent of its GDP. The new government:

    To satisfy the desires of their vastly different constituencies, Salvini and Di Maio included tax cuts, a minimum basic income and the retraction of the recently passed pension reform in their coalition agreement. According to the calculations of Carlo Cottarelli, a former director of the Fiscal Affairs Department, these measures will cost at least 109 billion euros per year. (Emphasis added)

Jörg Krämer, chief economist at Germany’s Commerzbank, calculates that the country’s budget deficit, which currently stands at 2.3 percent of GDP, would spike to fully 7 percent.

    The two parties refer to their coalition agreement as the “Contract for the Government of Change,” but in actuality, it is a blueprint for destroying state finances. And the consequences for Europe will be impossible to ignore.

I think the EU rules demand that deficits be no larger than 3 per cent of GDP. There is zero chance that the EU will support the Italians to 7 per cent. Then there is this:

    Credit rating agencies already hold a dim view of Italy. Were they to downgrade Italy two additional levels, Italian bonds would reach junk status, meaning that many investment funds would be forced by their own regulations to dump them.

Since the article was written Angela Merkel has responded to Emmanuel Macron’s proposals to reform the EU. The Financial Times report says she did not accept any of the proposals, but pitched her replies so that there could be talks to resolve the differences. Merkel and Macron have to present an agreed position to the EU later this month.

Yanis Varoufakis talking with Phillip Adams, blames Angela Merkel for the whole mess. He says the current EU architecture is simply unsustainable. The EU needs to move to greater union where the rich bits actively help the poor bits, the way Australia subsidises Tasmania (his analogy). Which is what Macron wants.

Seems that France and Germany are making heavy work of agreeing what to do about the EU, while they are also trying to work out what to do about Trump, where the German automobile industry in particular is under threat.

There is also the small problem of Germany’s internal problems within the governing coalition over how to deal with refugees. Interior Minister Horst Seehofer, also head of the Christian Social Union (CSU), the Bavarian sister party to Merkel’s Christian Democrats (CDU), wants to cut benefits for refugees, toughen the deportation law, and, critically, wants turn back refugees at the German borders. Merkel wants a European solution. What Seehofer wants is contrary to EU regulation, but is increasingly the policy trend in frontline European countries. Seeehofer feels so strongly about the issue that he is willing to push it to the point of breaking the CDU-CSU coalition which has endured since WW2.

Italy has just turned away a boat carrying 639, including 123 unaccompanied minors, 11 other children and seven pregnant women, taken in by Spain.

James Newell, Professor of Politics at the University of Salford, talked with Amanda Vanstone on the political situation in Italy. The sophisticated north centred on Milan would gladly shed the south, which they regard as lazy and backward. The current government contains elements so disparate that it is hard to see it lasting. A return to Berlusconi is even possible.

There are stress lines all over Europe. Macron is concerned that the countries in the Eurozone, sharing a common currency, are moving further apart. His vision is for greater integration. Merkel is an incremental problem solver.

European issues used to be solved initially by France and Germany getting their act together. Since Merkel’s came to power in 2005 she has had weak French presidents to deal with – until Macron.

No telling how it will all end, but we are likely to see Merkel’s eye roll more than once.

3 thoughts on “Italy: too big to fail, too big to save”

  1. Germany has benefited from the Eurozone because the poor performance of other parts of the EU keeps the value of the euro lower than what it would be if it was the currency of the strong economic performer Germany alone. The converse is true for poor performers such as Greece and Italy who really need the value of their currency drop.
    The eurozone might work if there was much more integration of the economies, welfare systems etc. of the countries that belong OR the Euro be dropped in favour of separate currencies like what Britain enjoys.

  2. John, that is exactly right, but I think the cultural gap between the countries north of the Alps and those below is too great.

    Those in the east where Hungary has made it illegal to assist an asylum seeker in any way are becoming scary.

  3. Where the Eurozone/EU is at the moment is not working for a number of reasons. Brexit was significantly about resentment of EU rules in areas where it could be argued that the EU really didn’t need to have rules. Then there is the loss of border control issue that is encouraging a lot of nasties from the past to crawl out of their holes.
    Time for a serious review by both the winners and losers.

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