I decided to write an extended blog post today (Wednesday) because events in Italy are so interesting. My usual short post on a Wednesday will resume next week. George Soros is now saying that “everything that could go wrong has gone wrong” in Europe and a financial collapse is in the wind (Source). I doubt the latter but agree with the former assessment. All the flaws in the original neoliberal design of the Eurozone have been revealed and all the reasons why those flaws were created in the first place remain in place. Nothing has changed since 1977 when the MacDougall Report concluded that the cultural and national differences between the (then) Member States of the European Communities were too great to allow an effective monetary union to be created. That assessment and the earlier work of Pierre Werner in his 1970 Report were ignored as the neoliberals in France and Germany rushed headlong to Maastricht. France thought it would have a chance to dominate and Germany was distracted by unification but still firmly in charge of what would be allowed in the new monetary system and what would not. Now, one of the biggest nations – Italy – is is turmoil as the damage of being part of the Eurozone slowly but surely erodes its capacity to deliver anything remotely like prosperity and its social and political system starts to collapse. Italy must leave the Eurozone – the sooner the better. And, that will bring a reality check for the whole disaster and encourage other nations to push for an orderly dissolution.
The reason I doubt that another major financial crisis is looming as a result of Italian bond yields spiralling in recent days is because the ECB knows it can fund Member State fiscal deficits to any level and basically play the private bond markets out of the game.
It has been doing that successfully since May 2010 when it introduced its Securities Market Program (SMP), which morphed into the more recent large-scale bond buying exercise.
On May 14, 2010, the ECB established the SMP, which opened the possibility that the ECB and the national central banks could “conduct outright interventions in the euro area public and private debt securities markets” (Source).
That was central bank-speak for the practice of buying government bonds in the so-called secondary bond market in exchange for euros, that the ECB could out of ‘thin air’.
The decision meant that private bond investors (including private banks) could off-load distressed state debt onto the ECB.
It also meant that the bond dealers (the selective institutions (mostly banks) that participate by tender in the primary bond market) knew they could safely bid for the primary issue, then offload the purchases at a tidy capital gain to the ECB.
So, for them, even if the credit risk for a struggling Member State was skyrocketing, the risk to them was minimal.
The action also meant that the ECB was able to control the yields on the debt because by pushing up the demand for the debt, its price rose and so the fixed interest rates attached to the debt fell as the face value increased.
Competitive tenders then would ensure any further primary issues would be at the rate the ECB deemed appropriate (that is, low).
At the time, a number of ECB’s official members gave speeches claiming that the SMP program was within the realm of normal weekly central bank liquidity management operations.
Of course, that was nonsense. They were were trying to disabuse any notion that they were funding government deficits. This was to quell criticisms, from the likes of the Bundesbank and others, that the program contravened Article 123 of the TEU, which in essence it clearly did.
Whatever spin one wanted to put on the SMP, it was unambiguously a fiscal bailout package.
The SMP ramped up in June 2012 when the ECB began buying large volumes of Italian government bonds when the private bond market investors were reluctant and Italy would have become insolvent.
We are back to that situation now.
As I concluded in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – while the SMP saved the Eurozone from breakup, it remained a failed vision for European prosperity because it didn’t address the core problem: Southern Europe was in depression and the only way out is for fiscal deficits to expand.
The ECB clearly signalled a willingness to buy unlimited quantities of government bonds if there was the risk of insolvency.
But this intervention required that the countries succumb to a fiscal austerity package that ensured their growth prospects were minimal.
And the combination just meant that the next crisis was just around the corner.
The SMP gave way to the more recent asset-buying programs, which have seen huge volumes of government debt (other than Greece) accumulate on the ECB’s balance sheet, which have funded fiscal deficits and kept the Eurozone intact.
The interesting point is that while the ECB eventually dealt the private bond dealers out of the game they waited a time (in each episode) for those dealers to express their market preferences.
Why? It is obvious. They wanted to create a sense of public debt crisis – let the spreads of the Member State bonds rise against the German bund – to make it clear that Germany’s position was sound and the example and the rest were out of control rabble with excessive deficits.
Then they could have it both ways.
On the one hand, they could confect the crisis which allowed the Troika (of which it was a part) to impose harsh austerity on nations such as Greece but, generally, create a climate of fiscal pressure on all Member States.
On the other hand, they could stop the ‘crisis’ in its tracks by ‘funding’ the deficits.
Make no mistake – the only reason the Eurozone remains intact and its Member States remain solvent is because the ECB decided to break the Treaty rules and bailout Member States deficits under the guise of liquidity operations.
Without the massive ‘fiscal’ operation, many Member States, including Italy would have become bankrupt and been forced to exit and restore their own currency.
The Europhile progressives ignore that when they talk about their dreams for reform. The system is only intact because one of its key institutions is breaking the law. I don’t think that is a very good place to start.
And the reformists must be feeling pretty bleak after this week’s shenanigans in Italy.
For an excellent overview of the Italian disaster, my co-author Thomas Fazi’s American Affairs Op Ed (May 2018) – Italy’s Organic Crisis – is worth the time.
The recent Italian political dramas are intrinsically linked to its fateful decision to enter the Eurozone in the 1990s.
There is great denial about that. We read constantly how stupid the Italians are – they are all over the place – a random people prone to all sorts of emotional and corrupt variability.
But that sort of narrative is just a smokescreen to isolate the problem to Italy. The reality is that Italy is now suffering from the years of austerity and social and labour policy retrenchments that are obligated as part of Eurozone membership.
Italy was going well before it surrendered its currency despite its alleged ‘corrupt and random culture’.
The last month has surely opened the eyes of the Europhile progressives who pine for reform and a pan-European democracy.
First, we had the fiscal statement from the new German Finance Minister Wolfgang Schäuble, oops, I mean Olaf Scholz. They are now indistinguishable in their pursuit of the schawrze Null.
Please read my blog post – Die schwarze Null continues to haunt Europe (May 21, 2018) – for more discussion on this point.
Second, that was followed by the Letter by 154 Economics professors in Germany who warned against any further European reforms that would render the EMU – in their words – a “liability union” (“einer Haftungsunion”).
If anyone thought that the new GroKo would change anything, then these two German inputs should immediately disabuse them of those thoughts.
Third, then the Italian drama unfolded with various diversions such as the feigned hurt over the overnight comments by the European Commissioner for Budget and Human Resources, German Günther Oettinger.
Oettinger had previously said (in 2013) that Italy was “ungovernable”.
The recent interview with – Deutsche Welle – has caused an uproar.
It went like this with DW asking him whether the latest Italian political drama proved he was correct in 2013:
Oettinger: We trust the Italian president who was pointing out to potential government or coalition partners the rights and duties that go together with membership in the European Union and the Eurozone. We also trust the new technocratic government and are relying on possible elections to produce a result with which Italy can be governed in a pro-European way.
DW: But given the strength of the populists don’t you think that these elections will produce a vote against the euro and perhaps against Italy’s EU membership? Wouldn’t another net contributor to the EU budget leave?
Oettinger: My concern and expectation is that the coming weeks will show, that developments in Italy’s markets, bonds and economy will become so far-reaching that it might become a signal to voters after all to not vote for populists on the right and left.
DW: You’re hoping for a market shock that would persuade Italians not to vote for the populist after all. That’s a vague calculation.
Oettinger: Even now developments on bond markets, the market value of banks, and Italy’s economy in general, have darkened noticeably and negatively. That has to do with the possible government formation. I can only hope that this will play a role in the election campaign and send a signal not to hand populists on the right and left any responsibility in government.
When I heard the interview I was not the slightest bit surprised. After all, he was just repeating the standard European Commission line and reiterating exactly the design principles that the Economic and Monetary Union are built upon.
The primacy of the technocracy and the markets over the democratic intent of the citizens in the Member States.
They will tolerate democratic freedom as long as it produces the ‘right’ result – a pro-European government. If the democratic process throws up something that challenges that aspiration then they will intervene and install one of their own until the ‘democracy’ conforms.
That is why I have been arguing for years that the European Union is fundamentally an anti-democratic technocracy.
You might like to read the Op Ed I wrote with Thomas Fazi to promote our book (March 8, 2018) – The EU cannot be democratised – here’s why.
Oettinger is just telling it as it is.
So why all the confected hostility and shock from Italian politicians such as Lega Nord’s leader Matteo Salvini?
Is Salvini so naive that he thought it would be all beer and skittles and what was a pretty lame attempt at challenging the orthodoxy – safely within the European tent – would go unchecked by the elites, who police dissent at every turn?
Oettinger was just being German and a Eurocrat.
His comrades like Jean-Claude Juncker and Donald Tusk, no less anti-democratic in their intent, knew Oettinger had probably disclosed the game to directly and made some appeasing noises.
Oettinger, himself, then issued a – Statement (May 29, 2018) where he said:
I fully respect the will of voters being left, right or centre and in every country. By referring to the actual market developments in Italy, I did not mean to be disrespectful and I apologise for this. Italy as a founding member played and plays an important role in European integration and I hope it will continue on this path.
Which, in part, is him lying to shore up the Groupthink look.
His earlier comments were the truth. If the people get restive a good dose of economic crisis is needed to bring them back in line – with fear and trepidation.
Remember back to April 2, 2016, when our friends from WikiLeaks released a new document – 19 March 2016 IMF Teleconference on Greece – that detailed the “Transcript of an Audio Recording of an internal IMF meeting” held on March 19, 2016 in Athens to discuss the next tranche of bailout assistance from the Troika.
We heard various top IMF officials plotting to create a new solvency disaster in Greece to get its way with its other Troika members, particularly the puppet master in the Eurozone, the German government (Merkel).
Three IMF officials who were “managing the Greek debt crisis” are recorded in the conversation.
It was full of bullying.
At one stage they talked about a “decision point” and said:
In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?
They then agreed that mid-April would be a good time to escalate matters.
The head of the IMF’s European Department, one Poul Thomsen replied:
But that is not an event. That is not going to cause them to… That discussion can go on for a long time. And they are just leading them down the road… why are they leading them down the road? Because they are not close to the event, whatever it is.
The IMF Mission Chief, one Delia Velkouleskou responded:
I agree that we need an event, but I don’t know what that will be. But I think Dijsselbloem is trying not to generate an event …
Nothing new in Oettinger’s candid remarks – when in doubt cause economic chaos and bend democracy to the pro-Europe direction.
I covered that IMF meeting in this blog post – The destruction of Greece – “only a down payment” according to the IMF (April 27, 2017).
The truthful part of Oettinger’s ‘apology’ is that the elites are scared witless that Italy might undermine the EMU. Unlike Greece, Italy is a founding member of what is now the European Union and a large economy.
If it goes pear-shaped – by which I mean starts talking of exit – then the whole ship will sink. Cannot come quickly enough in my estimation.
That was a diversion though in the main game.
The fourth Italian dilemma for Europe came when the Lega Nord and M5S coalition decided to nominate university academic Paolo Savona as Finance Minister.
Savona has occasionally made statements that paranoid European elitists would interpret as being anti-Europe and anti-German.
For example, he wrote in his most recent book that the euro was a “German cage” and spoke of the need for a Plan B (exit) to avoid ending up like Greece. Sensible stuff really.
He also correctly noted that the entry into the EMU was a huge mistake for Italy and that being anti-euro does not make him anti-Europe.
The conflation of the ‘euro’ and ‘Europe’ is always used by Europhiles on the Left to justify their dream of a united Europe with the euro. But Italy could leave the euro without leaving Europe. As if Italy could ever ‘leave’ Europe!
His nomination was one step too far for the paranoid lot in Brussels who were already having conniptions at the thought of the Lega/M5S coalition, despite the leaders of both parties affirming their support for the euro.
Solution? Invoke the Italian President Sergio Mattarella – a stooge of Matteo Renzi’s PD (Democratic Party) – to veto the nomination of Savona
He claimed the hidden agenda was that the new coalition wanted to “take Italy out of the Eurozone and that as the protector of the Italian Constituion and in the interests of the nation and its stability, he would not allow Savona to be appointed” (my translation from the Italian news service).
For his part, Savona went all ‘euro’ and claimed that all he wanted was a “stronger but fairer Europe” and remained committed to reducing the “public debt and deficit”.
The Brussels line in other words.
Next step was for the President to draft a conservative who will toe the Brussels line and take over government – none other than the former IMF economist Carlo Cottarelli.
Cottarelli has the nickname ““Mr. Scissors” (Source) – and it not because he is good at dressmaking.
He is “known for making cuts to public spending”. Just what is required in a nation that is languishing in near Depression.
Cottarelli has been “charged with establishing a neutral technocratic cabinet, and then holding new elections in early 2019”.
At the time of writing Mr Scissors had not formally taken up the invitation.
Mattarella’s plan is for Mr Scissors to push the 2019 fiscal policy statement through in October before the next election.
It might all unwind because even though Mattarella has the power to dissolve Parliament and thus can choose the timing of the next election (to some extent), the unelected technocratic government, if installed, is unlikely to survive a confidence vote on the floor of that parliament.
Anyway, is anyone surprised by any of this?
Not really. Remember back to 2010 when the pro-European central banker Lucas Papademos was installed as Greek Prime Minister.
When announcing the terms of the proposed bailout to the Greek people, the incumbent Prime Minister George Papandreou told them that he would take the last bailout to a popular vote. At that point his days were numbered.
Soon afterwards the Troika got rid of him and put one of ‘their men’ into the role, Papademos. It didn’t matter what the people who vote might think!
It is a pity that the Italian President plays a role of Brussels’ enforcer?
Remember back in 2010, Iceland soon learned that when your government is selling you out its only recourse is to get the titular head (president) to intervene.
That is what happened in Iceland when the President intervened – in line with the mood of the population – and refused to sign legislation passed by an out-of-touch government intent on big-noting itself on the world stage by pushing for EMU admission in spite of the obvious harm that would do to the nation.
The President of Iceland vetoed an act of parliament which would have seen the nation “repay” £3.4bn to Britain and the Netherlands. This repayment was in relation to the amount that the British and Dutch governments paid out in 2008 to their citizens who had deposits in a private Icelandic bank which collapsed during the height of the global financial crisis.
Go Prez (the Iceland one)!
The Italians however have no such president.
The interesting thing is that the latest polls (May 25, 2018) show that the Lega has risen sharply in popularity and the mainstream parties have lost further ground relative to the March 4, 2018 election polling.
It might all unwind still.
But then the elites will engineer the ‘markets’ to bring the Italian voters into fear and submission – that is Oettinger’s thesis.
Just like Greece.
Anti-democratic to the core!
So you Europhile progressives, how are your expectations for reform at present?
How is DiEM25 going to pull off their plans?
How are you going to de-Germanise Germany?
How are you going to launch your assault on the Euro tower and sort out the ECB, especially if Weidmann or similar takes over after Draghi?
And then how are you going to get rid of the likes of Oettinger and all?
Not a hope in hell!
As to George Soros. While he told the assembled press contingent how bad Europe is he then said he will pump money into a campaign to force Britain to have a second Brexit referendum because leaving Europe will be damaging (Source).
Soros revealed why he should be disregarded when he claimed that by remaining in the European Union, Britain “would also render Europe a great service by rescinding Brexit and not creating a hard-to-fill hole in the European budget”.
The British people should be looking Eastwards and thinking how lucky they will be that soon they will be free of the anti-democratic, corporatist mess that the EU has become.
At least then their destiny will be in their own hands.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.