The Corner

Meltdown, Italian Style?

I mentioned Italy’s forconi over the weekend.

Now The Daily Telegraph’s Ambrose Evans-Pritchard contributes his usual dose of good cheer:

Events in Italy are turning serious. President Giorgio Napolitano has warned of “widespread social tension and unrest” in 2014 as the Long Slump drags on. Those living on the margins are being drawn into “indiscriminate and violent protest, a sterile lurch towards total opposition”. His latest speech is a veritable Jeremiad. Thousands of companies are on the “brink of collapse”. Great masses of the working people are on the dole or at risk of losing their jobs. Very high rates of youth unemployment (41pc) are leading to dangerous alienation.

“The recession is still biting hard, and there is a pervasive sense that it will be difficult to escape, to find a way back to full growth,” he said.

Now why might that be? Might it not have something to do with the central overriding fact that Italy has a currency overvalued by 20pc or more within EMU: that it is trapped in a 1930s fixed-exchange system run a 1930s central bank that is standing idly by (for political reasons) as M3 growth stalls, credit contracts, and deflation looms?

I’d rein back a little on the criticism of the European Central Bank  (ECB), an organization that still shows some (very) faint signs of respect for the idea that Germany taxpayers, the German constitution  and, indeed, its own rule book still do very occasionally count for something, but otherwise Evans-Pritchard is spot on. The technocratic claque can jeer all they want at Berlusconi, but, for all Il Cavaliere’s faults, this mess is not his. It is the work of Monti, Prodi, Draghi and all the rest of those who thought they knew best, the sleek, slick elite who ‘orchestrated’ the entry of Italy into a currency union in which it should have had no place, the ‘visionaries’ who have shown themselves totally and utterly blind.

So what to do?

Back to Evans-Pritchard:

Mr Napolitano offers no answer. A former Stalinist who applauded the Soviet invasion of Hungary in 1956 (a youthful indiscretion), he has long since switched his ideological fervour to the EU project. He is by nature incapable of questioning the premises of monetary union, so don’t expect any useful insights from the Quirinale on how to break out of this impasse. He does concede that the eurozone crisis “has put a severe strain on social cohesion” but leaves the matter hanging, his argument unfinished, more descriptive than analytical. Without going as far as to warn that the Italian state itself is at risk, he said the growing threat from insurrectional forces must be confronted. The law must be upheld strictly. The country must continue to be governed. “Europe is watching us,” he said. Mr Napolitano is alarmed, and so he should be. The “forconi” pitchfork revolt has taken a disturbing turn for Italy’s elites. Police took off their helmets in sympathy at the latest mass demo in Turin. This is becoming an anti-EU movement. One of the Forconi leaders has just been arrested for climbing up the EU offices in Rome and ripping down Europe’s blue and gold flag.

Evans-Pritchard has much, much more to say, particularly on Italy’s debt-deflation squeeze  (this is one of those ‘read the whole thing’ pieces), but note this:

The ECB’s Mario Draghi warned yesterday at the European Parliament that EMU exit would lead to a 40pc devaluation and a crisis that would bring any country to its knees even more brutally than has the one it now faces. This is the sort of argument always heard in defence of fixed exchange rate systems, whether gold in 1931, or the ERM in 1992, or the Argentine peg in 2001. It was demonstrably false in the case of Italy in the 1990s when devaluation worked like a charm.

It dwells on the immediate trauma, but skips over the much more corrosive effects of perma-slump. Countries can in fact recover very fast if the exchange rate takes the strain. You could equally argue that there would a flood of pent-up investment into Italy the moment it lances the euro boil and restores currency equilibrium. In any case, Mr Draghi’s argument assumes that the ECB would let a 40pc slide happen, even when northern powers have a very strong interest in ensuring an orderly Italian exit? The ECB could intervene in the FX markets to stabilise the lira for a few months until the dust settles. That would avoid an overshoot, avoid crippling losses for German bloc creditors and exporters, and avoid a deflation crisis in Germany, Holland, Finland, and France. What Mr Draghi is implicitly saying (without meaning to) is that the ECB would behave in a reckless fashion, punishing Italy for the sake of it, even though this would make the whole ordeal worse for everybody. It would have been nice if an MEP had asked him why the ECB would do such a thing.

 “Ever closer union”, that’s why.  Onward, comrades, to the radiant future!


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