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May 23, 2018

Mattarella’s limited options

It has been our experience as seasoned observers of political and financial crises in Europe that is often best to ignore every twist and turn of a development, and to focus on the underlying dynamics. One could have wasted years of one’s life considering the possibility of a second Brexit referendum. A sober analysis of the incentives for the two main parties suggests that, first, Brexit is happening, and, second, that the version chosen is likely to be soft.

When looking at the latest twists in the fast developing political situation in Italy, it is best not to hyperventilate about President Sergio Mattarell’a second thoughts on the cabinet lists proposed to him. Instead one should recall that Five Star and Lega between them have a parliamentary majority. Nobody can govern against them. Mattarella has important formal powers. He can nominate a prime minister, but the prime minister needs to be confirmed by parliament. He can appoint a Maastricht-compliant finance minister, but the budget has to be approved by parliament. These are the salient facts of Italian politics right now. Five Star and Lega will likely get their candidate - Giuseppe Conte for now - appointed as prime minister. It looks like he fiddled an academic qualification. So what? The two expected outcomes of this process are that it will be either him or another low-profile servant, or else there will be new elections resulting in an enlarged majority for the populist parties. Mattarella faces a choice between bad options only.

Another incontrovertible fact of the political and economic reality of the eurozone is that Italy and Germany cannot forever be linked in a monetary union if both sides continue to act the way they do. Both sides fail to regard economic policy as a matter of common concern. Germany introduced structural reforms to improve its competitiveness against other eurozone countries, and a debt brake that will eventually end up eradicating all its debt. The reform process has stalled in Italy a long time ago, and a Five Star/Lega administration would pursue policies inconsistent with sustainable public finances in the eurozone. Something here will have to give.

Lucia Annunziata has read the forthcoming book by Paolo Savona, the designated finance minister. He used to be a minister under Carlo Azeglio Ciampi in the early 1990s, and was heavily influenced in his thinking by Italy’s traumatic expulsion from the exchange-rate mechanism in 1992. From extracts quoted by Annunziata, Savona writes that the euro has given rise to injustices, and situation in which there is no equality of rights but only of duties. It has done damage the European project because is was prematurely introduced. The EU was political not ready for it. 

His assessment is remarkably similar to Martin Wolf’s prediction in 1991, as he reminds in his latest FT column:

"The effort to bind states together may lead ... to a huge increase in frictions among them. If so, the event would meet the classical definition of tragedy: hubris (arrogance), ate (folly); nemesis (destruction)." 

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