November 25, 2019
Twenty years on - and less safe than ever
Over the 13 years since we started Eurointelligence, one of the few constants has the been the markets' backwards and forwards shift between complacency and panic. When we started in December 2006, we recall an analyst from a now-defunct bank telling us that his sophisticated value-at-risk models had the situation under control. As we are ending a decade of crisis, we note that complacency is back. We agree that the ECB will continue to support the monetary union under its new leadership. But the political threats are bigger than ever. And that is especially true for Italy.
Wolfgang Munchau writes in his FT column that the shifts in position on the euro by both Marine Le Pen and Matteo Salvini are tactical. They understand more clearly than before that they cannot win power by campaigning against the euro. But that should be no reason for optimism. On the contrary. Salvini may still introduce his minibots. Anybody who strategically gamed euro exit scenarios always ended up with transient stages of debt instruments with money-like characteristics. The danger to the eurozone is not an outright withdrawal of a member state. The smoke and mirrors of multiple currencies and parallel economies are a more realistic threat.
Both Salvini and Le Pen are now within striking distance of an absolute power grab. Le Pen is polling 45% in presidential run-off polls against Emmanuel Macron. Her seeming moderation, the disintegration of the centre-right and the radicalisation of the left are trends that run in her favour ahead of the 2022 presidential elections.
Salvini’s return to power in Italy is even more likely. We keep hearing that the present coalition will probably change the electoral law and stay in office to the very end - so that they can elect a new president before the next elections. That calculation is crucially dependent on the government coalition holding together. We currently see strong voter movements away from the Five Star Movement and towards the Lega. A good number of Five Star senators and MPs will have an incentive to jump ship as the Five Star Movement disintegrates. In that case there may not be a majority for a new electoral law, especially since the interests of the coalition partners are not aligned. The Italian political debate has an inbuilt tendency to overestimate technical features - like electoral systems or presidential veto powers - and fails to take sufficient account of political dynamics. The underlying political reality is that the Italian electorate is revolting not against the euro, but because of the euro and its governance framework.
We think Salvini is very likely to return to power, and very unlikely to follow European fiscal rules. Events can intrude, and they probably will. But the threat of political disruption to the eurozone is higher now than it was during the crisis.