Le Figaro - Europe will not succeed in bringing Italy to its knees

Steve Ohana, professor of finance at ESCP Europe, historical and
prestigious business school in Paris, comments on Le Figaro, with calm
and reasonableness, the challenge between the new Italian government and
the EU institutions, guardians of the rules of governance that are
leading to the failure of the Union.

Unlike the high cries that are raised by the great media of our country,
where associates of the old establishment spread terror over every
request for renewal in defense of the national interest, according to
this analysis, the European institutions will not easily succeed in
bringing Italy to its knees, as they did with Greece in 2015, for many
reasons, not least the systemic importance of the bond market and the
Italian banking sector. The yellow-green government's strategy is
therefore considered solid and well founded, and the European elections
in spring 2019 will be decisive.


FIGAROVOX / TRIBUNE. October 2018

The Italian government has announced that the public deficit will be
equal to 2.4% of GDP, instead of the 1.6 required by Europe: Steve
Ohana, professor of finance at ESCP Europe, historical and prestigious
business school founded in Paris, analyzes the risks for both the
European Union and Italy.

Friday was a day of truth for Italy and Europe. While for several weeks
investors and commentators seemed reassured about the Italian situation
and welcomed the presence in the government of the economist Giovanni
Tria, as guardian of Italian finances, on Friday the two leaders of the
majority, the leader of the League Matteo Salvini and the five-star
Movement Luigi Di Maio, announced that the public deficit for 2019 would
not be equal to 1.6% of GDP, as expected by the markets, but around 2.4%.

It was enough to unleash the fear of the markets: on Friday, the 10-year
Italian rates increased by 0.25%, reaching 3.15%. The index of the
Italian Stock Exchange fell almost 4%, dragged down by the banks,
including the giant Unicredit which lost almost 7% and the Banca
Popolare di Milano over 9%. The entire European banking sector was in
the red, with losses between 3 and 4% for all French and German mega-banks.

What are the intentions of the Italian government in this new game of
poker with the European institutions?

The "yellow-green" tide of March 2018 was born from the crisis of
distrust of Italian public opinion towards the European institutions.
Italy, with a zero growth of GDP per capita since the start of the euro
and unemployment that remains stubbornly above the European average,
rightly considers itself as the main defeat of the monetary union. And
this, despite all its efforts to comply with the European economic and
fiscal orthodoxy (we will come back to this). Moreover, the lack of
solidarity of European countries with countries that, like Italy and
Greece, have been at the forefront of the reception of migrants since
2015, has strongly fuelled this Eurosceptic wave.

It is in this context that Salvini and Di Maio have tried, since May
2018, to undertake a tug-of-war with the EU on migration issues,
economic and budgetary. With spectacular gestures of disobedience to the
rules of European governance, the two Italian leaders are progressively
undermining the credibility of the institutions that guard these rules.
Do international institutions such as the IMF and the European
Commission recommend a public deficit of 0.8% of GDP to reduce the stock
of Italian public debt from 132% today to 110% in 2025? The coalition
announces three times this deficit for 2019. Have previous governments
blocked the inflation-based revaluation of pensions and extended the
retirement age to accommodate Brussels? This reform will be reviewed.
Was the Jobs Act of democratic leader Matteo Renzi aimed at respecting
the European belief in the flexibility of the labour market? The
majority announced their intention to review the possibility of renewing
fixed-term contracts and the redundancy facilities offered to companies.
This is the case with all the rules of European governance, from the tax
pact to the privatisation of motorways and the rules for welcoming migrants.

This strategy of defiance of the treaties does not leave many
possibilities for European leaders. If they turn a blind eye to Italian
transgressions, they destroy the little credibility that remains of the
common rules. If they enter into conflict, even verbally, with the
Italian government, they allow Di Maio and Salvini to present themselves
as the guarantors of popular sovereignty against the establishment.
Furthermore, do Emmanuel Macron or Bruno Le Maire really have the right
to teach Italy a lesson, as they have just announced a deficit of 2.8%
of GDP for 2019 (also having, unlike Italy, a primary balance still in
deficit)? How could the European Commission rampant Italy without saying
anything to France?


Piere Moscovici
The strategy of Salvini and Di Maio is therefore not destined to provoke
in the short term a "great revolution", an exit from the EU or the euro
zone, an exit for which they currently do not have a majority. For the
time being, the objective of the head of the League seems to be to
polarize Italian and European public opinion in view of the European
elections of May 2019, in which he hopes to bring to the European
Parliament a majority of the deputies who share his sovereign and
anti-immigration line. It is in this sense that it launched with Steve
Bannon a coalition of political parties similar to the League, which its
two founders have christened "The Movement".

It is unlikely that the European institutions will be able to bring
victory in this guerrilla warfare by bringing the Italian government to
its knees, as they did with the Greek leader Alexis Tsipras in 2015.

Of course, the EU can count on the markets and the famous "spread" - the
gap between German and Italian debt rates - to "regulate" the sovereign
coalition. This market pressure has become even more important since the
ECB announced the end of its Quantitative Easing programme in December
2018 and Moody's rating agency said it could downgrade Italy's debt
rating in October 2018. But the importance of this market pressure
should not be exaggerated because, even if the increase in the spread
represents a disadvantage for the solvency of private operators and
banks, therefore for credit and ultimately for growth and employment,
the electorate of the coalition will not attribute the responsibility to
Salvini and Di Maio.

In fact, some very popular economists in Italy criticize the ECB for not
having done everything in its power to ensure the convergence of Italian
rates against French and German rates, despite an enviable fiscal
situation (Italy is the only major OECD country to have maintained a
primary balance - the balance of the government budget net of interest
on debt - in surplus since the early '90s). On the other hand, as long
as Italy manages to finance itself well enough on the markets, it does
not have to worry too much about daily changes in debt rates. As its
public debt has an average maturity of seven years, short-term
fluctuations in its debt ratios have a limited impact on its overall
debt service costs. These very high costs (just under 4% of GDP, almost
double that of France) derive from the weight of public debt inherited
from the 1970s and 1980s (in fact, it should be noted here that until
the early 1980s Italian public debt was still at 60% of GDP, having
grown very rapidly in just one decade - to over 100% - mainly because of
the new rules for State financing introduced with the famous divorce
between the Bank of Italy and the Treasury) and the financial crisis of
2008, as well as the high level of interest rates since 2010. A legacy
for which the current ruling coalition is not responsible.

If, following a wave of panic among its creditors, followed by a refusal
to come to the aid of the ECB, Italy could no longer refinance its debt
on the markets at a reasonable cost, then, as became evident this
Friday, the Italian problem would become that of the whole of Europe,
and even beyond: Italy is in fact the first European bond market and the
third largest bond market in the world after the United States and
Japan. Its Unicredit bank is a systemic bank whose fall could lead to a
global banking crisis. Although Italian public debt is mostly held (and
increasingly so) by residents, French mega-banks remain heavily exposed
to Italian banking and sovereign risk (this exposure is estimated at
about 320 billion euros).

And, if the ECB decided not only to let the Italian government's debt
rates take off, but also to deprive Italian banks of liquidity, in a
repeat of the Greek crisis of summer 2015, then Salvini and Di Maio
would seize the opportunity to issue a new currency. This scenario was
already mentioned between the lines in the electoral program of the
League through the possible use of "mini-bots", a fiscal currency
parallel to the euro that the government is ready to issue in case of
need. Knowing the Eurosceptic economists who now hold key positions in
the Italian government and parliament (Paolo Savona, Claudio Borghi and
Alberto Bagnai), we can think that the majority is actively preparing
for such scenarios. Given the political, economic and financial weight
of the peninsula in monetary union, Italy's exit from the euro zone
could then lead to the disorderly end of the euro, a political and
financial Armageddon for which the other European countries are probably
less prepared than Italy ...

If bringing the Italian Government to its knees is probably impossible
for the EU, supporting this permanent guerrilla warfare with the third
economy of the euro zone can also represent an existential challenge for
the construction of the Community. On the Italian side, if the war of
attrition with the EU drags on, it is likely that the electorate of the
League and M5S will lose patience and that the Italian government will
end up losing the strong capital of trust it enjoys today (the two
parties in the coalition are given at 62% in the polls, with the League
that has grown by 12 points since the elections last March).

This is probably the reason why both Salvini and the European leaders,
attached to the acquis of the single market and the euro, Emmanuel
Macron in the lead, have high expectations in the European elections of
May 2019. Will the result of these elections be clear enough to
determine the outcome of the Italian guerrilla warfare against the EU?