From the moment he was ‘chosen’ (rather than elected) Enrico Letta (left) made it clear: no more austerity for Italy. Just in case anyone in Brussels-am-Berlin might be hard of hearing, yesterday in the Italian assemby, Signor Letta gave everyone a watch-my-lips moment: austerity is dead, time to change course. Despite troll propaganda to the contrary, I’ve been saying for nearly a year now that events in ClubMed and then opposition at home will lead to Germany leaving the euro before Greece does. Yesterday, Enrico Letta turned that strong likelihood into a near-certainty.
The balance of power in the EU changed the minute Francois Hollande was elected President of France. Last week, a suitably well-timed leak from Hollande’s Parti Socialiste berated “German austerity” and the “egoistic intransigence of Mrs Merkel”. For the last six months, Spain has been poking the eurocrats in the eye, and deriding the output of Olli Rehn. Beppo Grillo changed the game in Italy, and with a bit of luck Alekos Alavanos might do the same in Greece. The openly anti-EMU Alternativ für Deutschland (AfD) is already, as of yesterday, the fastest-growing Party in German history.
But for those who would like the EU to return to its Common Market days (minus only Brussels) there is still a long way to go. Lest anyone be in any doubt about this, Enrico is a dyed-in-the-wool pro-EU Leftie of the old school. What he wants is a reconfigured EU in which default is recognised as an option and Nordeurope doesn’t wind up carpetbagging its way across a scorched-earth ClubMed. Given his own way, Wolfgang Schäuble would go merrily carpetbombing his way through Southern Europe until everyone was suitably in line or dead, but that’s not going to happen now. And while Letta might think the euro can be saved, the obvious market reality is that it can’t. It’s all coming to a rather unpleasant boil.
One major unanswered question is what will Italian bond yields now do? The yield on 10-year Italians fell 0.08% to 3.975%, back towards the 3.895% last week’s unlikely low – which was itself the cheapest Italian debt cost since November 2010. Six months ago yields soared above 7%, but today – with the collapse of fiscal consolidation in sight and Italian politics more deadlocked than ever – they’re below 4. Go figure.
Another of my long-running ClubMed hobby-horses (informed by Spanish and Italian contacts rather than guesswork) is that various governments in Rome have been lying for Europe about their true financial state for donkey’s years: they’re just better at it than the Greek elite. More and more of this is coming to light, but still the yields stay lower than a double-jointed anorexic limbo-dancer. Go figure.
Well alright, if you insist, I will. The markets must decide, as rusting iron ladies were wont to remark, but unfortunately markets are often driven by people on the other side of the Pond who don’t understand europolitics…..and couldn’t analyse their way out of a paper bag anyway. For them, any Government is better than none. Then we mustn’t forget the awesome power of Draghula in Frankfurt, who was (you can be certain) keeping the Italian bond sale and subsequent yields on an even keel last week. Don’t try and work out how he does it: I certainly can’t, and neither can anyone else. But just as gold shouldn’t be down at $1465, the Dow shouldn’t be as high as 14,700, Britain didn’t really evade a recession last week and all the West’s unemployment/inflation data is a figment of Billy Bureaucrat’s limited imagination, so too there is no real confidence about Italy’s prospects out there among the smart money. I’d imagine that sooner rather than later, even the suckers must work that out: at which point, it will become a case of Whatever It Takes from SuperMario.
It’s a heady brew is this WIT. Berlin has felt for some time that Draghi should be renamed Mario Dragusdown, and Frankfurt is positively demented about the possibility of another 1923 heading its way. But unlike Enrico Letta, the man atop the ECB paper mountain is his own boss. He cannot be fired, and Germany cannot stay in the eurozone as long as he’s there.
Meanwhile, as I shall expand a little later, Germany is about to face some banking problems of its own. Stay tuned.