ANALYTICS

02.06.2018 | Guru of helicopter money takes Italys treasury as insurgents gain their way
by Ambrose Evans-Pritchard - The Telegraph

Italys new finance minister is an advocate of full-blown fiscal reflation and printed money to rescue Europes high-debt states, putting him on an inevitable collision course with Brussels and Germanys policy elites. After weeks of brinkmanship, the radical Five Star Movement and the anti-Lega nationalists have largely succeeded in forcing their own eurosceptic choice on the Italian political establishment. Professor Giovanni Tria is a soft-spoken but tenacious critic of the eurozones Fiscal Compact and the EMU apparatus of debt-deflation austerity. His economic outlook may prove just as threatening to Berlin and the euro policy regime as the previous vetoed candidate, Paulo Savona, even if he does not talk so openly of a "Plan B" to leave the euro or denounce monetary union with such relish as a German cage. While Prof Tria argues that it makes no sense to walk out of the euro, he says it is equally senseless to persist with the euro i f EU leaders refuse to make it workable. The real risk for monetary union is implosion rather than exit. For now markets are reacting euphorically to the eleventh-hour deal between the insurgent parties and President Sergio Mattarella. Days earlier, the president had precipitated a constitutional confrontation - and calls for his own impeachment - by rejecting the last line-up of ministers as too dangerous and eurosceptic. His veto set off panic in bond markets. The accord averts the prospect of mass political protest against an unelected "technical government", followed by a snap vote that would probably have led to a clean sweep by the two rebel groups and the total destruction of the Italian political centre. Yields on two-year Italian debt fell to 0.72pc in early trading on Friday after spiking to 2.8pc earlier this week in the wildest moves for a quarter century. The bonds had briefly become the proxy gauge of eurozone break-up risk. The Italian treasury intervened directly on Thursday in a successful bid to shift sentiment. Surging bank stocks led the relief rally on Milans MIB index of equities. Banco BPM was up 9.7pc, Banca Generale up 8.1pc, and Intesa SanPaulo up 5.4pc. All have large holdings of Italian sovereign debt and had been dragged down in a replay of the 2012 "doom-loop", the nexus of public debt and banks dragged both into a downward vortex. Lorenzo Codogno, former chief economist at the Italian treasury and now at LC Macro Advisors, warns that the rally may be a false dawn. He fears a long struggle of trench warfare between the rebel government and President Mattarella over Europe and fiscal discipline. Silvia Ardagna from Goldman Sachs said the market exuberance was misplaced and warned that months of confrontation over spending rules will reopen the question of Italexit and the future of the euro. The coalitions budget-busting proposals amount to 6pc of GDP and are fundamentally incompatible with the current German-inspired architecture of monetary union. The "contract for government" includes a flat tax, universal basic income, a costly roll-back of pension reform, and a reversal of a VAT rise. All this remains policy. Prof Tria is a veteran scourge of German mercantilism. He argues that Berlin has in effect used monetary union to lock in a structural competitive advantage, ending in a permanent - and illegal - current account surplus of 8.5pc of GDP at the expense of eurozone partners. The self-correcting mechanism is jammed. This leaves the vulnerable debtor states of the South trapped in a vicious circle. The supposed remedy of an internal devaluation within EMU to regain viability leads to a contractionary bias for the eurozone as a whole and has a fatal contradiction: it smothers nominal GDP in those economies that are already in trouble and further skews the debt trajectory. It is self-defeating over time. In an essay last year, entitled "Rethinking the Deficit Monetization Taboo to Save the Euro" he said the attempt to restore debt sustainability through austerity had failed. The only way out is strong fiscal stimulus to boost demand and close the output gap, accompanied by conditional and temporary overt monetary financing at European level. This is what is known in central banking circles as "helicopter money". It is anathema to the Bundesbank and the German ordoliberal professoriat. The paper drew heavily on work by Britains Lord Adair Turner, a global champion of controlled monetary financing of deficits for countries in a liquidity trap. Whether or not Prof Tria and the Lega-Five Star alliance are actively pushing for Italexit - or "Libertalia" as some prefer - is an idle discussion. Both parties accept that a euro referendum is unconstitutional in Italy. The anti-EMU hardliners in each movement have studied the fiasco in Greece and switched to subtler tactics. They are preparing ways to undermine monetary union from within if the EU refuses to accept the fait accompli of their budget plans. Its blackmail, said Clemens Fuest, head of Germanys IFO Institute. Their plan for a "minibot" parallel currency is still in the contract for government. The proto-lira can be activated as a means of self-defense at any time should the European Central Bank up the ante by restricting liquidity to the Italian banking system or by using the pretext of collateral rules to halt the automatic roll-over of its Italian bond holdings. The moment they issue this parallel currency, it is the end of the euro, said Professor Costas Lapavitsas from the University of London. Pro-European optimists have interpreted Mr Mattarellas deal over the ministers as a retreat by the Lega and Five Star. It could equally be seen as a disguised climb-down by the president himself, an unelected holdover from the old "casta" who was operating in the grey area of his constitutional authority. He must soon have realized from the visceral reactions that he was playing with fire by vetoing Mr Savona and then trying to impose a technocrat regime - without the backing of parliament - committed to policies explicitly rejected by the great majority of Italian voters in March. As a leaked email from Mr Savona put it, the president did not seem to understand that the nation was in rebellion. He understands now. There remains a strange naivete among EU insiders and foreign investors over the political character of the Lega-Grillini rebels. Some still seem to think that the Legas Giancarlo Giorgetti - the powerful cabinet chief - is a pro-euro loyalist. In fact he gave a long TV lecture with detailed charts last September explaining why Italy had to leave EMU to prevent being reduced to a de-industrialized shell. Five Star leader Luigi di Maio is equally seen as defender of monetary union. But as recently as December he made a passionate plea for liberation, blaming austerity imposed by Merkel for the closure of 573 businesses every day in the South. If we dont free ourselves from the euro, the Italian Mezzogiorno will become a desolated and depopulated zone," he said. "Only by retaking true economic sovereignty can we revive our land." These two men are the moderates in each party. It is a brave assumption to bet that the Lega-Grillini alliance will roll over like Syriza in Greece and abandon its core electoral pledges in order to keep Italy in the euro. The EU may have to meet them at half way and accept the end of the Fiscal Compact if it wishes to avert disaster. But if it does that, it risks losing German political consent for the euro project. The AfD anti-euro party is already the official opposition in the Bundestag, and chairs the budget committee. A group of 154 German economists signed a joint letter in late May warning that the slide towards a eurozone debt union was undermining the Bundestags budget powers and was a mounting threat to German democracy. The IFO Institute wants a legal mechanism to let a country leave the euro. The presumption is that Germany may require it. If the EU allows the Italians to do what they want on spending, the Germans will not accept it, said Prof Lapavitsas. "The euro will still die, but it will die in a different way. It will be a slower death."


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