The great Lira revolt has begun in Italy
The biggest single party in the Italian parliament by votes has thrown down the gauntlet, calling for a euro referendum to end depression and save democracy, writes Ambrose Evans-Pritchard
By Ambrose Evans-Pritchard
6:15PM BST 13 Oct 2014
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The die is cast in Italy. Beppe Grillo’s Five Star movement has launched a petition to drive for Italian withdrawal from Europe’s monetary union and for the restoration of economic sovereignty.
“We must leave the euro as soon as possible,” said Mr Grillo, speaking at a rally over the weekend.
“Tonight we are launching a consultative referendum. We will collect half a million signatures in six months – a million signatures – and we will take our case to parliament, and this time thanks to our 150 legislators, they will have to talk to us.”
Ever since the pugnacious comedian burst on the political scene, the eurozone elites have comforted themselves that the party is not really Eurosceptic at heart, and certainly does not wish bring back the lira. This illusion has been shattered.
A referendum itself would not be binding, but a “law of popular initiative” certainly would be. For the first time, a process is underway in Italy that will set off a national debate on monetary union and may force a vote on EMU membership that cannot easily be controlled.
Gianroberto Casaleggio, the party’s co-founder and economic guru, told me today that the Five Star Movement - or Cinque Stelle - had set out its demands in May, calling for the creation of Eurobonds to back up EMU, as well as the abolition of the EU Fiscal Compact. “Five months have gone by and we have had no reply. They have totally ignored us,” he said.
The Fiscal Compact is economic insanity. It would force Italy to run massive fiscal surpluses for decades. These would cause an even deeper depression, pushing the debt ratio even higher, and would therefore be scientifically self-defeating. Historians will issue a damning verdict on the scoundrels who foisted this atrocity on Europe.
My own view is that Italy could not restore viability within EMU even if Germany agreed to the two conditions (an impossible idea). It is already too late for that. Italy has lost 40pc in unit labour cost competitiveness against Germany since the Deutsche Mark and the lira were fixed in perpetuity in the mid 1990s.
Any attempt to carry out an Irish-style “internal devaluation” in a closed economy in conditions that are already deflationary would be suicidal, triggering a collapse of the Italian banking system and an explosion of public and private debt ratios. I suspect that Mr Casaleggio holds the same view. “A quarter of Italian industry has disappeared. Our currency is overvalued and there is nothing we can do about it within the euro,” he said.
The Five Star critique of EMU is not purely economic, a point of crucial significance. It is defending Italian sovereignty, self-government, and democracy against the encroachments of an EU machinery that has usurped parliamentary functions.
“I don’t give away my sovereignty to anybody,” said Mr Casaleggio.
“My grandfather fought with the partisans for three years. If you want my sovereignty, you have to come and take it, not by waving some letter from the ECB. You have to come well-armed, as they tried once before,” he said.
The ECB letter – La Lettera as it is known simply in Italy – was the secret diktat sent to Italy’s leader Silvio Berlusconi in August 2011. It demanded drastic “reforms” of all kinds. A similar letter was sent to Spain’s leader. The quid pro quo was bond purchases.
The implicit threat was that the ECB would refuse to carry out its responsibility as lender-of-last resort unless Mr Berlusconi capitulated. He did not, or was deemed not to have done so. Bond purchases were halted. Italy’s 10-year yields spiralled above 7pc. Mr Berlusconi was toppled.
I have always thought these two letters would come back to haunt the ECB, and monetary union itself, and so it is now unfolding.
“[Mario] Draghi [the president of the ECB] has told us that governments that don’t reform will be thrown out. He is not a member of the government and I don’t know with what authority he demands these reforms. He has no right to order us around, either directly or indirectly,” said Mr Casaleggio.
Cinque Stelle won 26pc of the vote in Italy’s general elections last year, more than any other single party. (It did not win the biggest bloc of seats because of the way the parliamentary system is designed). It has 108 deputies in the lower house, and 54 senators.
It is true that premier Matteo Renzi has stolen Beppe Grillo’s thunder this year but Cinque Stelle has not faded away. It came second in the European elections in May, winning 21.5pc of the vote. Its 17 MEPs sit with UKIP in Strasbourg.
Mr Renzi’s honeymoon is already over, and he has in any case made a strategic misjudgement. The young Wunderkind snatched power in an internal party coup in February – with tactical brilliance, to be sure – on the assumption that Italy had touched bottom after six years of depression, a 9.1pc fall in output, a 24pc crash in industrial production, and youth unemployment of 43pc.
He believed the mantra, so widely put about, that Europe was on the cusp of a fresh cycle of self-sustaining recovery, lifted off the reefs by world growth, and that all he had to do was to float on the rising tide. Instead, it has crashed back into slump.
Mr Renzi’s error is understandable. Wishful thinking has been pervasive, even though such recovery claims skate over Irving Fisher’s theories of debt deflation, or Knut Wicksell’s theories of self-feeding spirals caused by credit contraction and misaligned interest rates, or indeed Michael Woodford’s more recent theories of the real exchange rate.
Italy is already in a triple-dip recession, its output back to levels first reached fourteen years ago. The OECD says the slump will drag on through most of next year. Growth will be just 0.1pc in 2015.
Note that the Monti government said three years ago that Italy’s debt ratio would end 2014 at 115pc.
In fact it reached 135.6pc of GDP in the first quarter this year, soaring at a rate of 5pc of GDP each year, despite a series of austerity packages, and a primary budget surplus of 2.5pc.
Antonio Guglielmi from Mediobanca warned last month, that this is “catastrophic for the finances of the country”. The debt will automatically rocket towards 145pc next year (under the old measure, cut to 140pc under new accounting rules). “It is going to take a nuclear bomb to turn this around. If Draghi ends up doing almost nothing, Italy is dead,” he said.
This is not a moral failing by Italy over recent years. It is a mechanical “denominator effect”, the result of a rising debt burden on a shrinking base of nominal GDP.
The point is very simple. The average interest rate on Italy’s public debt is still around 4pc, so interest payments are near 5.5pc of GDP. Unless nominal GDP grows at the same speed, the debt ratio must keep going up. Structural reform is no doubt desirable as an end in itself, but it has nothing to do with the matter at hand.
Italy’s current crisis is ENTIRELY due to monetary policy failure and the refusal of the ECB to meet its inflation target, or to comply with its own Lisbon Treaty obligations to support growth. (And yes, it does have a dual mandate under EU Treaty law.) The more that Italy carries out drastic reforms in these circumstances, the worse it will get. The short-term effects of reform are famously contractionary.
We have reached a remarkable state of affairs in all three of EMU’s leading economies: France’s Front National swept to victory in the European elections in May with calls for an immediate return of the French franc; Germany’s anti-euro party AfD has suddenly broken into three state parliaments with calls for a return of the Deutsche Mark; and now Cinque Stelle wants a return of the lira in a country that has been reliably and passionately pro-European for sixty years.
Takes some doing.
Gianroberto Casaleggio, the party’s co-founder and economic guru, told me today that the Five Star Movement - or Cinque Stelle - had set out its demands in May, calling for the creation of Eurobonds to back up EMU, as well as the abolition of the EU Fiscal Compact. “Five months have gone by and we have had no reply. They have totally ignored us,” he said.
The Fiscal Compact is economic insanity. It would force Italy to run massive fiscal surpluses for decades. These would cause an even deeper depression, pushing the debt ratio even higher, and would therefore be scientifically self-defeating. Historians will issue a damning verdict on the scoundrels who foisted this atrocity on Europe.
My own view is that Italy could not restore viability within EMU even if Germany agreed to the two conditions (an impossible idea). It is already too late for that. Italy has lost 40pc in unit labour cost competitiveness against Germany since the Deutsche Mark and the lira were fixed in perpetuity in the mid 1990s.
Any attempt to carry out an Irish-style “internal devaluation” in a closed economy in conditions that are already deflationary would be suicidal, triggering a collapse of the Italian banking system and an explosion of public and private debt ratios. I suspect that Mr Casaleggio holds the same view. “A quarter of Italian industry has disappeared. Our currency is overvalued and there is nothing we can do about it within the euro,” he said.
The Five Star critique of EMU is not purely economic, a point of crucial significance. It is defending Italian sovereignty, self-government, and democracy against the encroachments of an EU machinery that has usurped parliamentary functions.
“I don’t give away my sovereignty to anybody,” said Mr Casaleggio.
“My grandfather fought with the partisans for three years. If you want my sovereignty, you have to come and take it, not by waving some letter from the ECB. You have to come well-armed, as they tried once before,” he said.
The ECB letter – La Lettera as it is known simply in Italy – was the secret diktat sent to Italy’s leader Silvio Berlusconi in August 2011. It demanded drastic “reforms” of all kinds. A similar letter was sent to Spain’s leader. The quid pro quo was bond purchases.
The implicit threat was that the ECB would refuse to carry out its responsibility as lender-of-last resort unless Mr Berlusconi capitulated. He did not, or was deemed not to have done so. Bond purchases were halted. Italy’s 10-year yields spiralled above 7pc. Mr Berlusconi was toppled.
I have always thought these two letters would come back to haunt the ECB, and monetary union itself, and so it is now unfolding.
“[Mario] Draghi [the president of the ECB] has told us that governments that don’t reform will be thrown out. He is not a member of the government and I don’t know with what authority he demands these reforms. He has no right to order us around, either directly or indirectly,” said Mr Casaleggio.
Cinque Stelle won 26pc of the vote in Italy’s general elections last year, more than any other single party. (It did not win the biggest bloc of seats because of the way the parliamentary system is designed). It has 108 deputies in the lower house, and 54 senators.
It is true that premier Matteo Renzi has stolen Beppe Grillo’s thunder this year but Cinque Stelle has not faded away. It came second in the European elections in May, winning 21.5pc of the vote. Its 17 MEPs sit with UKIP in Strasbourg.
Mr Renzi’s honeymoon is already over, and he has in any case made a strategic misjudgement. The young Wunderkind snatched power in an internal party coup in February – with tactical brilliance, to be sure – on the assumption that Italy had touched bottom after six years of depression, a 9.1pc fall in output, a 24pc crash in industrial production, and youth unemployment of 43pc.
He believed the mantra, so widely put about, that Europe was on the cusp of a fresh cycle of self-sustaining recovery, lifted off the reefs by world growth, and that all he had to do was to float on the rising tide. Instead, it has crashed back into slump.
Mr Renzi’s error is understandable. Wishful thinking has been pervasive, even though such recovery claims skate over Irving Fisher’s theories of debt deflation, or Knut Wicksell’s theories of self-feeding spirals caused by credit contraction and misaligned interest rates, or indeed Michael Woodford’s more recent theories of the real exchange rate.
Italy is already in a triple-dip recession, its output back to levels first reached fourteen years ago. The OECD says the slump will drag on through most of next year. Growth will be just 0.1pc in 2015.
Note that the Monti government said three years ago that Italy’s debt ratio would end 2014 at 115pc.
In fact it reached 135.6pc of GDP in the first quarter this year, soaring at a rate of 5pc of GDP each year, despite a series of austerity packages, and a primary budget surplus of 2.5pc.
Antonio Guglielmi from Mediobanca warned last month, that this is “catastrophic for the finances of the country”. The debt will automatically rocket towards 145pc next year (under the old measure, cut to 140pc under new accounting rules). “It is going to take a nuclear bomb to turn this around. If Draghi ends up doing almost nothing, Italy is dead,” he said.
This is not a moral failing by Italy over recent years. It is a mechanical “denominator effect”, the result of a rising debt burden on a shrinking base of nominal GDP.
The point is very simple. The average interest rate on Italy’s public debt is still around 4pc, so interest payments are near 5.5pc of GDP. Unless nominal GDP grows at the same speed, the debt ratio must keep going up. Structural reform is no doubt desirable as an end in itself, but it has nothing to do with the matter at hand.
Italy’s current crisis is ENTIRELY due to monetary policy failure and the refusal of the ECB to meet its inflation target, or to comply with its own Lisbon Treaty obligations to support growth. (And yes, it does have a dual mandate under EU Treaty law.) The more that Italy carries out drastic reforms in these circumstances, the worse it will get. The short-term effects of reform are famously contractionary.
We have reached a remarkable state of affairs in all three of EMU’s leading economies: France’s Front National swept to victory in the European elections in May with calls for an immediate return of the French franc; Germany’s anti-euro party AfD has suddenly broken into three state parliaments with calls for a return of the Deutsche Mark; and now Cinque Stelle wants a return of the lira in a country that has been reliably and passionately pro-European for sixty years.
Takes some doing.
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