 The end of Berlusconi – but not the end of the crisis
After a day of political drama, it is now over for Silvio Berlusconi. He got 308 votes on the bill to validate the 2010 budget, 8 eight short of an absolute majority. The bill was passed because the opposition abstained but it was clear that Berlusconi had lost the majority. After the vote he went to see President Giorgio Napolitano, who later announced that Berlusconi would step aside after a vote on the economic stability law, due next week. These are the measured Berlusconi promised the European Council, and which will incorporate additional demands made by the European Commission. (But as ever, it will be important to look at the details of the actual package, and assess its impact.)
Corriere della Sera reports that Berlusconi gathered the most senior politicians of his coalition at his residence in Rome last night to discuss further strategies. The article refers to a paper in which he outlined various options – to resign, to accept a technical government, new elections. In a telephone interview, Berlusconi later explained that his preferred solution would be new elections.
There is still much uncertainty about the succession. The names most frequently mentioned are those of Gianni Letta, cabinet under-secretary and Berlusconi’s most trusted lieutenant (who worked for him at Fininvest after a journalistic career). The other is Angelino Alfano, the party secretary of Berlusconi’s PdL. Umberto Bossi of the Lega Nord favours Alfano. Corriere writes that that opposition leader Pier Luigi Bersani rejects both, unsurprisingly, and says the only constellation the opposition would support, is an interim technical government. One of the candidates frequently mentioned in this context is Mario Monti.
The global market reaction to the news was positive. Global stock prices rose after the announcement, but Italian spreads which breached the 5% mark yesterday, came down only a little.
Olli Rehn writes a letter
La Repubblica has a letter by Olli Rehn to the Italian government, highlight 39 points on which Italy needs to report back to the European Union in terms of fiscal adjustment and economic reforms. The letter started with a statement that the economic deterioration has blown the balanced budget projection off course, as a result of which Italy needed to pass a new mini-budget to take account of the deteriorating fiscal position. (The EU is still chasing deficit targets in a recession, which is likely to prolong and deepen the recession. We expect that Italy will, as ever, comply with any fiscal demands, but will be more resistant to structural reforms. The combination of the two will be severely negative for economic growth, and thus to debt sustainability.)
Martin Wolf and Nouriel Roubini on why the eurozone is very likely to break up
In his FT column, Martin Wolf write that a break-up of the eurozone is hard to avoid. He calculates that a combination of real interest rates of 4.5% and real growth of 1.5% (the average of the last decade, and a very flattering assumption), Italy’s needs a primary surplus of 4% indefinitely to sustain its debt level at 120% (and more to reduce it).
In his column, he quotes at length from a recent analysis by Nouriel Roubini, whose core argument is worth laying out in some detail. Roubini focuses on stocks and flows and derives at the following four scenarios. 1. Aggressive monetary easing, leading a weaker euro, fiscal stimulus in the core, austerity in the periphery 2. deflationary adjustment and structural reforms in the periphery 3. Transfer union 4. partial break-up of the eurozone.
The first would be feasible (but politically unlikely in our view). The second would fail to produce the adjustment I time. The third would bankrupt the core. Not many choices, really.
John Plender warns about technical governments
John Plender warns in his FT column that one should not place too much faith in technical governments – options that are now under consideration in both Greece and Italy. Historically, technical governments in Italy have failed to implement big reforms. And the environment in which a technical government could function is not good, especially, as Plender puts it, “if the electorate thinks the government is taking dictation from punitive German politicians.”
New Democracy holds up nomination of interim government
The two parties were close to naming a new prime minister, with Lucas Papademos back in the picture, but the process was held up by New Democracy leader Antonis Samaras who objected to eurozone demands for a written commitment to the fiscal targets and measures. He insisted that his verbal commitment should be enough. Samaras faces internal party divisions since his staged U-turn on the package last week. He is expected to write to the European Commission and eurozone officials to explain that he is committed to the existing agreements and fiscal targets but wants to reserve the right to change the policy mix, according to Kathimerini. But Commissioner Olli Rehn warned that, without the signed documents, Greece would not receive the loan instalment of €8bn it is expecting. New Democracy sources insist that the standoff would not damage coalition talks.
CDU wants to turn Germany into an ECB superpower
Angela Merkel’s CDU wants to dramatically increase Germany’s influence in the ECB’s decision making, Financial Times Deutschland writes. In a position paper for the party convention next week in Leipzig, the CDU will ask that “the presidents of the national central banks vote on all decisions in the governing council with weighted votes according to the economic power of the national economies”, a draft says. “Additionally a majority of the board’s members is required for the adaption of a decision.” Should the CDU request one day become reality, it would give the Bundesbank president a weighted voting power of 27%, which is Germany’s capital share in the ECB and which is by far the largest share of any euro country. Such a decision making modus would represent a dramatic shift away from the current one-man-one-vote practise where the Bundesbank president has the some voting power as Malta’s central bank governor. The party’s request is a reflection of the revolt in Germany’s political and economic establishment against what they perceive as a takeover of the ECB by the southern European countries.
The ECB could end up refinancing the EFSF after all
According to Le Monde, the debate about the ECB refinancing the EFSF could return quickly if Italy needed assistance urgently and the euro rescue fund was short of money to do so. “Led by France, the Latin countries have not abandoned the idea of anchoring the European financial stabilization fund at the central bank in order to turn it into a bank”, Le Monde writes. “The idea is not on the table of negotiations, but it is in everybody’s head”, several sources told the paper. “It will come up again if the difficulties continue to escalate.”
Wise men expect soft landing for German economy
The so called wise men’s group (they are actually four men and one woman) expect Germany to grow by 3% this year and 0.9% next year, according to Frankfurter Allgemeine Zeitung. In their yearly report, to be presented today, the economists will also say they expect unemployment to drop further from 3m to 2.9m on average. The group underlines, however, that the on-going eurozone crisis presents formidable downside risk to their projections. Should the crisis escalate further, they expect German growth to drop to 0.4% only. Should the crisis spiral out of control and provoke worldwide turmoil, German growth might even turn slightly negative.
Weidmann criticises Merkel over tax cuts
Bundesbank president Jens Weidmann criticised Angela Merkel over her government’s decision to lower taxes by €6bn in 2013 and 2014, Financial Times Deutschland and Handelsblatt report. “I would advise the German government not to weaken its fiscal stance by spending any revenue windfalls, but rather to continue the timely consolidation of the budgets at all levels of government”, he said. It was more important for Germany to be the eurozone’s credible stability anchor than to engage in a “short lived fiscal stimulus”, he added, reminding the chancellor that the government had to abide by the constitutional debt rule. Weidmann’s comments may encourage the opposition Social Democrats who threaten to block the cuts in Bundesrat, the second chamber, and to take the government to the constitutional court for not abiding by the debt break.
Spreads, Forex, and ZC Swaps
Italian 10-year spreads yesterday went through 5% mark, but have just below this level at 4.96% this morning. This is a surprisingly mild reaction to Berluconi’s announcement that he would stand down. The bond market seem to think that it makes no material difference. Notice also the steady creep of French spreads.
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