New elections could see Italy drop euro
Further political convulsions in Italy this week threatened a Europe-wide financial crisis as well as an opening for the far right to move into government.
As we’ve been reporting, negotiations to form a government after the March 4 elections have been protracted, understandably since the result gave two populist parties at opposite ends of the political spectrum and socioeconomic demographics roughly equal vote shares, but neither enough to take power on its own. They are the right-wing League, based in the more prosperous north, and the anti-establishment Five Star Movement, strongest in the lagging south.
A week ago, it seemed the League and Five Star had formed a coalition, proposing a law professor as prime minister to avoid having to choose between their leaders.
Then they hit an obstacle, in the unlikely form of the Italian president, Sergio Mattarella, a quiet and rather grey figure who had only entered politics after he pulled the bloodied body of his brother Piersanti, governor of Sicily, from his car after he was shot and killed by the Mafia.
The president objected not to the coalition, nor its proposed premier, nor even the planned appointment of the League’s leader, Matteo Salvini, as interior minister with an announced intention to detain and deport half a million migrants and asylum seekers. He opposed the selection of a well-known opponent of the European common currency, Paolo Savona, as minister for the economy.
Mattarella then moved on Monday to appoint another economist, Carlo Cottarelli, as interim prime minister with the task of getting a new budget approved ahead of fresh elections. Five Star leader Luigi Di Maio was outraged, but then had second thoughts and is working on a government without Savona. Fresh elections looked a gift to the League to expand its power, and many wondered whether Salvini hadn’t created the impasse for this purpose.
As well as extending Europe’s political swing to the right, new elections will be a referendum on the euro. Five Star and the League have been ambiguous about staying with the common currency, and surveys show most Italians still support it, but that could now change. If Italy, one of the founding core members of the European Union, left, that would be the death of the eurozone.
This prospect led investors to dump Italian shares and bonds this week, making refinancing of debt amounting to 120 per cent of gross domestic product look difficult. Italy was not far away from the “very serious risk of losing the irreplaceable asset of trust”, its central bank governor, Ignazio Visco, warned.
Mattarella is asking the country to think about it. But there are other voices saying a rethink of the euro is overdue. “The singular reason for Italy’s woes is its membership of a terribly designed monetary union, the eurozone, in which the Italian economy cannot breathe and which consecutive German governments refuse to reform,” wrote the former Greek finance minister and University of Sydney professor Yanis Varoufakis.
If we think there’s always China to carry us through any economic wobbles in Europe, some economists are urging us to think again as they look at that country’s enormous mountain of debt, amounting to 260 per cent of its GDP.
Reserve Bank of Australia governor Philip Lowe dissected it in a speech recently for the University of Technology Sydney’s Australia–China Relations Institute. He pointed out that much of the debt has come from the “shadow banking” sector, the thousands of smallish financiers offering savers higher interest rates than the big state banks and lending it out with fewer questions.
Lowe signalled it as a big worry for Australia, but offered the reassurance that the RBA had more experts watching China than any other country and counterparts at the People’s Bank of China were taking steps to defuse the debt bomb.
But this week one of his former colleagues, Stephen Joske, previously posted by the RBA to the Australian embassy in Beijing and since then a private-sector China-watcher, said it was no longer a matter of if but when a Chinese financial crisis would happen. Official responses to the debt problem were “too late and too slow to avert a crisis”.
“China’s road to a crisis became irreversible in 2015,” Joske wrote in the Lowy Institute blog The Interpreter. Its authorities launched a stimulus when they should have let growth ease, and President Xi Jinping announced an annual growth target of 6.5 per cent through this decade. Xi’s accumulation of power meant these steps could not be questioned. Regular and shadow banks began concealing loans as they helped meet targets. “Reintroducing one-man rule in China is not only creating political tensions, but also leading to bad macroeconomic policy,” Joske said.
Addressing the debt bomb would mean winding back growth to 2 per cent, a political impossibility for Xi, Joske said. “So when will the financial crisis occur? The build-up of wholesale funding as reflected in the broad credit-to-deposit ratio for the financial system points to early next decade. The economic and political effects of this crisis, for which Xi himself will be to blame, are something Australia must prepare for.”
Xi Jinping is juggling a more immediate economic threat, as Donald Trump announced on Tuesday he was going ahead in mid June with 25 per cent punitive tariffs on $US50 billion worth of imports from China unless China changed “difficult and unfair” trade practices.
Beijing must have thought Trump mollified, after making a vague promise to step up imports of American products. Only a week ago, Trump had declared the tariffs suspended and called off sanctions on the Chinese mobile phone maker ZTE for exporting devices with high-tech chips made in the United States to places such as Iran, saying he felt sorry for its employees.
Steps had also been taken to benefit Trump and his circle directly: daughter Ivanka received unusually quick Chinese approval of more trademarks for her fashion and homewares products, while an Indonesian hotel and golf-course project involving Trump’s company got a $US500 million loan from China. But when you start paying blackmail, it never ends.
Trump’s announcement at the end of last week he was pulling out of his summit with Kim Jong-un played havoc with weekly newspaper deadlines, but by later the same day, he had proclaimed the summit back on.
The summit’s retrieval followed quick work by South Korea’s Moon Jae-in, who had most egg on his face from Trump’s pullout, since he’d only met Trump in Washington two days earlier and had not been warned. Moon called another quick meeting at the demilitarised zone with Kim Jong-un, who put out conciliatory messages to Trump.
With Trump’s second U-turn, US and North Korean officials met at the DMZ and in Singapore, the likely venue for the summit scheduled for June 12. Kim also sent one of his most senior advisers, former intelligence chief and Korean Workers’ Party vice-chairman Kim Yong-chol, to Beijing and also New York, where he met secretary of state Mike Pompeo to give some idea what Kim Jong-un is offering immediately in the way of “denuclearisation” and what he would expect in return. But 10 days is an awfully long time for Trump to stay on course.
This article was first published in the print edition of The Saturday Paper on Jun 2, 2018 as "New elections could see Italy drop euro". Subscribe here.