One can hardly follow Italian TV news bulletins and current affairs programmes today without noticing frequent references to ‘lo spread’. The bond dealers term ‘spread’ has acquired new political and popular significance as Italy faces one of its toughest economic phases in the last six decades.
The ‘spread’ represents the risk premium that the Italian government pays to borrow over Germany. However, for the governing coalition ‘lo spread’ represents a symbol of a hostile force that is trying to oppress the Italian people who have suffered for long enough by the application of EU stringent fiscal rules.
A cold-blooded analysis of Italian economic indicators is indeed worrying. However, the government coalition made up of a strange coalition of the extreme right, and extreme left Eurosceptic parties are putting electoral expediency before fiscal rectitude. Vice premier Matteo Salvini, whom many consider as the most powerful politician in Italy, does not mince his words when attacking Brussels politicians.
“The enemies of Europe are those barricaded in the bunker of Brussels,” said Salvini. He accused European Commission’s president Jean-Claude Juncker and Economics Commissioner Pierre Moskovici of being villains who “have ruined Europe and our country” through austerity measures.
Many economics analysts are worryingly predicting that Italy’s finances and economic indicators are unsustainable and may well lead to the next major recession in Europe. A mountain of sovereign debt, weak banks, and an erratic government are a lethal cocktail that could spark a loss of confidence in financial markets. The premium that the Italian government has to pay to borrow money is over three per cent above that applicable to Germany.
Debt and weak banks have a great multiplying effect when a country like Italy faces turbulence
Many are comparing Italy’s economic and financial situation to that of Greece in 2010. Major financial crises seem to occur every 10 years. Europe may be due to experience one very soon, and Italy may provide the spark that ignites the next crisis. However, Italy is not Greece. Its economy is the third-largest in Europe and contributes to 11 per cent of the European Union’s GDP. This GDP is 10 times as much as that of Greece.
The Italian government, especially the two maverick Eurosceptic vice premiers Matteo Salvini and Luigi Di Maio, are not worried. The popularity of La Lega and Movimento 5 Stelle keeps rising as many ordinary people feel they have had enough of traditional centre-right and centre-left politicians. Salvini and Di Maio know that their confrontational style with Brussels will win them more support in the forthcoming EU parliamentary elections. They already have over 60 per cent popular support in Italy, while Forza Italia and the Partito Democratico wallow in internal battles as they have become insignificant for many Italians.
The EU is unlikely to take a hard line against Italy for ignoring strict fiscal guidelines. The European Commission has its own problems to handle. In the run-up to the parliamentary election, the Commission is focusing on combating the surge in the popularity of Eurosceptic parties in many countries as many ordinary people feel disenchanted with traditional politicians of the right and the left. Taking a hard line against Italy could well have the effect of strengthening populist parties in Italy and in other countries.
Italy may suffer financial consequences in a few years’ time if they break the fiscal rules in 2019. However, this is a worthwhile price to pay if it guarantees electoral success for the governing parties. Rating agencies and financial markets may not have the same mindset. Fitch Ratings is not impressed by the ‘disorderly build-up’ to the Italian 2019 Budget. A further downgrade is now likely.
Debt and weak banks have a great multiplying effect when a country like Italy faces turbulence. Central banks have never been put to the test of rescuing a significant economy in a time of crisis. Spain, Portugal, Ireland and Greece have relatively small economies that the European Commission, ECB and the IMF could handle with some difficulty. Italy is in a different league.
As in other EU countries, political rhetoric and spin are what is undermining political democracy in Italy. Di Maio said on a television interview that he cares about markets and the spread. However, when faced with a choice between bond yields and the Italian people, “I choose the Italian people”.
As often happens when mediocrity becomes the hallmark of politics in a particular phase of a country’s history, the chickens will eventually come home to roost. Italians have suffered for long enough under traditional politicians. They may suffer more under maverick populists.
johncassarwhite@yahoo.com