Did Mario Monti really come to Brussels, see Angela Merkel and conquer the euro crisis? Even though the Italian media (uniformly) and most foreign newspapers – including the NYT and Spiegel – portrayed the Italian prime minister in these semi-imperial terms, it is far from clear that he got what he wanted both at the June 28 European Council and at the July 9 Eurogroup meeting of finance ministers.
Monti’s idea when he went to Brussels was to have the EFSF-ESM act as an antidote to the spread, i.e. using the rescue fund resources to prop up the demand, and hence bring down the interest rate, for bonds of virtuous eurozone countries right on the path of fiscal consolidation and structural reforms (read Italy and Spain).
On paper that’s exactly what he got, but only on paper. To effectively fight the spread, the antidote needs to have access to almost unlimited resources – for example by being able to borrow from the ECB – so that an upper limit to the interest rate paid by those bonds can be declared and credibly maintained. But that access was denied and what the rescue fund can count on now is not enough to sustain the financing needs of Italy and Spain. Moreover, intervention should have been automatic (above the upper limit), whereas now it has to be triggered by an explicit request of the countries in distress.
Markets are not impressed by paper tigers and thus the interest rate paid by Italy’s and Spain’s ten-year bonds, after the usual 24-hours of post summit euphoria, came back to slightly below 6% and 7% respectively – dangerous zones indeed in terms of debt sustainability. Note that talking in terms of spreads is increasingly irrelevant: you cannot expect them to narrow when the lower bound, what the German bund pays, keeps going down and down – down to negative territory in real terms.
Is there a Monti’s touch, capable of making defeats look like victories? Possibly. And it stems from the fact that almost no one has any interest in seeing his government fail. Monti’s receivership of the country is sponsored by a broad international consensus that includes the European Commission and the ECB, the Obama administration and certainly the German government – a consensus that began to coalesce exactly a year ago when a sudden and dramatic widening of the bond spread caught the government of Silvio Berlusconi wrong-footed.
The trust placed in Monti was repaid by his strong support of the fiscal compact, backed in turn by his swift and aggressive strategy of fiscal consolidation and structural reforms – the one on the labor market finally approved right on the eve of the European Council on June 27. Thus, seen in a longer-term perspective, Angela Merkel has found such a strong ally in the current Italian government that she’s probably happy to play, for public consumption, the role of the loser in a summit confrontation with Monti that probably never truly took place – particularly when at home she may argue, rather convincingly, that Germany gave away very little of substance. This Pirandellian gioco delle parti played also in Rome.
In fact, when Monti was about to leave for Brussels, Berlusconi let the world know that he had a number of reasons to be unhappy with the government, so much so that he was thinking about withdrawing his party’s confidence to the government in case Monti came back from Brussels empty-handed. Was this threat real or just a ruse to actually strengthen the Italian premier’s hand, whose premature ousting from power practically everyone dreads?
The latter explanation is backed by the fact, plain for all to see, that also at home no one has any interest in having Monti fall. All parties and politicians – and most of all Berlusconi and his allies - are still happy to shift the blame of austerity on a technocratic government. They also need time to settle their internal disputes and come up with some presentable electoral platform. In other words, a diffused political interest plays in favor of the current government reaching the natural end of the present legislature, in spring next year.
Thus, the multiple precarious political equilibria that keep Monti afloat somehow echo the much more unfortunate multiple equilibria for Italian debt yields. Beyond the (perhaps fake) battles of personalities, markets remain diffident toward the public finances of Italy and Spain and of the euro as a whole to survive as a common currency. Short, that is, of the nuclear option – which is unlimited backing of these countries’ solvency by the ECB, or some form of mutualization of the eurozone debt. Germany, which loathes that option, has clearly engaged in a game of brinkmanship, knowing that exercising it would probably mean an end to fiscal consolidation and structural reforms in both Italy and Spain.
Thus, a reformist-minded, federalist-inclined Italian, such as yours truly, is completely lost on what to hope for. On the one hand it is crystal clear to any reformist that the Italian political system is simply unable to cut and redirect toward more productive goals the country’s public spending, or to seriously deregulate its economy, without a pistol to the temple – the markets’ or Mrs Merkel’s or both. So, the longer the pistol stays there, the better and more numerous the reforms. On top of that, as the German government makes the nuclear option more and more conditional on further political integration, a federalist may see with sympathy the chancellor’s unwillingness to budge.
On the other hand, though, the brink remains unnervingly close and with it the likelihood of the euro eventually stepping over it too high to bear. Even for Mario Monti and his special touch.
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