Month: June 2012

Back in November, Monti’s popularity was such that he could have imposed to parliament and to the country measures that would have been impossible to even discuss for the previous governments. His power was not due to the usual honeymoon effect, as here there was no election and no love, only fear of national bankruptcy and the general consensus that if there is someone that can save Italy, it is Super Mario.

Eight months later, the day after parliament finally passed the most complicated bill introduced by Monti (which had to be pushed with repeated confidence votes), the Labour bill, things are quite different. It is possible, even if not likely, that Monti will have tried to pressure his European colleagues at the summit currently underway that unless he comes back home with a tangible result from his list of requests, he will resign. It wouldn’t be an empty threat. Monti knows that his power base, the Italian people, has eroded as Italians have seen the famous ‘spread’ return back near the levels last seen during the last days of Berlusconi’s administration. Simply put, Italians agreed to tighten their belts without too much complaint but were expecting in return to be able to return borrowing at European and not South American rates, to see Italy diverge from not only Greece, but also Spain, Portugal, Cyprus.

Unfortunately, this hasn’t happened and there are two main reasons for this, the first endogenous and the other one exogenous, as Monti himself would have said in his Macroeconomics classes. The exogenous variable is the continuation of the European crisis which sees markets continuing to go after the next perceived weak link. When Spain’s banks got bailed out, Italy’s started appearing in the crosshairs.  Monti is quite appropriately trying to address this by persuading Ms.Merkel that the markets need some short term mechanism that automatically speed-limit the borrowing costs of Italy, Spain and the like to deviate too much from Germany’s.  We will know soon if he succeeds. The internal issue is that Monti’s government ended up watering down its initial promises and has had to acquiesce to the political games in an even greater way as ‘normal’ governments, as he has no constituency in parliament of his own. The main example is the Labour bill: nobody likes it because it didn’t really achieve anything. Ms.Fornero had a historical chance of rewriting the book on Italy’s terrible labour laws but only achieved to change a few footnotes.

I contributed a comment on a recent UK Reuters piece about on-going European market volatility. The article can be found here.

http://www.thehedgefundjournal.com/magazine/201205/commentary/revisiting-consolidation.php

June is going to be even warmer than usual, not only in the Med, but across Europe. If the ‘anti-Europe’ parties win the re-vote in Greece, the EU and the ECB in particular will have to unsheathe whatever secret weapons they have prepared in order to prevent the great recession turning into the great depression of the twenty-first century.

There are three main outcomes following a ‘bad’ outcome in Greece. The most likely, but just, is still that the ECB and the EU will step up to the plate and do whatever it takes to keep Greece in the Euro despite the vote. This will have to include agreeing to much softer bailout terms, debt forgiveness, quantitative easing, and other novel weapons.

The second possible outcome is that Greece is allowed to leave the Euro in an ‘orderly’ fashion, i.e. with the cover of many of the same actions described above save of course for the softer bailout. The objective will not be to help Greece but to attempt to stop the rout by the Balkans and prevent a Southern European contagion. This will probably be a short term solution.

The third possibility is that in the context of a disorderly Greek exit, the ‘hard’ countries, led by Germany leave the Euro and adopt some new version of the DMark. This will have the effect of mitigating the depreciation of the ‘leftover Euro’ and of curing the problem of the two speed euro once and for all. Strong countries will adopt the new DM and be under German orbit, while the Med and others will have a ‘weaker’ common currency.

Clearly, all solutions save for one where the Euro remains in its current form with its current members will generate short term disruption in a scale that hasn’t been seen in most people’s living memory.