Of Marcello Minenna
What is happening in Italy represents the stone in the pond of German and French intentions, the stimulus to reflection for a European apparatus that so far has shown itself to be almost indifferent to the economic and social implications of too rigid fiscal discipline.
The first exam will be, like at school, in June on the occasion of the meetings of the Eurogroup and the European Council on the review of the Monetary Union.
But unfortunately it is difficult to concentrate on this, given the heart-pounding developments in the Italian political scenario; developments that are fundamentally derived from the expansive approach of the Lega e economic policy program 5 position.
International concerns
Dream book or not, international stakeholders have expressed concern that so far not even the twist of Cottarelli's appointment seems to have succeeded in bringing him back given the uncertainty about the date of the next elections and the consequent political-institutional framework.
A new scenario is therefore emerging in Europe which could re-open the debate on some Eurozone rules hitherto considered to be solid and on the proposals to reform our currency area developed in recent months by Germany and which obviously reflect on the assessments of the financial markets.
In fact, the markets do their part and must also include extreme scenarios in the estimates such as Italy's exit from the Eurozone with all the associated. And so – Quantitative Easing permitting – the yield differential with respect to the Bund has gone beyond 3% (300 basis points).
Confirming this analysis are the two main market indicators of redenomination risk, that is, the risk that Italy returns to the lira and can benefit from the debt reduction resulting from the weakening of the new national currency compared to the euro-mark: the ISDA basis and the spread between securities governed by domestic law and those governed by foreign law and/or with CAC.
The ISDA basis is the difference between the credit-default-swap price (CDS) reported to a sovereign issuer according to the new standard (fish 2014) and the price of the same contract according to the old standard (fish 2003). Under normal conditions this difference is modest, but when the risk of redenomination increases, the ISDA basis soarsbecause only the new standard includes conversion to a new currency among the credit events that trigger CDS coverage. In the last month, Italy's ISDA basis more than quadrupled going from 27,5 a 113 basis points.
Also the spread between securities subject to domestic law and those subject to foreign law or with CAC (the collective action clauses introduced since January 2013) is experiencing a similar dynamic. As I explained in a report drawn up with researchers from Mediobanca, Local Law qualifications are subject to the Lex Monetae (e, Therefore, to the renaming) without problems, while the Lex Monetae is not applicable to securities governed by foreign law and problematic for those including CAC because these clauses limit the sovereignty of the issuing State over the portion of its debt that incorporates them.

Voices from Germany

 
In Germany the ordo-liberals have been working at full speed on the revision of the Eurozone for some time. At the beginning, Italy was the stone guest of their proposals; now the veil is lifted.
Clemens Fuest – president of the IFO Economic Research Institute, that already in March (after the elections in Italy) had supported the opportunity of an exit clause from the euro – he thundered again: in his opinion the ECB should cut credit to the Bank of Italy as part of Europe's interbank payment system (Target2), stop purchasing our government bonds and stop accepting them as collateral from banks. In a nutshell: administer to Italy the same treatment used with Greece.

Read also: “Germany proposes a way out of the euro. To protect herself“

Equally drastic i 154 German economists who a few days ago they signed a manifesto that preaches the principle of responsibility of individual national governments. The official recipients of the manifesto are the French president and the president of the European Commission who promote albeit moderate forms of "union of responsibility" in the architecture of the Eurozone. Germany has already given too much – they argue 154 economists – as they demonstrate, in their opinion, the beyond 900 billion in Target2 credits from the Bundesbank. Our thoughts inevitably turn to Italy which instead, su Target2, has a negative balance of more than 440 billions of euros.
We are sure that the market turbulence is not also due to these rigid positions which increasingly distance the project of a federal Eurozone?

 

The contradictions of austerity

 
Yet there is something wrong with the austerity-based approach. Greece's recent experience is emblematic: 3 “rescues” in just 5 years (dal 2010 al 2015) and the country is still far from recovering. But even without looking that far, Even here the scenario is anything but rosy. In recent years – as I have illustrated in detail on Financial Times Alphaville – Italy has experienced a major collapse in investments: between 2009 and the 2017 public ones fell by 35%. And the latest ISTAT data for the month of April, confirms the negative trend which is not good for growth at all. A growth that is already starting to languish: the latest estimates from the Parliamentary Budget Office have revised the increase in GDP for 2018 to the downside of 0,1% (from 1.5% to 1.4%). Nor are we better off in terms of unemployment: still around 11% with peaks of over 30% among young people who pass the 50% in some southern regions.
With these data it seems incredible (but it's true) that for Europe our actual GDP is substantially aligned with the potential one, that is, what would occur in the hypothesis of full use of production factors. However absurd the explanation for this paradox is that, as Italy is now profoundly de-industrialised due to a shortage of investments, the Euro-bureaucracy considers our level of unemployment compatible with the country's low infrastructural endowment.
 

Stimulate investments by enhancing national savings

 
In this context, Lega e's will is understandable 5 Stars stimulate investment: a bet on the future, on our ability to return to playing a leading role on the European and global playing field. I've always believed that, also with a view to limiting the reliance placed on public funding, it could be useful to involve the private sector. Italians have a high propensity to save which could be profitably used to rebuild the country's infrastructure, possibly providing for the use of appropriate financial engineering solutions. I recently developed a proposal that provides for the creation of a sovereign investment fund that enjoys state guarantees and offers retail and institutional investors differentiated risks and returns in the form of tax discounts and extra returns linked to the performance of the financed project.
Such a fund could operate in synergy with the Cassa Depositi e Prestiti which also due to its role as "national promotional institute" (regarding the Juncker Plan) it could centralize the use of European structural and investment funds currently dispersed in the streams of regional and state bureaucracy.
And then we deserve the support of European partners: the pro-cyclical provisions of the Fiscal Compact that prevent governments from financing highly profitable investments should be reviewed in an anti-cyclical sense and, at the same time - as I have suggested on several occasions - direct support measures are needed for the most fragile economies by European institutions such as the State Rescue Fund (ESM).
These solutions could easily mobilize more than 100 billions of euros and accelerate our GDP, allowing, among other things, to bring the evolution of public debt under control.
 

The enigma of public debt without monetary sovereignty

 
Another central theme in the interaction with Europe is the approach to public debt. At the height of the crisis we saw first-hand how the architectural fragilities of the Eurozone can favor divergent dynamics between member countries: the spread indicated a different cost of money for each of them, an authentic “shadow currency” in the financial economy. The resurgence of recent days proves that the problem remains unsolved. On a technical level - as authoritative foreign economists including Paul De Grauwe and Peter Bofinger have also observed (member of the Council of Economic Advisors of the German Government) – given the operational limits of an ECB which has exclusively one objective in terms of inflation, Eurozone states borrow de facto in foreign currency, which makes them extremely vulnerable in case of difficulty.
With the aim of contributing to the debate on this topic - until now an almost exclusive prerogative of the Germans with the sweetened participation of France - I have developed a proposal to achieve a gradual mutualisation of the sovereign risks of member countries (not to be confused with the mutualisation of debts) through a supranational guarantee from the State Rescue Fund. In order to avoid the usual criticism from Germany and its neighbors, the most indebted states (starting from Italy) should pay the ESM periodic premiums equal to the market price of the collateral received.
Thanks to risk sharing (risk-sharing) between member countries, such a measure would restore the uniqueness of the term structure of interest rates in the Eurozone, definitively archiving the spread dossier and allowing the transition to a federal public debt of our currency area. Something very different from the ESBies proposal – on which the 25 last May, the proposal for a regulation developed by the European Commission was released - which provides for a partial securitization of public securities of member states without any sharing of risks. Government bonds would therefore be packaged to issue new bonds: some safe or "safe" as the authors of the proposal say, others much less. Ma, as I explained some time ago on the pages of Wall Street Journal, ESBies wouldn't solve the problems; rather they would end up increasing the segmentation of the public issuer bond market within our currency area, due to the division into at least two tranches (senior titles and junior titles) with heterogeneous risk-return profiles. It would be nothing other than the formalization of the euro 2 speed.
As noted by Daniel Stelter, founder of the German think tank Beyond the Obvious, it will be difficult to ignore Italy's requests, third largest economy and founding country of the Eurozone. Let's hope he is right and that by putting forward the right proposals we will overcome German rigidity. Investing in a future of the euro with shared risks is in fact the responsibility of all Eurozone partners, taking into account that, as Flaiano said, "the best is over": oil is no longer at 30 dollars per barrel and sooner or later the economic cycle will turn its back on us if it hasn't already started.
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Source: https://www.maurizioblondet.it/col-nuovo-governo-i-tedeschi-saranno-costretti-ad-ascoltare-le-proposte-italiane/