vrijdag 18 mei 2018

Return of the lira


Nick Hubble

Dear Reader

The lira is coming back. After two months of silence from Italy’s coalition negotiations, it’s all happening too fast.

Remember, politics is Italy’s only way out of the euro. That currency and its monetary policy has kept one of the world’s major economies in the doldrums since its inception. GDP has barely grown since Italy joined. There have been five recessions in that time.

But the people are fighting back. Three eurosceptic political parties rose to prominence by rejecting the euro and the EU’s rules. They’ve since softened their stance on Europe to just rejecting the EU’s budget rules. But the anti-euro sentiment is still in the electorate.

Yesterday evening the Five Star Movement and Lega struck a deal to form a government together. The consequences for the EU, the euro and debt markets couldn’t be bigger.

If you want to be prepared for the coming crisis, keeping an eye on Italian politics is crucial. I’ll try and make a confusing mess coherent for you…

Italy’s new government

The compromise set of policies between the far-left and centre-right are full of dramatic changes to the status quo. The new government will likely launch its own parallel currency to compete with the euro, completely trash what’s left of Italy’s fiscal ruins, and become a major pain in the neck for the EU. That’s the summary, anyway.

This is very much in line with my prediction about what’ll happen to Europe in coming months.

One stepping stone towards the crisis was provided by the former Italian leader Silvio Berlusconi. He gave his endorsement for the other two major parties to form government last week.

These are the left-wing Five Star Movement and the fairly far right-wing Lega. They were at the negotiating table until last night, when they announced a deal.

The left/right mantra is proven false by the fact that these two parties could form a coherent set of policies. In truth, they are merely promising dramatic change. There isn’t much traditional coherence in their positions. It’s a real hodgepodge of ideas. Some of them I even like.

Berlusconi’s endorsement was crucial because his party had expected to form government with Lega in a coalition deal made before the election. But they didn’t get enough votes, even together. Lega more or less needed Berlusconi’s permission to leave the alliance and join up with Five Star.

The new coalition between Five Star and Lega is expected to throw up an odd set of policies:

  • The prime minister will be a neutral arbitrator between the leaders of the two parties. Probably a career diplomat.
  • Pension reforms will be stopped, putting Italy back on to a disastrous fiscal path instead of just a bad one.
  • A flat tax on companies and people will mean a huge tax cut costing tens of billions of euros a year.
  • A type of universal income will launch to ensure minimum living standards.
  • EU fiscal rules will be renegotiated to allow Italy to stimulate its economy with deficit spending.
  • Immigration cuts.
  • Pushing for a pro-Russia agenda in the EU.
  • And, most importantly, the country will explore launching a parallel currency.
Most of those policies only worsen Italy’s fiscal decline. Some are all about sticking it to the EU. Italians see the immigration debacle as Angela Merkel’s fault for her open-door policy. Now they’ve had their say by giving Merkel a rock in her boot.

But it’s the parallel currency that’s the key. This is essentially the first step to leaving the euro. It’s still well disguised. But that’s what it is.

I’ll explain what the Italians have planned for their money in a moment. First, realise what it’ll mean.

If the Italians pull this off successfully, there’ll be no reason to keep the euro. And other nations will follow Italy.

If a big chunk of the eurozone isn’t using the euro, it’s defunct.

And a defunct currency is worthless. Which will make debt markets denominated in euro panic.

You may be interested in

One of the world’s most powerful central banker warns investors…

The NEXT financial crisis starts here

This critical indicator helped predict the last debt crisis. Now it’s flashing a critical warning to investors once again

Capital at risk. A regulated product issued by Southbank Investment