Summary
Last week, Italian President Sergio Mattarella blocked the formation of an anti-European coalition government consisting of the anti-establishment 5 Star Movement and League parties. Instead, he appointed a new prime minister, Carlo Cottarelli, a former director at the International Monetary Fund. But Cottarelli is expected to lose a vote in the Italian parliament, which means that Italy is headed for a second election, possibly as early as July. And the outcome of the new election is expected to be more dangerous than the first one because the populist parties could win a more significant parliamentary majority. The outcome could bring the severe damage to both Italy and European Union as the populist parties insist the opinion of Italy’s snub to Europe.
Worries rapidly escalated that the future government could take a tougher stand against the euro. On Tuesday, the Italian bond spread, an essential indicator of investor concern, rose to its highest level in four years, implying that Italy was losing the investors’ trust. Meanwhile, the Milan stock market slumped to its lowest level since July 2017, and the euro dropped to its lowest level against the US dollar in six months.
Italy at risk of new financial crisis in wake of coalition’s collapse
Italy risks careening into a new financial crisis after the Bank of Italy said the country’s leaders could not “disregard” financial constraints and its commitments to Brussels.
Escalating worries that Italians may be poised to take a tougher stand against the euro prompted a round of accusations and finger-pointing among EU officials, including a rare admonishment by Donald Tusk, the European council president, who said EU institutions needed to show “respect to voters” in Italy.
“We are there to serve them, not to lecture them,” Tusk said after the German budget commissioner, Günther Oettinger, had suggested the market turmoil in Italy would show voters the dangers of supporting populists.
Ignazio Visco, the Bank of Italy chairman, said the country was at risk of losing the “asset of trust” with investors. On Tuesday the Italian bond spread, a leading indicator of investor concern, rose to its highest level in four years.
The crisis was set off late last week when the the Five Star Movement (M5S) and the League, which had been attempting to form a government, insisted that the president, Sergio Mattarella, approve their choice for finance minister, Paolo Savona, who is a fierce critic of the euro. Mattarella vetoed the nomination and the incoming populist government collapsed before it had taken power.
The president appointed a new prime minister, Carlo Cottarelli, a former director at the International Monetary Fund, who was expected to present a list of ministers to Mattarella on Tuesday. The president’s spokesman said after a meeting that the two officials would meet again on Wednesday morning.
Cottarelli is expected to lose a vote of confidence in the Italian parliament, which in turn is likely to lead to a new election, possibly as early as July.
In Brussels, politicians were supportive of Mattarella’s move, which was seen as protecting Italy’s position in the eurozone. But there was also concern that the populist parties could win a bigger parliamentary majority in the new election, creating a bigger risk for the future of the eurozone.
In an interview with the German news network Deutsche Welle, to be aired on Tuesday night, Oettinger said: “My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy’s economic development could be so drastic that this could be a possible signal to voters not to choose populists from left and right.”
The Italian embassy in Brussels responded by tweeting to Oettinger and Tusk: “Italian voters do not need any teaching. Free #elections and #democracy are key European values.”
Manfred Weber, the leader of the largest group in Brussels, the European People’s party, of which the German chancellor, Angela Merkel, is a member, said he trusted in the Italian constitution and its president.
The leader of the socialist group, Udo Bullmann, a German MEP, said Mattarella had done “a great job” and had “safeguarded the future of the next generation”.
But Philippe Lamberts, the leader of the Green group, warned against complacency. “Let me be clear: I have no time for the government that was being formed in Italy, but like it or not that was the choice made by Italians and at some point in time you have got to accept that,” he said.
“Would it have endangered the eurozone? Yes, of course, but what we have seen over the weekend [is] that tensions in the financial markets have not calmed down but been exacerbated.”
Oettinger late apologised for being “disrespectful”, although he claimed he was only reflecting the “actual” market reaction.
A statement from the European commission said: “The president of the European commission, Jean-Claude Juncker, wishes to put on record his conviction that Italy’s fate does not lie in the hands of the financial markets.
“Regardless of which political party may be in power, Italy is a founding member of the European Union that has contributed immensely to European integration. President Juncker is convinced that Italy will continue on its European path. The commission is ready to work with Italy with responsibility and mutual respect. Italy deserves respect.”
Guy Verhofstadt, the former prime minister of Belgium, who leads the liberal group, said the crisis proved the need for an EU finance minister with a budget and a banking union to ease the pressure on the eurozone during such periods of political instability. “Everyone knows what we need to do,” he said.
Mattarella has faced a political storm and threats of violence over his decision. Some critics argue the two populist parties that emerged as the had a mandate to challenge the euro.
On Sunday Mattarella emphasised he had accepted most of the populist government’s recommendations, despite “perplexities” over its choice of prime minister.
“I shared and accepted all the proposals made for the ministers, except the one for the minister of the economy,” he said. He had sought an individual who “may not be seen as the promoter of a line of reasoning … that could probably, or even inevitably, provoke Italy’s exit from the euro. This is evidently quite different from having a strong attitude within the European Union in order to improve it for the better from the Italian point of view.”
Until the weekend, investors had remained calm about the prospects for the Italian economy and its public sector debt mountain, which ranks as the third largest in the world behind the US and Japan.
But the Milan stock market slumped on Tuesday to it lowest level since July 2017, 3,000 points lower than its best performance this month.
The euro, which Italy uses as its currency along with 18 other countries, dropped to its lowest level against the US dollar in six months.
Fiona Cincotta, a senior market analyst at the spread betting firm City Index, said Italy’s unsettled domestic politics had also damaged confidence in London, where the FTSE 100 closed down 1.26%.
Source: The Guardian, Stephanie Kirchgaessner, Daniel Boffey and Phillip Inman, May 29, 2018. Photo credit to Daniel Dal Zennaro/EPA.