The Italian drama

The Italian President blocked the appointment of a Eurosceptic finance minister and the new government formation has stopped. The parties are preparing to go back to the voters again! These are my thoughts now on what the Italian President did.

These situations are difficult to analyse in real terms. There are no templates and no precedents. Clearly, the President has to choose, in his opinion, the option with lower risks of blowing up the Eurozone. Of course, I am assuming that that is his objective. The alternative is too difficult to grapple with for many in Europe. Ask Tsipras.

So, the Italian President has chosen to thwart the government formation. He might have calculated that the political parties would go to the people again and that the voters might blink, this time. Incidentally, this is the calculation of those in the ‘Remain’ camp in the UK too and that is why they want a referendum again, on Brexit. But, the contexts are different.

In Italy, the public may conclude that the parties it voted for have been robbed off the opportunity to form the government, even though the President is apparently well within his constitutional rights to reject appointments to the Cabinet.  So, that is the unknown risk.

The alternative would have been to let the government be formed even with the Eurosceptic Finance Minister, betting on two possibilities. One is that the realities and compulsions of office mellow him and the government and two, the ‘Troika’ (or the ‘Duet’ of the European Commission and the ECB) manage to browbeat and defeat the government in Italy, making them fall in line as they did to Greece. Quite what it would do to Italy’s growth and public debt is another matter.  Greece’s fundamentals cannot be said to have improved much in the three years since the Troika managed to eject Yanis Varoufakis and co-opt Tsipras.

In the end, the real issue is about the suitability (or, otherwise) of the single currency, in economic terms, for the current member countries. But, the single currency is a political project more than an economic project and hence, solutions have to be political.

In that sense, does it make sense to keep the political drama domestic or make it a continental affair as happened for five months between Greecea and the European Commission+ECB (and a reluctant IMF playing along)?

Viewed from this angle, the decision of the Italian President becomes somewhat easier to understand although someone else might have decided to trust the European ‘powers-that-be’ to exercise their ‘coercive charm’ on the new Italian government (without solving the underlying issues as in the case of Greece) rather than risk getting the Eurosceptic parties a bigger mandate.

If that outcome materialises, some would conclude that the Eurozone project was proceeding in the right direction, after all?!

Since, in real life, counterfactuals are impossible, debates, analyses and arguments will remain inconclusive and continue into eternity.

From a trade surplus and balance of payments perspective, the Euro might be undervalued (and that too for Germany, for sure) but from the perspective of the pricing of a risk of implosion, the currency is probably not done falling against the US dollar. That said, it might actually rebound this week as financial markets might wager that the Eurosceptics might not come back to office.

[Pl. note that this does not constitute any investment advice. Period]

At this stage, I can only hope that there is someone like Yanis Varoufakis in Italy who would capture the drama for the rest of the world like he did with his excellent book, ‘Adults in the Room’.

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