My guess is that the austerians are going to blink first. Because in the battle of TINAs, the debtors hold some very significant advantages.
‘Italy may abandon euro if debt not renegotiated’ - politics kingmaker GrilloPublished time: March 02, 2013 23:31
The economic crisis may see Italy abandoning euro and returning to lira, says comedian-turned-politician, Beppe Grillo, who’s anti-establishment Five Star Movement became a major power in the country’s politics after the last week’s general election.
In his interview with German Focus magazine, Grillo urged for the renegotiation of Italy’s €2-trillion debt, which is the second highest in the euro zone after Greece, at 127 per cent of gross domestic product (GDP).
“Right now we are being crushed, not by the euro, but by our debt. When the interest payments reach €100 billion a year, we’re dead. There’s no alternative,” the 64-year-old said.
According to the Five Star Movement leader’s forecast, the Italian political system has "only six months" left before it collapses and the state will no longer be able "to pay pensions and public sector salaries".
If there’ll be no changes to the debt obligations, Grillo believes, the option for his country would be to leave the euro and return to it's former national currency, the lira.
"If I've bought shares in a company that goes bankrupt, then that's my bad luck. I took a risk, and lost," he explained, drawing a comparison with the private market. “If the conditions remain the same, Italy would leave the euro and return to the lira.”
The Five Star Movement has attracted the sympathy of nearly a quarter of the many austerity-weary voters to win 109 seats in the Chamber of Deputies and 54 seats in the Senate in the general election on February 24-25. This has created a political deadlock.
Neither Pier Luigi Bersani‘s center-Left Democratic Party nor the center-Right coalition led by Silvio Berlusconi currently have sufficient majority in in both chambers to form a government. The conditions of the parliament’s newcomers is unacceptable to the established parties preventing the formation of a coalition government.
"If Bersani's PD and Berlusconi's PDL suggest an immediate change in the electoral law, cancellation of election expenses reimbursement, and a maximum of two terms for any deputy – we would of course support such a government immediately," Grillo said. "But they won't do that. They are just bluffing to win time."
"If we get into parliament we would bring the old system down, not because we would enjoy doing so but because the system is rotten," he added.
The Five Star Movement has everything it takes to become a huge headache for the European leaders, who have urged Italy to stay on the economic course laid out by Mario Monti ‘s outgoing government.
"Italy, as a major European economy, has a great responsibility,” Philipp Roesler, Germany's Economy Minister, was quoted in the same edition of Focus. “There is no alternative to the policy of structural reforms... I'm confident that those responsible in Italy recognize the importance of stability.” more
Krugman doesn't think much of the austerians. Here he compares them to Herbert Hoover and Chancellor Brüning. This is not good company.
CITI: The Italian Elections Reflect The Collision Of Two Big Macro Trends We've Been Warning About For A Long TimeJoe Weisenthal | Mar. 2, 2013
It seems like ages ago that the Italian election result caused markets to spasm and volatility to surge.
In fact, it was just on Monday, and by the end of the week, the event had largely been forgotten by the global markets (although Italian markets continue to underperform, as headlines reveal the difficulty the parties will have going forward in their attempt to form a government).
But it would be a mistake to think the significance of the elections is just old news.
To recap what happened: The big "winner" of the election was Beppe Grillo, the populist, anti-bank comedian, who took nearly 25% of the vote. Between him and Berlusconi, anti-austerity forces took over 50% (!) of the vote. Since the current stability in Europe is premised on a bargain whereby the ECB promises to backstop government bond markets in exchange for austerity, this massive rejection of austerity is a shot straight to the heart of how Europe has managed to calm its crisis.
In a note published after the election, Citi's Tina M. Fordham wrote ominously:
The outcome also reflects the collision between two macro trends we have long warned of: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation. The subsequent political gridlock will raise concerns both in markets and among European political leaders, with Italy's prospects for fiscal consolidation and economic growth diminished. It also marks the end to a two year electoral trend of majority victories by mainstream opposition parties.These sentiments are echoed by a great piece in the FT by Mark Mazower (via Krugman) which warns that between austerity and aloof technocrats, Italy has exposed a crisis of democracy, which only seems to be getting worse in Europe.
The response from Brussels and the creditor north to all this has been robotically unimaginative — to insist that the debtors, like the little fish in Finding Nemo, must just keep on going. And so they may — for a while. It is possible that southern Europe will give the Germans until the autumn to come around to a new approach. But toleration for austerity is unlikely to last much beyond then.The next German election is coming up in September (and it's possible that we'll see another Italian election, then, too, depending on the stability of any new government that can be formed).
A moment of truth is surely approaching. Joachim Gauck, the German president, has called for a new debate on Europe, and suggested that its future lies in reviving the idea of a commonwealth of nations. But if such a debate is to go anywhere, it will have to confront the question of monetary union. For Europe may be approaching a stark choice: giving up the euro; or keeping it and seeing the political crisis spin out of control.
Europe is in the mist of a clear economic tragedy. The longer it goes on, the more likely we'll see a full-on political tragedy as well. more
Self-destructive EuropePaul Krugman March 2, 2013
I just wanted to flag two important articles on Europe. First, Simon Wren-Lewis reminds us that while extreme austerity is being imposed on Europe’s periphery, the core has also pursued contractionary fiscal policies. Here’s the IMF’s estimate of the cyclically adjusted primary balance — a measure of what the non-interest budget balance would have been at full employment:
Basically, faced with a huge blow to private demand from a burst housing bubble and deleveraging, Europe has responded not as 75 years of economics said it should, with temporary stimulus, but with Herbert Hoover — or, better, Chancellor Brüning — policies of retrenchment. And policy makers pronounce themselves shocked both to find that the bottom is dropping out of Europe’s economy and that their perceived authority and wisdom is being rejected by voters.
Meanwhile, Mark Mazower, an actual European historian, says better and with more authority than I could what I’ve been trying to get at: the Chancellor Brüning reference is not a joke:
Those preaching austerity probably do not see themselves as contributing to a crisis of democracy, but they are. The Italian elections should remind eurozone leaders to pay attention to their voters. Economic fixes have failed to staunch a political crisis that has the capacity to harm not only EU integration, but the legitimacy of the continent’s democratic order itself. more