Grave Consequences: Italy Bond Yields Soar, Protests Called, Euro Referendum
Italian President Sergio Mattarella refused to seat a eurosceptic finance minister and as a direct result, the coalition between the Five Star movement and Lega collapsed.
As noted in my last article, this started Constitutional Crisis in Italy
A brief rally on news the coalition collapsed was short-lived. Yield on the Italian 10-year bond soared from 2.35% to 2.69%, a whopping 34 basis points. Italian bank shares collapsed.
Arrogance of Institutions
Five Star leader Luigi Di Maio addressed the Italian nation on a live Facebook feed this afternoon calling for them to mobilize against the institution represented by President Mattarella and demanding a new election as soon as possible.
"We can not stand watching, we must react immediately firmly. Today he will hang an Italian flag out the window and ask you to do the same. We claim the pride of being Italian..., " said Di Maio.
"There are tons of lies. I have said throughout the electoral campaign that we do not want to leave the euro. Savona would not take us out of the euro, he would have asserted Italy's interests in the EU headquarters ".
"On June 2nd I invite everyone to come to Rome for a great demonstration."
Yesterday - with the "no" of the Quirinale to the binding of Lega and M5s on the name of Sardinian economist Paolo Savona - "was the darkest night of democracy", he added.
"We ask to go to the vote as soon as possible. Even in August? As soon as possible", he clarified at the end of the meeting in the Chamber with Matteo Salvini.
Referendum on Euro Coming Up
Reuters reports Italy's Fresh Election Risks Being Referendum on Euro.
Risk or Certainty?
“The upcoming elections will not be political, but instead a real and true referendum ... between who wants Italy to be a free country and who wants it to be servile and enslaved,” League leader Matteo Salvini said on Monday.
“Today Italy is not free; it is occupied financially by Germans, French and eurocrats.”
“The election is going to resemble a referendum, de facto, on the European Union and the euro,” said Francesco Galietti, head of political risk consultancy Policy Sonar in Rome. “It’s an existential threat for the entire euro zone.”
I seldom agree with Eurointelligence on solutions, but I nearly always agree with them on what is happening at the moment. Let's check in.
With his veto, Mattarella triggers new elections, probably in the second half of the year. But, unlike the last elections, this will be de facto a referendum on Italy’s membership of the euro, given the reasons why this government failed to be formed. In the meantime, Mattarella decided to make Carlo Cottarelli, a former IMF staffer, prime minister in order to calm the markets. Cottarelli is a Mario Monti-type technocrat, never elected to office. But, unlike Monti, he will not even have a parliamentary majority behind him.
Parliament remains the ultimate constraint in Italian politics - and the reason why this presidential stitch-up job is unlikely to succeed. We see no way that this parliament can pass a budget proposed by a Cottarelli administration. Do they expect Five Star or the Lega to vote in favour? The messier the country gets, the more votes they will get.
These are grave political events because they are likely to have a number of important consequences, some unintended.
For the first time since we can remember in a democratic European state, a president has used his constitutional powers to prevent the establishment of a government with a firm majority in parliament. The original idea to bestow a president with such formidable powers immediately after an election was the very opposite - to give the president the right to impose compromise when there is none.
It also reinforces a xenophobic discourse. Matteo Salvini, the Lega leader, immediately accused Berlin and Paris of being behind what he considers a coup d’état. Just watch the explosion of anti-German outburst in particular. And watch the anti-Italian outburst in the German media. Ralf Dahrendorf warned in the early 1990s that the euro would turn the peoples of Europe against one another. We did not believe it then, but Dahrendorf was right.
We have previously noted the parallels with Weimar, specifically with how a liberal establishment lost the plot: not solving the economic problems, keeping the extremists - Nazis and Communists then, the Populists today - out of power at any price; underestimating them; overestimating its own ability to stitch up majorities against the popular forever; and forcing multiple elections. It is all there. History repeating itself as a farce.
Rolling the Dice
As I stated in my previous post, Mattarella has elected to roll the dice, but he needs an amazing amount of luck to say the least.
I also noted that it is unclear if the center-right would get an outright majority which strangely is 40%.
Eurointelligence had this to say.
Mattarella’s decision is also based on a calculation that the Lega, together with Forza Italia and the Fratelli d’Italia, might capture an absolute majority of seats at the next election, which would require a minimum of 40% in the proportion vote. If they achieve 40% they would end up with 50% plus one seat in the parliament. In practice, this will not be enough to govern because a one-seat majority is useless. They will still need to form a coalition.
The thinking behind this strategy is that, by binding Salvini into a coalition with Silvio Berlusconi, his euroscepticism could be tempered. We think this view is wrong. More importantly, it is ahistorical.
Also, note that Berlusconi was at one time eurosceptic. He changed his tune as a matter of political expediency. He might easily change back again.
Mattarella is counting on someone highly unreliable as a political partner.
Rules of the Game
I am unsure of the rules of the game here.
But if possible, and I think it is, the Northern League could drop out of a coalition with Berlusconi and create one directly with Five Star or more likely, with no one at all.
The new math them would look like this: 22 + 35!
Lega and Five Star would have a 57% outright majority.
At a minimum, Mattarella's game playing will rally Five Star and Lega supporters, while other parties may decide to sit this out.
Don't Rule This Out
Five Star and the Northern League proved they can form a coalition, and it can happen again with an even bigger majority if Lega cancels its coalition with Berlusconi.
Recall my March 1 post, three days ahead of the election: Italy Election March 4: Consider a Surprise M5S + NL Alliance.
I have not heard anyone discuss this new scenario, as everyone is still focused on the center-right even though Savini has no reason to trust Berlusconi.
That's the political dice game Mattarella is playing.
One way or another, the dice are loaded against Mattarella.
Mike "Mish" Shedlock