13.07.2011

Euro zone crisis spreads from periphery to core

Toby Abse looks at the interplay between economics and politics after 'Black Friday'

Until Friday July 8, the general view of those observing the crisis of the peripheral countries of the euro zone had been that the expression ‘PIGS’ had become an acronym for ‘Portugal, Ireland, Greece and Spain’, with Italy, the third largest economy in the zone, being considered far less vulnerable. Now, however, it is as though the expression has reassumed its southern European connotation.

Whilst one credit rating agency, Moody’s, had already reclassified Italy downwards, the majority of informed observers felt this was an excessively harsh and perhaps rather eccentric judgement. However serious the sovereign debt crises of Greece, Ireland and Portugal are, these countries, which have already received bail-outs, have economies that are relatively insignificant compared with the euro zone or the European Union as a whole. A similar problem in Spain would be cause for more concern and might trigger a more general crisis, but even Spain was not considered absolutely central to the whole structure in the way that Italy, one of the major founding members of the original European Economic Community, is.

July 8, predictably branded ‘Black Friday’ by the Italian press, saw the Milan stock market tumble by 3.47% and on Saturday comparisons were already being made in the more serious Italian dailies with the events that led Italy to leave the European Monetary System (EMS) in 1992. The dramatic events of September of that year led Italy to devalue her currency and impose some rigorous austerity budgets in both 1992 and 1993. These attempted to make the working class pay for the capitalist crisis through attacks on pensions, health spending and other social benefits and through a tripartite deal on wages between the government, the unions and the employers’ organisation. However, the lesser degree of integration between the European economies 20 years ago meant that the Italian developments had less significance for the entire EU (or EEC, as it was still called in those days), even if the Italian events of 1992 were intertwined with the low point of John Major’s government, when the pound collapsed and both Italy and the UK exited from the EMS at the same time.

Last weekend saw frantic efforts to stabilise the situation. The depth of Germany’s concern about developments in Italy can be seen by the fact that German chancellor Angela Merkel spoke to the Italian prime minister, Silvio Berlusconi, about his budget programme by telephone on July 10, despite her well known loathing for the Italian premier. After making the call, Merkel said in Berlin: “Italy must itself send an important signal by agreement on a budget that meets the need for frugality and consolidation. I have full confidence that the Italian government will pass exactly this kind of budget.” Despite Merkel’s efforts, the July 9 ruling by the civil court of appeal in Milan, ordering Berlusconi’s Fininvest to pay €560 million in compensation to CIR - his hated media rival, which owns Espresso and La Repubblica - for bribing judges to give Fininvest control of the Mondadori publishing group in 1991, did not improve Italy’s international media image. The subsequent outbursts against the judges by both Berlusconi and his daughter, Marina, were so counterproductive that president Giorgio Napolitano, who some days before had in effect forced Berlusconi to remove from the budget a clause specifically designed to pre-empt the court’s verdict in this particular case, pleaded with the premier to keep silent in the ‘national interest’.

The reopening of the markets on Monday July 11 saw a further and greater fall on the Milan stock market, this time of 3.96%.The eight-hour emergency summit of European finance ministers in Brussels that day - which discussed Greece as well as Italy - had no immediate calming effect and may even have increased the degree of anxiety whilst it was taking place. Indeed, the sharp fall in Italy had an effect on all the major stock exchanges, particularly those of the euro zone (Paris lost 2.71%, Madrid 2.69% and Frankfurt 2.33%), while even New York went down by 1.20% and London by 1.03%, despite many Anglo-American traders paying more attention to the troubles of News International than the ups and downs of Italian bonds.

Whilst Tuesday July 12 saw a slight recovery in the Italian stock market, with a rise of 1.18% by the close of trading, this only cancelled a small fraction of the losses made since July 8 and the outlook remains very unsettled. Tuesday was a very turbulent day indeed and at the start of trading the marked negative trend was continuing - the general index of shares was down a further 4.7% at 10am Italian time, and at one stage the spread between Italian and German 10-year bonds rose to 347, before closing at 285. Trading in the shares of Unicredit - Italy’s biggest bank- had to be suspended for a period due to the speed with which they were falling. Tuesday’s auction of one-year government bonds (Bot) worth €6.75 billion was a success in terms of demand - even if the interest rate that has to be paid has risen to 3.67%, the highest since 2008. It is widely believed that this was in large part due to a massive intervention by the European Central Bank, which was anxious to avoid Italian state bonds following Greek, Portuguese and Irish ones on the road to junk status.

The main factor behind the general stock market crash, which has had a particularly devastating effect on the shares of the major Italian banks (Unicredit fell by 7.85% on Friday July 8 and a further 6.33% on Monday July 11, whilst the Banca Intesa Sanpaolo went down by slightly less, 5.46%, on Friday, only to suffer more on Monday with a 7.74% drop), is a rapid increase in the spread between the Italian government’s 10-year bonds and their German equivalents. Fifteen percent of these bonds are held by Italian banks, so their shares fell more than those of other companies. The gap between the German and Italian bonds had only been 143 points as recently as April 1, but it had been growing for several weeks. This trend has now accelerated. Friday saw the gap widen from 219 to 244 in a single day and on Monday Italian bonds seemed to go into freefall, with the gap increasing from 244 to 303 at the close of trading.

It is difficult to work out what has caused the sudden speculation against the Italian economy. It is true that the Italian public debt as a percentage of gross domestic product is a high one at 119% (in 2010) as well as being large in absolute terms (€1,600 billion, compared with Greece’s €350 billion), but this is not a sudden development. It had reached 121.8% of GDP back in 1994 and, after much controversy during the later 1990s over this issue, Italy was nevertheless allowed to join the euro, despite this percentage being far above the officially permitted maximum. Italy’s debt had gradually fallen to 103.6% of GDP by 2007, but, like public debt in most advanced countries, it has increased with each year since the world financial crisis. According to Christine Lagarde, the newly appointed managing director of the International Monetary Fund, Italy’s crisis was “essentially market-driven”. In fact she declared: “Some of the Italian numbers are excellent. Its primary deficit is one of the lowest” (Financial Times July 13).

It might be argued that the speculation has political rather than strictly economic causes, or at any rate that it is a reaction to political arguments over short-term economic policy within the government. Berlusconi’s current finance minister, Giulio Tremonti, has sought to gain a reputation as a fiscal hawk and a paragon of neoliberal orthodoxy - quite a reinvention, given his earlier notoriety for very creative accounting in the budgets he produced for Berlusconi’s second government and the protectionist diatribes against globalisation that he wrote some years ago. Berlusconi himself has probably paid even less attention to the country’s finances - as distinct from his own - than he did during previous spells in office, although even then they were never his prime concern. But whether, given such unfavourable world conditions, he can be held responsible for the rise in national debt is debatable.

However, it is clear that since his ignominious defeat in all four of the June 2011 referenda (coming immediately after his party’s loss of its former stronghold in Milan) he has made a desperate attempt to regain some popularity by attempting to bamboozle Tremonti into cutting various taxes that bear down on his own traditional base. Whilst in the past Umberto Bossi, the leader of the Northern League, tended to side with Tremonti against Berlusconi in any such conflicts (presenting them as a clash between northern rectitude and southern wastrels and spendthrifts), the Lega, equally concerned about its own losses in May’s local elections, has now enthusiastically endorsed Berlusconi’s desire to loosen the fiscal reins. Awareness of such arguments within the Italian cabinet probably did nothing to boost Italy’s standing on the international markets.

The feud between Berlusconi and Tremonti has taken on an even more personal dimension over the last few weeks. Marco Milanese, a Popolo della Libertà deputy and Tremonti’s right-hand man over many years, has been caught up in the wide corruption scandal involving the P4 secret society, leaks about which started to dominate the pages of La Repubblica after the referenda results, even if the magistrates’ investigations have been going on for some time. Tremonti, whose main residence is in Milan, used to stay in a Roman property belonging to Milanese whenever he had to be in the capital on parliamentary or ministerial business. Whilst there seems to be some controversy as to how much rent Tremonti paid and whether it represented the market value of the property, there is no serious evidence that Tremonti was involved in the much more extensive pattern of wrongdoing alleged against his political lieutenant.

Although the P4 in general has done further damage to Berlusconi and led him to once again attempt to bring in a gagging law criminalising the publication of wiretaps in the press, there is some suspicion that Berlusconi has been inflating Tremonti’s very peripheral involvement in a bid to smear and discredit his own finance minister, whose policies he finds inconvenient at a time when he is anxious to play any populist card he can and whom he fears as a credible centre-right candidate for the succession, should he be forced out of Palazzo Chigi, the prime minister’s residence.

It now seems unlikely that Berlusconi will sack his finance minister - to do so in present circumstances seems the quickest way to precipitate Italy’s economic collapse. There is now considerable international pressure on Italy from the ECB, the EU and, behind the scenes at any rate, from the IMF to pass Tremonti’s €40 billion austerity package by the end of July at the very latest. There is no doubting the depth and breadth of the attacks on the working class this will entail.

President Napolitano has put massive pressure on the mainstream opposition leaders - Pierluigi Bersani (Democratic Party), Antonio Di Pietro (Italy of Values) and Pier Ferdinando Casini (Union of the Centre) - to allow the budget to be passed as quickly as possible, whilst preserving the superficial formalities of parliamentary debate. The opposition will move a few carefully chosen amendments agreed amongst themselves, rather than a large number from each of the different factions, and go through the motions of opposing the budget, but will not debate it clause by clause in detail - let alone engage in systematic filibustering, as they have sometimes done in the past and might well have done in other circumstances as a way of capitalising on Berlusconi’s weakness.

By July 12, there appeared to be an agreement between the government and opposition parties that the budget would be passed in both houses by Sunday July 18 at the latest. If this does happen at such breakneck speed, it will be an unprecedented development in a country where budget debates generally go on for weeks and sometimes months and will serve as a clear indication of massive pressure on the politicians from both the EU and the Italian ruling class.

However, it must be stressed that criticisms of the budget that the Democratic Party is agreeing to play down in the interests of national unity are in no sense leftwing. The largely ex-‘official communist’ DP is not attacking Tremonti for his shift towards a more orthodox neoliberalism, but because he has not gone far enough in that direction. The interview given by leading DP figure Enrico Letta to La Repubblica is a clear indication of how neoliberal and rabidly anti-working class the current DP line is. He stressed “the moment has arrived to start to speak of privatisations. I am thinking of the post office, the railways … and the 20,000 enterprises involving local government bodies” (July 11).

It is true that Berlusconi has undermined state provision in certain areas: for example, he has allowed the Catholic church - especially the front organisations, Communion and Liberation, and Opus Dei - to colonise parts of the health and education systems at the expense of the taxpayer through subsidised Catholic private schools or private hospitals. However, this has been driven more by a desire to buy Vatican support rather than an ideological commitment to the free market as such. A government led by the PD might well implement the dictates of the ECB and IMF not just with more consistency than Berlusconi, but with more enthusiasm than similar ‘leftwing’ southern European parties - Pasok in Greece, the PSOE in Spain and the PS in Portugal.