Echler Solomon Feng
Oct 09, 2018

The Final Nail: Why Italy is different

“If you owe the EU 330 billion [Greece], then that's your problem. But if you owe the EU 2.42 trillion [Italy], then that's the European Union's problem.” – J.Paul Getty

After that long and grueling management of Greece’s debt burden, the EU should have learned all those hard lessons and should have done everything it could to avoid another – Greece.

Recent events in Europe are becoming most worrisome, and Greece is looking to be the least of EU’s worries amid a bigger debt problem that is counting the ticks before the bomb explodes. That time bomb, seven times the size of Greece – is Italy.

As of writing, Italian state borrowing costs have surged to a four year high as Investors, both domestic & international, contemplate another severe assault on the Euro.

Deputy Prime Minister of Italy has branded the President of the European Commission Juncker and his European Finance Minister Moscovici, the ‘Enemies of Europe.’ He went further, in alluding to the ‘Euro Construct’ as ‘Only Death is Irreversible.’

Amid mounting concern that came straight out of Jean-Claude Junker's mouth. The EU Commission President was caught saying in one of those infamous Freudian slips, that when push comes to shove… “When it becomes serious, you have to lie.”

Make no mistake it is damn serious. If the EU moved heaven and earth to get Greece out of its Euro 330 Billion obligation, imagine the stakes over Italy’s Euro 2.42 Trillion debt. Following Junker’s comments on Bloomberg about Italy:

“One crisis was enough,” Commission President Jean-Claude Juncker said in televised remarks at an event in Freiburg, Germany. “After the toughest management of the Greece crisis, we have to do everything to avoid a new Greece - this time an Italy - crisis.”

Part of the problem is Italy’s new coalition government – who would rather not listen to the EU but rather look after the best interests of the Italians - a campaign battle cry that catapulted them into office in the first place.

The new Italian government is not adhering to EU rules about the size of the budget deficit, and has tabled a budget with a 2.4% deficit as a percentage of GDP – this is higher than what the EU allows. Under the leadership of Jean-Claude Juncker, wanting to avoid another Greece – have increased their rhetoric hoping that the Italians would back down and give in to the EU.

A tug of war between the EU and Italy continues to spook markets.

Even the German bund markets are not too happy with this situation, as the tussle continues to put pressure on yields.

But Italy will not yield.

Italy knows only too well that it is too big for EU to kick it out. So, it is obviously calling the EU’s bluff.

Compared to the EU, it doesn’t have that much to lose, and independence from the EU means so much to gain. So, it stands its ground.

As if deficits really do matter. It does not, not entirely. For all intents & purposes, Italy is handling its fiscal balance quite well. It understands the situation from the ground up. A 2.4% deficit of GDP is far better than that of the United States that runs at about 4%. Yes, Juncker is of the old school with textbook economic philosophy, and his views are increasingly seen as antiquated. The economic powerhouses in the world have deficits – the US, UK, and China.

Deficits are a new kind of normal in today’s economic scenarios. The world is fast changing. Live with it.

And what does this mean for markets? Surely Italy will not back down.

That means the EU giving in if it wants to save the great European experiment of one economy powered by a continent of nations. This gives Italy more firepower.

Rather than servicing debt, it will allocate a budget for maintaining essential social services, infrastructure, and pension funds – at the expense of rising debt. The Italians will not care. Again, they have nothing to lose compared to what kicking them out will do to the EU.

And if the Italians showed the way, others may follow suit. The EU will lose its clout. Moreover, the EU’s financier, Germany – will go bankrupt.