OK, beyond the Nero jokes… we’re still very confused by this big movement to suppress political risk, or volatility, in the eurozone. Betting on “technocrats” to solve the debt crisis, as it’s called.
Nomura analysts touched on this familiar theme on Wednesday:
A technocrat [Italian] government, most likely headed by Mario Monti (although Giuliano Amato is another likely candidate), is in our view the best and at this stage probably the only possible, credible outcome. It remains to be seen whether mounting pressure from the markets together with the “moral suasion” from President Napolitano will be enough for such an option to materialise. This might be similar to what happened in 1994 when the Berlusconi government collapsed (because of a disagreement with Umberto Bossi on pension reform) after the budget was approved in December. A technical government headed by Lamberto Dini (which had only technocrat ministries) stepped in in January 1995 and ran until early elections in April 1996.
It is clear that the ECB has signalled that its bond buying is “conditional” on Italy taking the “right” policy steps. One way to alleviate the ECB’s concerns would be for the Italian government to sign a Memorandum of Understanding (MoU) with the European Commission and the IMF. Once signed, this would pave the way for the EFSF to eventually start buying bonds in tandem with the ECB. Calling the precise timing of when such an MoU would be drafted and signed is difficult. But it seems to us that the market pressure is pushing Italy in that direction.
It’s some interesting detail. And this is probably exactly what the European Commission — including Olli Rehn with his ludicrous questionnaire: truly the technocratic illusion of control — and ECB want to happen in Italy.
On the other hand…
- There’s every sign that “market pressure” has turned into a nasty positive feedback loop that no longer responds to Italy changing its politics. It only responds to itself, or to systemic factors.
- French, not Italian, bonds being a case in point — with those recent warning signs of France under-performing Germany’s credit coming true, as the bond spread widens to a record.
- The “technocrats” who could do something about this — the ECB, by buying bonds en masse — won’t do something. The central bank is, ironically, technocratic to a fault about price stability and independence from governments. Even more ironically, the ECB using bond purchases to “pressure” Italy doesn’t actually have much to do with price stability. While clearly, letting Italy default or leave the euro would blow up price stability (it’s a monetary emergency). There’s a lot of organised hypocrisy here.
So, actually, technocrats can be pretty rubbish when it counts!
It’s also worth noting the slight irony of recalling Lamberto Dini’s government in the mid-1990s — i.e. as a bad sign that nothing in Italian politics has really changed. The mid-1990s were a rough period (especially after Italy’s crisis with ERM in 1992) in which outsiders often begged for radical reform before Italy’s economic growth disappeared.
Well, it has disappeared, and this is what is blowing up Italy’s debt ultimately — and they still think technocrats are the answer to resolving things right now.
If you want that, you’re looking at the wrong technocrats.
Related links:
An entire order converted into what it was intended to end – LRB
Europe’s leadership deficit – Felix Salmon