Thursday, 13 February 2014

Two Italians: one in a hurry - one biding time

The future of the EU may depend on two Italian gentlemen.

The Italian in a hurry

It is easy to label the new head of the Italian left of centre Partito Democratico (PD) and Mayor of Florence, Matteo Renzi as a man in a hurry. Renzi has brought new energy and determination to the Italian political scene.

Italy would have had a stable government had the PD chosen Renzi as its leader rather than old-school Bersani who managed the impossible wasting a substantial poll lead and practically single-handedly lose the election of February 2013.  This condemned Italy to an unstable government under fellow PD Enrico Letta who had to organise a grand coalition with Berlusconi's Party before the latter was split up.

Politically it would suit Renzi to allow Letta to stay in position for a few more months until he takes the hard decisions necessary to continue cleaning up Italy's fiscal mess and until a new electoral law is in place to ensure that the electoral process can deliver a clear winner that can form a stable government.

But Renzi is a man in a hurry.  For him Letta works too slowly, makes too many compromises and shows no urgency to gets things done.   Renzi is bubbling to show that he can do for the country what he has done in Florence; that the same way he worked his way to become the uncontested leader of the PD he can prove to be the man that Italy needs to modernise the country and liberate it from the clutch of the various lobbies and vested interests.

Renzi is business friendly but unashamedly left opinionated and he makes no secret of his ambition to win an outright mandate without having to borrow support from other political philosophies that dominate right wing parties.

In many ways he is a replica of our Prime Minister Joseph Muscat.

But in forcing himself to become the third Italian Prime Minister in a row without commanding an electoral mandate, Renzi is taking a grave risk.   Unless he manages to clear up the moderate agenda of this government, especially the change in electoral law, and take the country to fresh elections rather quickly, he risks denting the aura which currently depicts him as the man that can save Italy.

Being in  hurry could be a virtue as much as a vice.    Renzi must ensure that he turns it to a virtue a he is Italy's real and only hope.   And as Europe cannot really be a stable place if Italy stays fickle, Renzi is also Europe's hope to help smooth out the difference between core and periphery EU.

The Italian biding his time

If anyone deserves merit for calming down the Euro crisis and restoring confidence in the capital markets thus permitting peripheral countries to borrow on the market at sustainable interest rates than that person is Mario Draghi, the President of the ECB, an Italian biding his time.

The ECB is the only supra national European organisation that can operate in the name of the whole Euro area without needing approval from national parliaments.

Because it can do so, the limits of authority of the ECB are circumscribed by its constitution, rendering it responsible only for price stability through the operation of monetary policy.   The ECB is not responsible, like other Central Banks, for low unemployment, economic growth, balance of payments stability and other macro-economic issues.

This puts the ECB in a very serious dilemma.   How possible is it to have proper tools for execution and transmission of monetary policy if it does not also have control over other macro-economic policy issues?

EU politicians realising their inability to forge ' an ever closer Europe' beyond what is possible on the basis of the present EU institutional arrangements, by default rely on the ECB to keep things together when they are unable to.

So when the Euro area was on the verge of disintegration in July of 2012 it was Mario Draghi with the famous 'whatever it takes' statements that calmed the markets.   Later on he defined the 'whatever it takes' by announcing the Outright Monetary Transactions programme (OMT) for countries that need ECB support but only if they engage to a macro-restructuring programme with the ESM.

Now the ECB has been commissioned to act as the single supervisor for large banks in the EU with authority to operate or influence a common resolution mechanism for banks that are destabilising and causing systemic risks.

Draghi is biding his time.   The ECB is performing a deep analysis to check the health of the banking institutions it is meant to supervise before taking over responsibility therefor.   There is a grave risk that such deep analysis will expose capital deficiency which has somehow to be financed.   Politicians are unduly optimistic to assume that such an occurrence can be handled without destabilising the markets, as the risk of bail-ins and bail-outs becomes more real.

At some point in time Draghi will force the EU politicians to decide whether they want to risk such destabilisation or whether they want to authorise the ECB to interpret its mandate as permitting some sort of monetisation of the ESM so that the capital deficiency would be filled without undue macro-instability.

Draghi not only plays his cards well, but he plays them at the right time.  For time being he is biding his time.

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