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Mario Draghi, Giorgia Meloni, Italy: Shift to the right

2022-09-16T05:28:12.367Z


Italy's debt is higher than ever. The country is dependent on injections of billions from the EU and the ECB. The mood could change at the end of September – Eurosceptic right-wingers are leading in the polls.


Enlarge image

Tame towards Brussels:

Giorgia Meloni

buried the anti-European tone during the election campaign.

She likes to continue to agitate against gays and migrants.

Photo: IMAGO/www.imagephotoagency.it / IMAGO/Matteo Gribaudi

Italy has accumulated the highest mountain of debt in its history.

It is currently around 150 percent of gross domestic product.

So far, things have been going well, but since

Christine Lagarde

(66, ECB) announced a sharp hike in interest rates, interest rates on government bonds have also risen.

On Tuesday, the interest rate on the ten-year Italian bond was almost 4 percent.

In December last year, this was still 0.5 percent.

And something else unsettles investors: Prime Minister

Mario Draghi

(74) has only been in office on an acting basis since he announced his resignation in July.

A coalition of right-wing parties is leading the polls for the September 25 parliamentary elections.

Giorgia Meloni

(45)

is considered promising for the post of Prime Minister .

Her right-wing party Fratelli d'Italia (FdI, in English: Brothers of Italy) comes in polls at 25 percent and would be the strongest force in parliament.

Draghi, who led the notoriously fractious country with a broad seven-party coalition, reassured investors.

As a former head of the ECB, he stood for stable finances and the clear commitment to Brussels not to endanger Italy's solvency.

This policy stabilized Italy's interest rates on the money market.

In addition, the ECB bought bonds on a large scale.

Now a lot looks like Meloni will win the election.

Italy's brothers display anti-euro and anti-EU traits.

Meloni's coalition partner

Matteo Salvini

(49) and his Lega party have also repeatedly attacked Brussels in the past.

What will happen if Meloni and Salvini really win the election?

How are the markets reacting?

One thing is clear: Italy is dependent on financing from the ECB and the EU.

Brussels can stop payments and bond purchases if Italy doesn't play by the rules, for example by taking on too much debt.

Traditionally, the Italian right has no desire for budgetary targets from Brussels.

Eurosceptic parties in the government have already destabilized the country's public finances on several occasions.

Most recently, the dispute with the EU escalated in 2018, when left-wing and right-wing populists formed a two-party government - they were united above all by euroscepticism and the clear stance not to let Brussels interfere with the finances.

The EU Commission repeatedly threatened the government at the time to initiate a so-called deficit procedure against Italy.

As a result, the country would have lost access to rescue mechanisms such as the ESM.

But the threats didn't really go off.

Because both Brussels and the Italian government knew that the EU would hardly risk letting Italy slip into the sovereign debt crisis.

Then as now:

The EU and Italy are in the same boat.

"If Italy goes bankrupt, the euro will probably not be around much longer," says Ulrich Stolzenburg from the Kiel Institute for the World Economy.

Danger of a downward spiral

Even if individual investors panic and frantically reduce their credit lines, Italy can actually experience liquidity problems.

Then everyone else would have a reason to get their money to safety as quickly as possible.

Interest rates would rise as a result.

This can quickly develop into a downward spiral until the state is really broke.

Economists call it a "self-fulfilling sovereign debt crisis". In a 2012 report, the German economists warned of such dynamics.

Short sellers accelerate the downward spiral by betting on a country's bankruptcy.

That is why the ECB announced in July that it would buy additional bonds from states that it is betting against, at the same time as it made its first rate hike since 2016.

Hedge funds are currently holding short positions against Italy worth over 39 billion euros - the highest since 2008.

Christine Lagarde attaches as few conditions as possible to the bond purchase.

Economic researcher Stolzenburg says that no one is in the mood for austerity measures like the ones used by the creditors to save Greece.

Huge street protests, a right-wing populist government that can present itself as being suppressed by Brussels, nobody wants to see these pictures.

The third in the right-wing coalition could be ex-prime minister and multi-billionaire

Silvio Berlusconi

(85) with the Forza Italia party.

His government collapsed in 2011 in a dispute with the Lega under Salvini's predecessor,

Umberto Bossi

(80).

The reason for the clinch: the state finances and guidelines from Brussels.

Before that, the pressure on Berlusconi and his government had also increased because of the high interest rates on government bonds.

From an investor's perspective, the trio of Meloni, Salvini and Berlusconi wouldn't exactly be a dream team.

The three parties themselves noticed that.

In August they published a 15-point plan for a "centre-right government".

Point 1: "More Italy in Europe".

A clear commitment to the EU and NATO.

The right is already trying to allay investors' concerns during the election campaign.

The behavior towards Brussels is also more diplomatic than in previous years.

Are they really serious?

Hard to say.

It would be a quick turnaround.

In the 2018 election campaign, Salvini called for an exit from the euro.

The brothers of Italy removed the demand from the program shortly before the election at the time.

In points 4 and 8 of today's program, the coalition government calls for tax cuts for companies and households.

At the same time, the coalition wants to increase social spending and pensions.

It is unclear how this should be possible in an over-indebted country suffering from a chronically stagnant economy.

Meloni will probably not be able to implement the demands without violating EU fiscal rules.

That is why the right-wing coalition is also demanding renegotiation of the EU's reconstruction fund, from which Italy benefits the most with 191 billion euros in absolute figures.

The money should not only flow into infrastructure, but also be used to cushion the high energy prices.

Source: spiegel

All news articles on 2022-09-16

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