Berlusconi to Run Against Merkel

Marc To Market's picture

Draghi's pledge to do what is necessary, within the ECB's mandate, to save the euro cleared reduced the extreme tail risk in the euro zone. Greece is about to receive a large dollop of aid so it can continue to keep its public sector creditors whole at the expense of domestic financial institutions. 


While the risk of a Grexit, which many thought was so imminent, has receded, euro skeptics have turned their attention to Spain and/or Italy.


The Wall Street Journal reports of a euro skeptic hedge fund note warning of a 40% chance that Spain leaves EMU 2014-2015.   Some economists have also identified rising unemployment as the breaking issue.


Italy, though, is poised to leapfrog ahead of Spain. A couple of large banks argues that Italy, more than others, has much to gain on leaving EMU. It highlights its diversified economy and its modest primary budget surplus (~3.5% this year and projected to be closer to 5% next year).


Until this past weekend, the market had anticipated that the pro-EMU forces, the center-left PD would lead a coalition that would continue the broad path that Monti set. In fact, there were some in Rome who suggested that under a PD-led government, Monti could become the next Italian President. A hung parliament could have resulted in the parties turning again to Monti as technocrat or as the head of a "national unity" government.


These scenarios were dashed by the withdrawal of support by Berlusconi's PDL. Berlusconi is nothing if not an astute diviner of the public mood. The harshest criticism Berlusconi has for Monti and one that strikes a very response chord among Italians is that he is doing Germany's bidding.


Berlusconi is gambling he can run against Merkel. An outline of his strategy can be gleaned from the latest FT/Harris Poll: 83% of Italians (surveyed) think that Germany has too much influence in the EU, up from 53% a year ago. Nearly three-quarters of Italians do not think Germany is doing enough (55% of Germans think they are doing too much). Three-quarters also do not have confidence that their government can handle the debt crisis. Two-thirds of Italians think there has been too much austerity.


There is no love lost between Berlusconi and Merkel, who he had made some insulting personal comments about just before Berlusconi he was forced out in Nov last year. It seems to be a bit over the top to claim, as at least one journalist does, that Berlusconi was toppled by a German and ECB putsch. A putsch implies secret and illegal plan. It was far from secret and it is not clear what law was violated.


Although pressure on Italian bonds and stocks were immediately evident when the political news first broke, investors seem a bit calmer late yesterday and today. That said, the CDS market has not shown the more relaxed mood. Italian 5-year CDS price jumped from 230 at the beginning of last week to 291 yesterday and is near 290 presently. Italy was 40 bp below Spain at the start of last week and is now about 14 bp below. The cost of insuring Italian exposure is likely, we think, to rise above Spain. This has not been the case since late February.


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Marc To Market's picture

Just to be clear, I think AEP is wrong.  Italy does not drop out of EMU.  He cites economists he agrees with suggesting the cost-benefit supports exit.  What it is, I think, is euro skeptics, burned by Draghi and embarassed that despite their high conviction, Greece remains within the union, have turned to Spain and Italy.   

Italy has a large and well known public sector deficit and debt, but the private sector is quite wealthy.  It is the household wealth that wil be wiped out by an exit--currency devaluation, inflation, higher unemployment.  Yes, Monti's austerity and structural reforms are a headwind on the uncompetitive economy, but the it would worse outside.  

At the same time, I do not think it is simply a matter of economic calculus.  I would read the modern history as suggesting that Germany and Italy share a common fear of being isolated.  Italy was a founding signatory of nearly every treaty of European integration and often Italy hosted the meeting that produced the final agreement. 

In my note I suggested Berlusconi knows the mood of Italians, but he does not speak for them.  His party does not represent a majority.  Coalitions with other small far right, often regional parties and a weak, divided, if not bankrupt, opposition is how Berlusconi has managed to be elected so often.  I see ZH has reposted the incumbants don't get re-elected chart.  Cool, except for Obama and maybe Berlusconi.  

Madcow's picture

it is sad to watch Europe slowly descend into anarchy and cannibalism -

but there's a silver lining:  its great for US markets !!

HoaX's picture

The Wall Street Journal reports of a euro skeptic hedge fund note warning of a 40% chance that Spain leaves EMU 2014-2015.

Didn´t John Paulson lose enough of his money already?


I am on to you's picture

So Berlusconi will try to be Chansler of Germany????

No love between Merkel and Berlusconi??

Berlusconi only love one person on this planet,And thats, Berlusconi,the, Don, is a selfcentret Neanderthall,and he dont want nothing for Italia,he wants spotlight,he wants young girls,and ever lasting snow,that aint cold,and maybe some new Hair!!

Monti Draghi Berlusconi=Mafia,plain simpel,latrinatos!

bank guy in Brussels's picture

This ZH article is on target, Berlusconi has superb instincts for the Italian mood ... as Ambrose Evans-Pritchard has just written, confirming the points above, Italian support for the euro has sunk to only 30% now - very different from Greece or Spain, the Italians are much smarter!

Silvio Berlusconi's personal life aside, he will be a hero for taking Italy out of the euro and ending this 'austerity' debt-slavery agony of more than a hundred million Europeans

And he has a much better chance to win than most people think

ZH has spoken of Berlusconi's nominally low figures in the polls at the moment ... but (1) He hasn't begun campaigning yet (2) Berlusconi owns a significant portion of the Italian television media and (3) Berlusconi's party is one of 3 parties that may work together to bring down the euro, natural coalition allies

The Italians were the first to leave the 'Latin Monetary Union' in the 1800s and they may well be the ones to wreck the euro now.

Evans-Pritchard cites: « ... a "25pc" chance of victory by the eurosceptic forces of Mr Berlusconi, the Northern League and comedian Beppe Grillo ... »

Tho I'd say the odds are better than that, that the euro will blow apart as Italy makes the big move -

Berlusconi ... Bunga-bunga ... break-up of the euro

Evans-Pritchard's last two articles in the UK Telegraph giving his superb perspective on the euro crisis, quite in line with what is above