Debt crisis: desperate Monti needs Merkel summit deal to stop revolt at home
22.06.2012 13:00
TheTelegraph: Italy's technocrat government risks a parliamentary mutiny unless premier Mario Monti can secure major concessions from Germany at a crucial summit of the eurozone's Big Four powers in Rome on Friday.
"Monti is desperate. Reform fatigue has breached breaking point," said a top Italian official. "There is a feeling here that the euro is basically dead already. Unless Germany offers a road map out of this crisis, Monti is not going to be able to hold it together much longer."
The main Left and Right parties have until now backed Mr Monti's fiscal squeeze – a net tightening of 3.2pc of GDP this year – and radical reform of pension and labour markets.
The implicit trade-off was that Brussels and the European Central Bank would in return intervene to keep the bond vigilantes at bay, if necessary. Germany has so far blocked such action. Yield spreads of 10-year Italian bonds over German Bunds neared a record 500 basis points last week.
Party leaders fear an electoral massacre akin to the PASOK defeat in Greece if they back further austerity with no reward. Dissidents are near open revolt.
"We will back Monti in spite of difficulties until the summit: after that it will depend on Angela Merkel," said Angelino Alfano, secretary-general of the dominant Peoples of Liberty Party (PdL).
He said refusal to activate the ECB as a lender of last of resort is the cancer eating away at the system. "Mr Monti, tell Merkel that if Germany continues to act as it is, the Italian parliament could react badly," he said
The soft-spoken Professor Monti – flanked by French president Francois Hollande and Spanish premier Mariano Rajoy – is unlikely to be so blunt. Yet he has lured German Chancellor Angela Merkel into a Latin ambush, symbolically staged in the seat of Roman power.
The unspoken message is that Germany does not command a majority vote at Europe's high table and can no longer rely on the Franco-German axis to impose its will. The deal agreed by the quartet in Rome – if there is one – will largely dictate the final EU response to the crisis next week in Brussels.
The so-called Monti Plan includes a call for the mobilisation of the eurozone's bail-out funds (EFSF and ESM) to cap the borrowing costs of "virtuous" countries shut out of the bond markets due to contagion, without having to request a formal rescue or submit to EU commissars.
Mrs Merkel gave the idea a chilly reception at the G20 summit in Mexico though said it might be "possible".
The fund already has powers to buy sovereign debt "premptively" on the open market. The dispute is over whether Germany will stand behind a commitment it has already made, and on what terms.
Berlin fears that the term "virtuous" could prove elastic, even if Italy qualifies right now. Spain is a borderline case after dragging its feet on bank closures.
Piecemeal intervention at this stage would be worse than useless. It would subordinate other creditors and quicken the exodus from Italian and Spanish bonds. Any action would have to be overwhelming. That would be a hard sell in the German Bundestag, where feelings have hardened.
"We reject any form of debt mutualisation," said Volker Kauder, the Christian Democrat leader in parliament. "That is against German and European law. I don't think there would be any majority in the Bundestag for a change to the constitution, and certainly not among our citizens."
Yet the mood is hardening just as fast in Italy. Former finance minister Antonio Martino is calling openly for Italy to withdraw from EMU and regain sovereign control over monetary policy.
Former premier Silvio Berlusconi said his PdL party would hold a forum in mid-July with "nobel prize winners" on whether Italy should return to the lira. "It is not blasphemy to talk of leaving the euro," he said in carefully scripted remarks.
Mr Berlusconi said the eurozone's weaker states may have to revert to national currencies if Germany refuses to let the ECB back-stop the financial system.
"It would have its advantages, because devaluation would allow us to export more," he said. "We will finish up in a worsening recessionary spiral if we keep going with Mrs Merkel's policies."
There is mounting bitterness in Italy that it has been pushed deeper into crisis by the perverse mechanisms of the euro itself. The country is clearly not a basket case on any measure.
It will have a primary budget suplus of 3.6pc of GDP this year, and 4.9pc next year, the best in the G7 bloc.
Combined public and private debt is 260pc of GDP, similar to Germany and much lower than France, Spain, or the UK. With private wealth of €8.6 trillion, Italians are richer per capita than Germans.
Italy scores top on the IMF's long-term debt sustainability indicator at 4.1, ahead of Germany 4.6, France 7.9, the UK 13.3, Japan 14.3, and the US 17.
The country has been through a decade of stagnation, with growth averaging just 0.6pc, but that would not normally cause a bond market crisis.
Critics say the eurozone's policy of combined fiscal and monetary contraction is what is doing most damage to Italy's debt trajectory.
Citigroup says the double-dip recession will push public debt from 123pc last year to 137pc by 2014, beyond the point of no return in a fixed exchange system. It is this that is frightening investors.
Italy is well able to survive and flourish on its own with a sovereign currency. While Mr Monti will not be uttering such heretical words in Mrs Merkel's ear at the Palazzo Madama, others are saying it ever more loudly in the Italian parliament.
Ambrose Evans-Pritchard, in Rome