Tuesday, October 23, 2018

The EU vs Italy: By Going Nuclear The EU Has Already Lost Its Battle With Italy

By Going Nuclear The EU Has Already Lost Its Battle With Italy

If you ever want to know who’s losing an argument simply look at who’s doing the most threatening. 
Not who’s shouting the loudest or who’s the angriest, but who is threatening.

Those who threaten are doing so because they feel their power is, itself, under attack.
It doesn’t matter if it is an argument with your kids or a big, geopolitical disagreement, as I always say, he who goes nuclear is losing.
Now, you might think I’m talking about the U.S. and President Trump’s incessant financial bullying of allies and enemies alike.  I am somewhat, but not primarily. 
Because as important as Trump’s mad flailing to try and remake the U.S.’s trade position around the world is, it pales in comparison to the acute crisis brewing in Europe.
Yes, Europe is more important.  Why?

Because the EU just went nuclear on Italy. 

Former Dutch Minister of Finance and former President of the Eurogroup, Jeroen Dijsselbloem, went on CNBC on Friday to declare all-out financial war on Italy.
That’s the way Zerohedge put it. 
As a ‘former’ big wig it was his job to go out and state the position of those currently in power who can safely hide behind his words.
And if you watch the clip from CNBC in the linked article you’ll note that CNBC excised the most important quotes, where Dijsselbloem threatened the Italians that no exit from the euro is on the table.
But, why would he say this when Italy hasn’t brought it up at all?
In fact, Italy’s leadership has been nothing but supportive of the European Project while standing firm on it adopting fairer rules for member countries.
The response from Italy was calm and direct, not hyperbolic.     They would not violate their budget deficit targets and are trying to work with the European Commission on this.
Ignore the reality that Italy can’t grow their way out of this without shaving the scalps of bondholders and issuing its own currency.  Italy’s calm demeanor is what is important.
Dijsselbloem is lying when he says that most of the Italian debt is domestically owned. A large portion of it is.

Seeing marginal improvement in Italy’s 42% Non-Performing Loan portfolio after seven years of enforced austerity is not an endorsement of the policy but an indictment.
It’s a real liability which ECB President Mario Draghi says Italy must re-pay before it can leave the euro. 
Of course Draghi is acting like a loan shark, continuing to backstop purchases of Italian debt under TARGET 2 and then telling the debtor, Italy, it needs to pay up. 
The bigger these TARGET 2 imbalances get the more leverage Italy has in these budget negotiations.  Because no one is buying that the European banking system is not exposed to horrific losses if Italy defaults.

And while Dijsselbloem would have no problem bailing-in Italian depositors and ruining the Italian banking system I don’t think he realizes just what the secondary and tertiary effects of that action would be.
Why would anyone ever invest in a European bank that can be seized and sold leaving the investors to suffer 100% losses all because the technocrats in Brussels refuse to give up one iota of power? 
That’s what he’s saying in the video, though. 
So, note Italy’s response.  Calm, assertive. 
“We will do what is right for Italy and reform the EU.”
“We chose to start the process before it became a crisis.  Now you are threatening us with one.”
This is an astute political move which has moved Italian voters firmly on their government’s side.  Strategically this was always their best move. 
Brexit never polled that well.
As always, the heavy-handed Djisselbloem has his thumb on the pulse of the EU’s problems, opening his mouth and making things worse, just like he did with Greece.
In Greek negotiations, the EU was calm.  It told Greece over and over, “No.”  Greece threatened the nuclear option, leaving the euro and its bluff was called.
So, Dijesselbloem’s warning is just like Greece’s threats and they are going nuclear on Italy.
They have to.  The EU has zero leverage over Italy.

The so-called populists in charge in Italy know exactly what they are doing.  They are killing the EU with kindness. Five Star Movement leader Luigi Di Maio reiterated over the weekend that there is “no Plan B” for leaving the EU. 
The goal is to reform it from within.
That’s a talking point from the campaign they needed to cultivate a “Good Cop” to Matteo Salvini’s “Bad Cop” that talks openly about the euro being a monstrosity and “a crime against humanity.”
Italian polls have Salvini’s League more popular now than Di Maio’s Five Star.  They are becoming more radicalized.  The more Salvini lobs rhetorical grenades at Brussels, the more popular he becomes.

Together they command more than 60% of Italians.  Syriza, in Greece, never had more than 30%.  And no more than 30% of Greeks ever backed leaving the euro.
Trump went nuclear on Kim Jong-un before Kim lit off a couple of nukes himself to prove his point.  Then he went to the Seoul Olympics and ended the war of words. Peace is breaking out on the Korean peninsula and the U.S. cannot stop it now, though many want to.
Dijesselbloem just told Salvini and Di Maio the EU has no truly has no Plan B.  
You can bet that the Italians actually do.

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