An Italian euro exit may just have moved a little bit closer

Italy’s president has overruled the country’s populist coalition and appointed his own man as finance minister. That could mean fresh elections and an explicitly anti-euro government, says John Stepek.


Carlo Cottarelli, AKA "Mr Scissors": the president's pick for finance minister is not popular

Contrary to my overly optimistic earlier view on the topic, Italy is very much becoming this year's problem.

The story so far the odd-couple coalition of anti-establishment Five Star Movement and the right-wing anti-immigration League were on the verge of forming a government together.

They had even managed to decide on a prime minister (a little-known academic called Giuseppe Conte).

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But now, Italian president Sergio Mattarella (a one-man House of Lords, effectively) has put his foot down. He's rejected their choice of finance minister.

And so it looks like Italian voters will be getting another shot at the ballot box later this year.

Another own goal for the establishment

On Sunday, Italian president Sergio Mattarella vetoed the idea of having Paolo Savona as the country's finance minister. Why? Because he's a big eurosceptic. Mattarella argues that it's his job "to protect the nation's place in the eurozone", notes Tony Barber in the FT.

Or, as Mattarella himself put it: "The uncertainty over our position in the euro alarmed Italian and foreign investors who invested in shares and companies. The rise in the spread increases the debt and reduces the opportunity to spend on social measures. It burns companies' resources and savings and foreshadows risks for families and Italian citizens."

Markets probably wouldn't have taken kindly to Savona being in charge of the country's finances, this is true. That said, this is also the first time these presidential powers have been used to prevent the formation of a new government, so it does also rather play into the hands of anyone who wants to argue that Europe has too much influence over domestic politics.

Anyway, the coalition has given up on the idea of forming a government they're unwilling to do it without Savona. That means that Mattarella has had to appoint an interim prime minister to run Italy in the meantime. But that won't last long there will probably be new elections in autumn.

Now, I don't know enough about individual nations' political traditions and structures to comment on constitutional matters. Indeed, I've noticed that very few people do (although it doesn't seem to stop them). So I'm not interested in arguing over whether or not the Italian president has the right to do this.

What I will say, though, is that if you wanted to create the conditions in which the populists have the best chance of getting a mandate to put together an explicitly anti-euro government, then you'd be hard-pushed to find a better way to go about it.

Another victory for the "We're not Them" vote

One of the secrets to being a successful political disruptor (a more neutral term than populist, I think) is to position yourself as the "anyone but you lot" candidate. That's how Donald Trump won in America. He couldn't have done it without Hillary Clinton, because no one else better represented the complacent elite' the way that she did.

President Mattarella is setting up the same open goal situation for Five Star and the League. Not only has he rejected their choice of finance minister on the basis that he would worry the markets. But as stop-gap prime minister, he has appointed Carlo Cottarelli.

Here are Cottarelli's credentials. First, he worked for the International Monetary Fund (IMF), which many voters already identify with being a globalist organisation that bullies countries into austerity. Secondly, he became known as "Mr Scissors" for cutting public spending in Italy when he worked in the Italian government before 2014.

None of that is going to make him very popular. So it's very easy to paint this as Italian voters effectively being told what to do by ruthless eurocrats in Brussels. Which is of course, exactly what the coalition parties are doing.

Matteo Salvini, head of the League, raged: "Italy is not a colony, we are not slaves of the Germans, the French, the spread or finance." Meanwhile, Luigi Di Main, leader of Five Star, has called for mass protests, and declared: "Last night was the darkest in the history of Italian democracy."

Cottarelli is unlikely to win a vote of confidence in parliament, which effectively means that it's just a matter of months before a fresh election. And it's hard to imagine that this collapse won't boost the disruptor parties come the next vote, whenever it might be. And maybe that was the motivation behind nominating Savona in the first place, who knows?

As analyst Francesco Galietti of PolicySonar tells the FT: "The campaign would be fought entirely as the People v the Palazzo."

What this means for your investments

What does it all mean for your money? On Italy itself, I'm tempted to take my profits on my Italian equity position and wait for the next "end of the world" moment to buy back in. Italian ten-year bond yields have now risen to above 2.6% and at one point spiked above 2.7%. That's crying out for European Central Bank (ECB) intervention, which is conspicuous by its absence.

On the wider markets, the tricky thing now is that we might see a genuine existential threat to the euro and thus the European banking system being priced into the eurozone again.

A few years ago, Greece single-handedly had investors across the globe unsure of whether they should be adding money to markets. Now we're looking at a properly euro-sceptic coalition potentially coming to power in Italy some time this year, accompanied by a garnish of political turmoil in Spain.

On top of that, we have a ECB that's increasingly torn about whether to withdraw quantitative easing (QE) or not. And Mario Draghi the world's most competent central banker is in the "lame duck" phase of his administration.

That's a recipe for a much, much messier situation than Greece ever was. And this is coming at a time when markets are much, much higher than they were when Greece was the big story.

It'll be the usual slow-motion car crash in the eurozone. But I suspect that markets can only shrug this one off for so long before it starts to weigh on them.

You'd think that the next big political crunch point to watch for is the announcement of new elections for Italy, and maybe it will be. But without ECB intervention soon, I suspect that rising bond yields are going to force the issue to some sort of head before then.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.