Forget the Italian election – here’s the eurozone power shift you really need to fear

Mario Draghi © Getty Images
The ECB’s Mario Draghi: the best central banker in the world

Italy is having an election on 4 March.

It’s likely to be messy. Given that Italy is one of the biggest and most-troubled economies in the eurozone, that has some people worried.

I’m going to stick my neck out a bit, but here’s my suggestion: you don’t have to worry about this election.

In fact, there’s only one shift of power in the eurozone that investors need to worry about now, and that doesn’t happen until next year.

A possibly foolhardy call on Italy’s next government

I’m not an expert on Italian politics (I’m not sure anyone – including the average Italian politician – is). And I’m not even going to try to untangle the complexities, because it’s fairly dull and pointless for the purpose of this article.

So I warn you in advance that this may be overly glib. Maybe I’m missing something.

But I don’t think – as investors at least – we need to worry about the forthcoming Italian elections. Certainly not in the short term.

Firstly, what’s going to change? Italian politics has always been messy. The Italian economy has been sclerotic for decades now. So Italy could end up with a hung parliament and there could be some populists involved? Big deal. The Germans – the main power in the eurozone – had an election a while ago and they still haven’t managed to string a government together, and yet the world hasn’t collapsed yet.

Secondly, the key issue for international investors is a simple one when it comes to any eurozone election. Will this election result in a country making a break for it, and thereby endangering the continued existence of the euro, and the eurozone financial system?

If not, you don’t have to worry. The results of the election will certainly make a difference to the people who live in Italy, and it might make a difference on the fringes to some individual companies. But by and large, from an international investor’s point of view, it’s not much more important than any equally obscure electoral process in a US state.

So is there an outcome that results in Italy leaving the euro? No. Certainly not in the near term.

Yes, the Five Star Movement is “populist”, whatever that now means. Yes, they once made noises about having a referendum to leave the euro. But they’ve pulled back from that because they realise that changing currency is too terrifying a leap in the dark for most people. If the Greeks wouldn’t do it, even at the height of their deflationary collapse, then the Italians – generally richer, with more assets and more savings – are unlikely to do so.

So even if Five Star end up leading a majority government (which is deemed highly unlikely by the experts, for what that’s worth), it’s hard to see a systemic impact on the rest of the eurozone. And if it ends up being a hung parliament, then frankly it’s just more of the same.

Maybe I’m wrong. Come the big day and the outcome, I’ll update if I think I was. But if it does end up being a systemic threat, we’ll have plenty of warning. So you don’t need to batten down the hatches on Friday 2 March, for example.

Here’s the change of power you really need to worry about

If you want to know when the next systemic crisis might arise for the eurozone, then I’d worry more about next year. That’s when current European Central Bank (ECB) boss Mario Draghi steps down, in October.

I’ve often said that Draghi is by far the best central banker in the world. I am not a big fan of central banks in general (they are ground zero for financial moral hazard, as far as I’m concerned). But Draghi is the only central banker with a genuinely very difficult job.

If you’re running the UK, US and Japanese central banks, you only have one constituency to answer to. And that constituency (the politicians in charge) has been more than happy for you to keep cutting interest rates, thus propping up electorally-critical housing and stock markets.

But if you’re running the ECB, you have a much harder juggling act. You have one very strong country – Germany – plus a few intellectual allies, who actively want harder money policies. And you have another bloc of economically fragile but politically significant countries who desperately need weaker monetary policy.

Matching the desires of one with the needs of the other has always been one of the biggest structural flaws in the eurozone. Yet Draghi has achieved it, and also won the confidence of markets along the way.

It’s easy to overstate the influence of individuals over ‘big’ events. We can’t – as yet – spy on parallel universes to see what would have happened if things were just a little bit different.

But I think it’s fair to say that Draghi being in charge over the last few years has made a huge difference to the fate of the euro and the eurozone.  Sure, it might have muddled through without his “whatever it takes” promise. Equally, Europe could have ended up in a 2008-style banking crisis and the euro could have imploded.

If you doubt that, ask yourself: would Jean-Claude Trichet – the man who raised interest rates in 2011 to keep Germany happy – have managed things as well? There you have it.

Now, chances are that Draghi has done enough. He’s got the show back on the road and the eurozone is no longer one dud backwater bank away from a regional banking crisis.

However, you’ve already seen how fraught the transition from Janet Yellen to Jerome Powell has been in the US. Even a hint of hawkishness has had markets jumping at shadows.

Imagine how much trickier it will be when the ECB is handed over from Club Med defender Draghi, to Germany’s central banker, Jens Weidmann, who happens to be the favourite.

Given that the ECB will presumably be tightening policy by then (unless, of course, as is very possible, we’re in the midst of another market crash), then there’ll be plenty of scope for error.

But that’s a while off. For now, Italy’s coming vote – while no doubt messy – is just another eurozone election.