The Italian election has produced a predictably shambolic outcome, threatening a decisive new phase in the eurozone debt crisis.
Financial turmoil has given way to political instability, with electorates grown weary of the repeated rounds of self-defeating austerity forced on them by Europe’s political elites. This in turn threatens further financial instability.
For three or four months, European leaders have been confidently proclaiming the crisis essentially over. It seems they spoke too soon, as indeed they always seem to in this long-running euro-soap.
Last time a political crisis threatened to undermine the euro, the response was to impose unelected technocratic governments on the offending nations. It won’t be so easy this time around. Italians are in open rebellion, with Mario Monti’s pro-reform Civic Choice finishing a distant fourth in the elections. Italians have voted en masse against Berlin’s prescriptive austerity agenda.
The left-leaning Pier Luigi Bersani is still hoping to form a minority government, possibly with support from the comedian Beppe Grillo. Please don’t laugh: this is serious. They’ll make odd partners. The dull Mr Bersani could hardly be more different, yet to him almost anything would be preferable to leaping into bed with Silvio Berlusconi, which is the alternative. Whatever.
Despite their ideological differences, these warring parties are united by one common cause they are all vehemently opposed to Mario Monti’s reform agenda. A non-compliant government in Rome is a therefore a certainty.
This is something of a problem, to put it mildly, for “Super Mario” at the European Central Bank (ECB) (oh do keep up; there’s more than one Mario in this Italian tragic/comedy). The “Draghi put”, or the safety net which the ECB has managed to erect under European markets for the past six months, is based on strict conditionality, including a commitment to follow through on a credible deficit reduction plan.
The ECB’s promise of “outright monetary transactions”, an open-ended commitment to buy sovereign debt without limit, was crucial to putting the lid on the financial crisis, even though, ultimately, not a single bond had to be purchased. The pledge was itself enough to break the destructive link between deteriorating sovereign debt and banking insolvency. But now markets look set to test the ECB’s resolve afresh.
Conditionality was the price the German government demanded for sanctioning the bond-buying programme, yet there is not a snowball’s chance in Hades of the new Italian parliament agreeing to the sort of demands that will be made, or indeed coming up with a fiscal plan that will satisfy the ECB, the IMF and the credit rating agencies.
Sovereign bond yields in weaker eurozone member states have spiked higher accordingly, and equity markets have taken a pummelling.
Hold on to your hats. It’s about to get interesting again.
= Threadneedle St cranks up the ideas machine =
Like some zombie policymaking machine, the Bank of England is back from the dead. Just as Governor Sir Mervyn King was ready to write off monetary stimulus as a drug that requires “larger and larger doses” for the addict even to feel the hit, in comes his deputy Paul Tucker with an entirely new stimulant or, at least, a new variant on an old one. Negative interest rates.
To be clear, Tucker’s tonic is still very much in the experimental phase and would require a change of the Bank’s operational remit. But it was used with some success in Denmark last year, so there is evidence of it working. The idea is that lower interest rates encourage lending and spending: lending by banks which would otherwise be penalised for hoarding cash with the central bank, and spending by savers so fed up with the token rate they’re earning they start shopping instead.
There is little chance that banks will ever introduce negative rates for depositors, but they are likely to cut rates on savings products to claw some of their costs back. Savers won’t like it, but as Paul Fisher, the Bank’s executive director for markets, explained in a speech in Bristol, most growth policies would be “unpopular” with depositors but, ultimately, “economic recovery is in everyone’s interests”.
Cutting rates below zero has been dismissed in the past because it would bankrupt some smaller building societies, many of which rely on the income generated by base rate tracker mortgages. Tucker has cleverly thought of a way round the problem, by establishing a second interest rate for bank deposits. Better still is his idea to help small businesses re-create a market for working capital credit that might release them from the grip of the banks.
The real agenda here, though, was to demonstrate that the Bank can think radically, even without Mark Carney. That it is “not stuck in the mud”, as one senior Bank figure put it, and that policymaking is far from dead.
= Music industry finds the key to success =
The music industry is a bit like the canary in the mine shaft. Its painful decline over the past decade or so, as people stopped buying CDs and started downloading pirated music instead, was seen as a harbinger of the fate that awaited many other creative sectors, such as the film and publishing industries. Not long before the DVD box set or the chunky hardback novel go the same way, said the doom-mongers.
However, after 14 hard years of watching sales decline, the music industry has returned to growth. That growth is still low level just 0.3pc last year but the direction is unmistakeable. Music piracy might be rife, but the industry has found enough new ways of making money from its songs to offset the damage that has been wreaked.
Now, the Government needs to underpin that fragile recovery with legislation that will foster technology and innovation, but in such a way that it still makes sense for music executives to invest in the next Adele, Paloma Faith or Coldplay.
That would be music to everybody’s ears.