William Davies, head of Global Equities at Threadneedle Investments, says the election outcome in Italy this week signals a third stage in the eurozone sovereign debt crisis - a break with austerity.
William Davies, head of Global Equities at Threadneedle Investments, says the election outcome in Italy this week signals a third stage in the eurozone sovereign debt crisis – a break with austerity.
The current focus from the Italian election is on personalities, the rise of a new political force and the challenge facing the Italians to form a new government.
I believe we should be looking beyond this.
The vote against Mario Monti and austerity puts any Italian government, should it get formed, at odds with policies still followed across the eurozone. Italians offered their politicians a clear mandate for change. They voted for stimulus, not austerity and we should question whether the ‘OMT put’ should apply to Italy when their government would have no mandate to accept any potential conditionality. Hence unless Europeans relax their fixation with austerity and budget targets, the increase in risk brought about by the Italian election result resides across the eurozone, not just in Italy.
The Italian elections have caught the headlines, what with the emergence of the anti-establishment Five Star Movement under Beppe Grillo (25.6% of votes), the re-emergence of Silvio Berlusconi and his People of Freedom (29.2%) and the crushing of the prime minister, Mario Monti – Civic Choice (10.6%). The effect of the result is to give a majority to the centre left Democratic Party (29.5%) under Pier Luigi Bersani in the Chamber of Deputies, as expected, but no outright majority in the Senate, as feared. The hope had been that the Democrats, with the help of Monti’s centre grouping, would have enough seats to carry a majority in the Senate also. Alas, Civic Choice’s dreadful showing put paid to this. The conclusion of the election is that the Italian people have voted firmly against austerity and with the emergence of Grillo, against the establishment and politicians in general. So what does all this mean going forward?
To my mind we run the risk of reaching a third stage in the euro debacle.
The first stage concluded last summer when bond investors drove sovereign bond yields ever higher in the weaker periphery countries, creating a self-fulfilling situation where targeted countries could no longer afford the interest on newly launched bonds to support their budgets.
The second stage started last July when Draghi said he would do ‘whatever it takes’ to save the euro and we saw in September the imposition of the framework to support Outright Monetary Transactions (OMT) and common banking supervision in the euro area. It also helped that chancellor Merkel seemed around this time to realise that this policy would more likely support her re-election in September 2013 than would the demise of the euro and the implosion of the European financial system. Hence bond investors had effectively been emasculated by Draghi. The euro could still fail, but it would take countries to decide they should leave (instead of the alternative of accepting OMT and the ECB’s accompanying conditionality of austerity and structural reform), rather than to be at the mercy of bond markets.
So what is this third stage? To me, it is the arrival of the time when countries choose to break with austerity.