Italy: 'We'll Kneel No Longer!'

by: Mark J. Grant

"We'll kneel no longer!" - Deputy Prime Minister Matteo Salvini

Italy's Deputy Prime Minister, Matteo Salvini, slapped back at the European Union. He said that for the European Union to be "threatening" the country to change its 2018 budget proposal was totally unacceptable. He even urged Italians to take to the streets to signal Rome "will kneel no longer!" The exchange between the EU and Italy is quickly heating up.

He further stated yesterday that, "We have a right to work, a right to health, a right to education, a right to a pension. In Brussels they have nothing else to do but send us disapproving letters, threatening letters, telling us to change our budget plan, not to change our pension law. Telling us not to reduce taxation but to actually add more. No, the budget proposal coming to Parliament is a policy which allows Italy to grow and helps Italians. Nothing and nobody, no big or small letter will make us backtrack. Italy will no longer be a slave and will no longer kneel down."

I'm not the only one who's paying close attention here. Handelsblatt reports that Jamie Dimon, CEO of JPMorgan, said that, "Italy may cause a European crisis." They said he went on to state that, "I'm not predicting it and I don't know if the probability is 2 or 20 percent," but yes, that could happen. There have been several political problems in the recent past that haven't been solved well and this is one of them."

"The vicissitudes of fortune, which spares neither man nor the proudest of his works, which buries empires and cities in a common grave." - Edward Gibbon, The Decline and Fall of the Roman Empire

The confluence of events is taking the path that I suspected, and suggested, it would. The Italians gave the EU their budget. Brussels and Berlin rejected it. Now Rome is telling them to "stuff it" and things are heating up once again.

"The Lords of the spread should step aside," Salvini has demanded.

Prime Minister Conte, meanwhile, stated, "The more I study the draft budget, the more I like it." Protests from Brussels over the budget? "No problem," claims Di Maio. "This Europe will be finished in six months anyway." That is an interesting comment, no doubt.
He's referring to the European Parliament elections, whose May 2019 date is determining Italy's collision course, a plan which threatens to rock all of Europe, and the common currency area, in particular. Lega and the Five Star Movement hope to perform well enough that they can join forces with populists from other EU member states and subsequently reverse the balance of power in the EU's only elected body. Salvini recently announced that he's considering putting himself in the running to succeed Jean-Claude Juncker as president of the European Commission, the EU's highest office.

That's why the Italian budget, together with the country's debt, represents more than just a provocation against Brussels. The Italians have turned their budget into a weapon in their fight against the Brussels/Paris/Berlin system of running the European Union. Some say there might be a compromise. I just do not see that happening.

Long before we get to the European elections there will be a response from Brussels when Rome reacts to the Brussels rejection, and hands them the exact same budget as before. Oh, there may be a word or two changed but fundamentally, it's going to be the same budget. Berlin may well demand fines and sanctions and perhaps even that the ECB stop buying Italian bonds. I believe serious rancor is coming, and I, once again, advise everyone to take cover.

If Rome doesn't comply, and if the so-called "Excessive Deficit Procedure" comes into play, Italy could also be faced with the suspension of EU subsidies. However, such steps would require the approval of EU finance ministers, which could prove tricky given that EU countries generally have little interest in punishing fellow member states. Such sanctions have never been imposed. Of course, a nation's budget has never been rejected before either.

Friday is going to be an interesting day. European bank regulators plan to reveal the results of this year's bank stress test on Friday at 1700 GMT, and institutions with an above-average share of Italian government securities on their books are under closer scrutiny this time, Der Spiegel reports. Europe has a long tradition of sweeping unpleasantries under the table, but we actually might get some real results, in this instance, as it's an easy way to recriminate against Italy without bringing anything to a vote.

If Italy's banks do get tagged, then we might get to the Outright Money Transactions (OMT) program that Draghi first presented in August 2012. It's a kind of lifeline for crisis-plagued Eurozone members. The program allows the ECB to buy up unlimited government bonds of countries that have been cut off from the capital markets, provided they adhere to strict budgetary discipline. So far, no country has yet applied for OMT aid. I can foresee that Italy might sign up for the program, but I highly doubt that Italy would agree to the ECB's conditions for doing so. One more "stand-off" on the horizon.
"The situation is much more fragile than the Italian government thinks," says Guntram Wolff, head of the Brussels think tank, Bruegel. "If Italy ever gets to the point where Greece was in summer 2015, it will be more than we can handle." I'm in agreement with his assessment.

Clemens Fuest, the head of the Munich-based economic research institute, "IFO," says that with an economy 10 times larger than Greece's, Italy is "systemic." It could destabilize the entire European financial system. I think this is another spot-on observation.

Brussels may be about to learn a lesson. Unchecked power may corrupt but corruption may also breed unchecked power. "Et tu Brussels, er Brutus?"