Does the Italian crisis mean a new era of redistribution at the expense of Germany? Will Eurobonds return to the agenda?

GD – 12/2016

As was generally expected in Italy, Matteo Renzi lost the ambitious referendum regarding a profound change in the constitution that was tailored for him. As reported in Britain’s “The Times”, shocks in the European stock markets were held within bounds . Thus, the flight of capital out of the over-indebted and hardly productive country – determined by the so-called “target values” of the central banks - had already taken place and the result already anticipated. Renzi was therefore a political lightweight and his decisive referendum was deeply linked with the fate of his political person. As expected, the majority of the population was no longer behind this politician who was regarded as a “go-getter”. Given the majority of the Renzi camp in all chambers, President Mattarella was able to deal with the matter of forming government with “serenity”, as reported in the German media, following Renzi’s resignation. 


It came as no surprise, that the new candidate was former Foreign Minister, Paolo Gentilono, a very close confidant of Renzi. The true impact of this epochal defeat are unknown in Brussels and Berlin. Nevertheless, there is a desire to return to normality – status quo ante – as quickly as possible. Renzi talked a lot but neither improved the weak productivity of Italy – a fundamental ill – nor reduced the country’s exorbitant debt or safeguarded the ailing banking sector from worse to come. Many observers, including “The Daily Telegraph”, have rated his politics as no more than a gallery game that continued monetary attempts to preserve the previous euro model. 

It is more serious for the Italian banks. With around 360 billion euros in bad loans on their balance sheets (according to “Handelsblatt” it was only 132 billion euros in the crisis year of 2009), the default of just one institute such as Banca Monta Paschi di Siena (BMP), which needs at least five billion in new money before the end of the financial year, could be enough to cause the house of cards to collapse. Those who want to save the euro will do everything to prevent or postpone this situation. Many are of the opinion that the Italian government hardly plays a pivotal role as long as they “cooperate”. But this is exactly where the referendum shows possible limitations: the naysayers and populists – whether from the far right or far left – have achieved considerable success. They want new elections that would possibly deprive the Brussels-compliant Renzi camp of its power. However, in contrast to this, they appear to reach those voters who recognise that Italy is a seriously ill community with rising debt, enormous corruption (according to “Handelsblatt”, 89 per cent of voters view the Italian political parties as corrupt!) and rapidly increasing impoverishment. The classic formulas on offer are evidently no longer trusted. A decline in the social state would quickly deteriorate into a genuine banking crisis. The hopes of another generation would fade into the distance. 

A genuine Italian crisis would mean a new era of redistribution for Germany. “Eurobonds”, which MEP Martin Schulz proposed back in 2011, would quickly be back on the agenda. Eurobonds are new debt investments which would be issued in the name and liability of all or multiple European countries in order to not burden the battered creditworthiness of individual bankrupt countries. There are already calls in many places for harmonisation of primary encumbrances in the field of social protection. If the BMP were to be “wound up”, hundreds of thousands of small savers would be unable to get their savings out without massive losses. If other financial institutes were to shrivel up, the entire country could hardly compensate any more. The social and political consequences would be dramatic.