Lega strongman Matteo Salvini wearing his 'end the euro' shirt. He relishes a fight with the bond markets Credit: neXt quotidiano
Brussels prides itself on well-honed ways to bring recalcitrant governments to heel. "We have instruments of torture in the basement,” jokes Jean-Claude Juncker.
Europe's cheerful chief enforcer tests our humour. The methods deployed against a string of distressed nations from 2010 to 2014 were illegal, unconstitutional, and scandalous, though carried out with the complicity of vested interests in each country. This created a cloak of legitimacy.
Athanasios Orphanides, a former governor at the European Central Bank, says the nuclear weapon is the ECB’s control over sovereign bond spreads and liquidity for the banks. “They threaten governments that misbehave with financial destruction. They try to scare them into voluntary acceptance of policies,” he said .
“They cut off refinancing and threaten to kill the banking system. They create a roll-over crisis in the bond market. This is what happened to Italy in 2011,” he said.
Prof Orphanides, now safely distant at MIT in Boston, says the ECB was careful not to leave a paper trail or take decisions that could be challenged in court. “They operate in a grey area without clear legal authority.”
The trick is to work hand in glove with the Eurogroup, the Star Chamber of EMU finance ministers that is accountable to no democratic body and is essentially under the control of the German finance ministry. “What happens is that everybody at the Eurogroup meeting gangs up on the country they want to attack,” he said.
One saw the reflexes of an authoritarian proto-imperial entity during the crisis. To compound the damage, the policy prescriptions were incompetent. They led to an economic depression deeper than the 1930s. The end did not even justify the means.
Covering this episode closely as a journalist is a key reason why I voted for Brexit, knowing that British withdrawal from the EU would be traumatic. The counterfactual of remaining in Mr Juncker’s lawless dungeon was ultimately worse.
The EU’s gendarmes are now eyeing Italy’s rebel coalition with professional curiosity. This is a harder nut to crack. For the first time since the creation of monetary union they face a government in which the critical mass of sentiment is eurosceptic. The ‘Italy First’ cohorts of the Lega openly extol the patriotic lira - or the new florin as it may be called.
ECB Governor Athanasios Orphanides was shocked by the brutal methods of the bank. It has become a law unto itself. He is now at MIT
A crude attempt to bully the Lega and Davide Casaleggio’s Five Star techno-mystics risks defiance and a dangerous chain-reaction, ending in a €2 trillion default on German credits to southern Europe and the devastation of the EU project.
The enforcers must be subtle. They will try to peel off the softer Five Star ‘Grillini’, those such as nominal leader Luigi di Maio are already showing eagerness for EU approval. They will exploit divisions in Italian society just as they are doing in Brexit Britain. They will mobilize the ‘poteri forti’ of Confindustria and the mandarin class.
The Italian drama of 2011 is illuminating. The ECB used the bond market as a political tool. It switched purchases on and off to pressure Silvio Berlusconi, dictating detailed domestic policies in a secret letter (later leaked). It ordered specific reforms of the labour law, a neuralgic issue that had already led to two assassinations. It demanded austerity overkill on the urging of ‘ordoliberal’ quack economists in Berlin.
When Berlusconi balked, the ECB engineered a bond crisis. It chose a moment when contagion from the Spanish banking crash had left Italy vulnerable. This paved the way for a coup d’etat, orchestrated by the ex-Stalinist Italian president of the day. Berlusconi was toppled. A former EU commissioner, Mario Monti, was parachuted in with a team of officials from Brussels.
The ECB had no treaty mandate to do any of this. It was acting ultra vires. There was not a whisper of criticism from the European press corps. Don’t rely on them to expose arbitrary practice and defend the rule of law.
The forgiving verdict is that EU officials had to take these measures to save the euro. Yet the eurozone financial crisis was of their own making. It happened because the ECB failed to fulfil its primary central bank purpose as a lender-of-last resort in a crisis (at a penalty rate, true to Bagehot). The crisis stopped instantly when Berlin lifted its veto and authorized Mario Draghi to “do whatever it takes” in mid-2012.
The Five Star's Beppe Grillo is no fan of monetary union either. The banner reads "Out of the Euro"
Claudio Borghi, the Lega's economics chief, says the EU cannot pull off the same trick a second time. Italians are alert to the legerdemain. "Everybody can see that the spreads are a tool of political manipulation," he said.
What unites the Lega and Grillini is a shared suspicion that Germany has gamed monetary union, setting the rules to its own advantage. Many think it pursued a mercantilist beggar-thy-neighbour strategy (in effect, if not by intent), undercutting Italy's real effective exchange rate (REER) and trapping the country in a depression.
The effect in the particular circumstances of Italy - which used to have a trade surplus with Germany - has been debt-deflation, corrosive deindustrialization, an unjustified banking crisis (Italian banks were not the villains of pre-Lehman excess), and youth jobless rates above 50pc in the South. The Lega-Grillini may not understand the exact economic mechanisms. But their intuitive conclusion is broadly correct. Italy was as much sinned against than sinner.
The ECB's liquidity weapons can only work against a nation that is naive, has disarmed itself, and fears ejection from EMU. If subjected to Juncker's torture, the insurgent alliance would probably activate its plan for 'minibot' Treasury notes and launch its parallel currency. It would reassert national control over the banking system.
In other words, Italy would do what Yanis Varoufakis wanted to do in Greece: wage guerrilla warfare. The Greek finance minister was famously stopped by the Syriza 'war cabinet' in 2015. The plan was too radical.
The battle-scarred Mr Varoufakis is now watching the Italian drama with forensic fascination. He thinks the Eurogroup has met its match this time. German talk of a Target2 payment freeze to the Bank of Italy rings false. "It is an empty threat," he said.
Lega strongman Matteo Salvini almost seems to relish the chance to fight Brussels, Berlin, and the bond vigilantes. He dares his enemies to play the spread game. He once described the euro as a "crime against humanity" - to me as it happens.
"Salvini positively wants to get out of the euro. Alexis Tsipras did not. That is a profound difference," said Mr Varoufakis. He sees an unstoppable sequence as the Lega-Grillini budget blitz blows up the EU Fiscal Compact and the Stability Pact.
"The flat tax will create a big hole in the budget. There will be market tensions and the usual reactions from Germany," he said. The coalition will defend itself with minibots (though he advises them to keep it digital, rather than issuing paper - a fine legal point - and to avoid calling it a 'currency').
"There will be immediate capital flight. They will have to impose capital controls. Italians will find almost surreptitiously that they are no longer in the euro, without a referendum, without a vote," he told The Telegraph. It will just happen.
So the EU has a choice. It can bow to the fait accompli of Italy's revolt and allow Rome to let rip with fiscal reflation. It can accept that the euro has slipped German control, and that EMU is henceforth a lira-zone on Club Med terms. In which case Germany may leave.
Or it can pull out the thumbscrews, the pillory, and the rack, working day and night to overturn Italian democracy. If this succeeds, it can only be at an extremely high political cost. But it might not succeed. In which case Italy may leave, taking Spain, Portugal, Greece, and much of the German banking system with it.
In a dysfunctional monetary union, you pick your poison.
