The short history of the eurozone has taught us that resistance is futile. You cannot extricate yourself from its rules, to which all member states have agreed. Unless the Italian government has a clear-headed strategy for a eurozone exit, therefore, it is setting itself up for a monumental failure.
Wolfgang Munchau, writes on the Financial Times that confrontation over spending is reawakening the dormant eurozone crisis.
He argues that the leaders of the far-right League and the Five Star Movement have strong views, but he does not believe they have a strategy.
“The main instrument of coercion in the eurozone is not its fiscal rules, but the power of the European Central Bank to withdraw funding from national banks. This is not a discretionary power, but one that is automatically triggered once a country‘s sovereign debt loses investment grade status.
If the banks have large holdings of their home countries’ debt, as is the case in Italy, they are setting themselves up for failure if their governments run an unsound fiscal policy.”
The European Commission is right on substance.
Whether it was wise to take on a country that is too big to fail is another matter. Italy will need to issue some €250bn in debt next year. The spread of Italian 10-year debt over equivalent German bonds has been at around 300 basis points — or 3 percentage points — for most of this month. The Italian finance minister, Giovanni Tria, said such a spread would not be sustainable.
He is right. So what will happen when the unsustainable ends?