Short memories forget how rampant anti-EU sentiment was before Mario Draghi became Italy’s prime minister

Welshcake

welshcake@iongroup.com

Unrest in Italy threatens to escalate into a bigger crisis than Greece in 2012

Peripheral sovereign crises — fuelled by political instability, over-indebtedness, demographics and populism — have an episodic familiarity that masks how this time could be different, with prospects of a dramatic season finale for the European Union. But grab your popcorn for the UK, too.

It’s high summer. In close-up we watch as a celebrated Italian leader, famed for modernising infrastructure and reforming bureaucracy, finds himself in battle with people he previously had in coalition. A single bead of sweat on his brow stands for the project in this defining moment. But our protagonist’s actions begin a chain of events that lead to disaster.

Yes, we’re talking about Julius Caesar at the siege of Alexandria in 48 BC.

Before you goof-spotters complain there was no such thing as Italy back then, take it up with Antiochus of Syracuse, or Caesar himself — he would have referred to the peninsula as such.

Anyway, Caesar is in Alexandria and has commandeered 40,000 (or 400,000?) scrolls from the library for Rome’s greater glory. But fearing he’ll lose ships to an invasion, Caesar orders the whole fleet burnt. The fire spreads to dockside buildings where the scrolls have been temporarily stored. The loss to humanity of works by Theophrastus and Aristotle is unfathomable. (Unless, as some speculate, all the good stuff survived. And then rotted in the cellars of Neleus of Scepsis.)

This is the Caesar who in 55 BC decided to have a pop at Britain. Very reliable Celtic texts reveal that my forebears, led by King Nynniaw, gave him such a good kicking that Caesar’s first attempt at his famous line could well have been, “I came, I saw… I hate those bloody Welsh!”

He only just escaped. But that didn’t stop Caesar returning for a better documented second attempt. It’s hard not to think Wales lost out from the societal changes that ensued. But at least we got straight roads.

What do Italians learn from history?

In summer 2022, Italy’s government bonds and sovereign CDS are at the year’s wides, but markets don’t reflect the potential for a bigger crisis than the eurozone faced with Greece in 2012. Short memories forget how rampant anti-EU sentiment was before Mario Draghi became prime minister — and are underestimating this rallying call in the 25 September elections.

If Draghi was unable to fix Italy’s problems, who can? As ECB chief he saved the euro. In Italy he promised a “new reconstruction” with a €222 billion covid recovery plan using money from Brussels to build infrastructure such as roads and railroads — mainly in the country’s south, which has suffered longstanding neglect. Draghi took on an Italian bureaucracy and protectionism that has stifled investment, innovation, entrepreneurship and its small to medium enterprise sector.

That his government of national unity collapsed due to discord over a cost-of-living package emphasises that Italy is hard hit by surging inflation. It now faces two months of political paralysis, while the far right, anti-establishment Brothers of Italy party — the only one not in government, with just 4% of the 2018 election vote — has surged to a joint-equal 22% poll lead. Whatever government results from September’s vote will be even more fractious than the current one.

Pro-EU sentiment will not have been boosted by the vagueness in the ECB’s ‘Transmission Protection Instrument’. This leaves Italy ripe for a good amount of market testing in the weeks to come, which is arguably overdue given the country’s indebtedness, lack of GDP growth for over a decade, loss of exporting competitiveness since joining the euro in 2002, and decline in working age population, which puts it on course to compete with Japan for worst demographic profile in the developed world.

And yet, here in the UK we face the choice of Truss or Sunak, either of which would be very bad days for your Wordle average. One’s tax-cutting determination portends up to 10% mortgage rates that would make a bonfire of the housing market and expand long term debt, while the other — who, let’s not forget got the UK economy where it is now — seems bent on a sado-masochistic mandate of growth-quashing austerity.

Can’t we just swap Boris Johnson for Draghi? Maybe both countries would be happier.

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Global credit funds & CLO's

August 2022 | Issue 248

Published in London & New York.