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Tuesday, June 19, 2012 5:07 AM

Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement

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As I have said repeatedly, Greece is nothing but a sideshow, with the election last Sunday in France far more important than the election in Greece that has had everyone's attention.

For further discussion, please see Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?

Today I want to expand on that topic with the idea that Spain is a sideshow to Italy.

Rise of the Five Star Movement

Reader Andrea who is from Italy but now resides in France writes ...

Hello Mish.

As I told you some days ago, in Italy something quite new and disruptive is happening in the political landscape. As expected, the “Movimento 5 Stelle” (5 Stars Movement) had been the real winner of the recent round of regional elections a couple of weeks ago, and in my opinion it is worth to keep an eye on them especially in the light of the recent elections outcome in many European countries.

The founder of the movement is Beppe Grillo, a comic showman, very popular in the 70s and 80s. He was (unofficially) “banned” from Italian TV in the mid-80s when he made in a Saturday night show a very satiric (and funny) joke about the Socialist party and its chief Bettino Craxi, at that time Italian PM.

In the first half of 2000s he started Beppe Grillo's Blog, posting messages in a satiric style about economy, politics, ecology, society.

The movement is quite different from the other parties. It does not not a clear, hierarchic and defined organization. It is more a mixture of a method, a guideline and a set of rules to select candidates and programs and obtain its logo be part of the network.

Main Rules for the Five Star Movement

  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform

[Mish Correction: I originally posted "Get out of the Euro and default on debt" as one of the rules for the 5-star movement. That is Beppe Grillo's personal position, not a mandate for the Five Star Movement.]

In the latest elections, Five Star Movement candidates have been able to get almost everywhere between 10 and 20% of votes, sometimes even more, all without a single minute of TV advertising or a single advertising page on newspapers.

The movement has simply spread via the internet, social networks and public meetings around the country. The message sent by their success is clearly: we are fed up with this corrupted, inefficient and incompetent political class.

The most important thing for the future months is the last stance Beppe Grillo has decided to take just before elections: get out of the Euro and default on debt. This position has been strongly criticized the rest of the political class and mainstream media, but the fact that Beppe Grillo has been breaking this “Taboo” and that there was a strong reaction by political and media environments, has finally opened the debate in Italy and has certainly made people to start seriously think about it, despite the fact that Italy so far had no financial help from the EU or IMF.

The Monti consensus is now rapidly decreasing, mainly because the tax increases are starting to bite and because he seems unable to cut waste of taxpayer money as he promised. Political elections in Italy will take place in the spring of 2013: Beppe Grillo said after recent elections “see you in the next Parliament”.

If he will be present in the next Parliament with a significant number of members (which is likely), you can be sure that the topic will be more and more debated.

It already is. In numerous talk-shows, the issue is now openly debated. Discussing Italy leaving the eurozone one year ago was almost considered as "heretic". Now it's not.

Best regards, Andrea.
Ultimate Occupy Movement

That email from Andrea actually came in several weeks ago. In a recent followup post Andrea writes ...
Hello Mish,

Movimento 5 Stelle just won the its first Mayor of an Italian significant city, Parma (more known for its Parmesan cheese and the Parma ham).

For a movement born just 3 years ago and with no funds it is extremely significant. The prior local administration of this city had to resign,  pushed out by an angry crowd literally waiting for them outside city hall after discovering that they had indebted the city up to bankrupt.

Sounds familiar?
Regards, Andrea
The only way the "Occupy Movement" is ever going to work is the way it just worked in Italy: vote the bums out, not in favor of more bums, but rather in favor of candidates with principles.

European Unity on the Rocks

Inquiring minds are digging through a fascinating six-page report by PEW Research entitled European Unity on the Rocks.
The report is a survey on attitudes within the eurozone towards the EU, the euro, and how countries in the EU view each other. Here are a few tables and comments.

Across the eight European Union member countries surveyed, a median of only 34% think that European economic integration has strengthened their country’s economy. Indeed, majorities or near majorities in most nations now believe that the economic integration of Europe has actually weakened their economies. This is the opinion in Greece (70%), France (63%), Britain (61%), Italy (61%), the Czech Republic (59%) and Spain (50%). Only in Germany (59%) do most people say that their country has been well served by European integration.

Among the five euro area nations surveyed, a median of only 37% believes having the euro as their currency has been a good thing. This includes just 30% of the Italians and 31% of the French. At the same time, the three non-euro zone countries surveyed are quite happy they have kept their own currencies, including nearly three-quarters of the British (73%).

Among the Europeans surveyed, only in Germany is there a growing majority that believes that integration has been an economic boon for the nation and a strong majority that says EU membership has been good.

Despite the falloff in EU favorability, most Europeans surveyed still see the European Union in a positive light, including 69% of the Poles, 68% of the Germans and 60% of the French and Spanish. And more than half in all five euro area countries surveyed – including 71% of the Greeks, 69% of the French and 66% of the Germans – would like to keep the euro as their currency and not return to the drachma, the franc, the mark or other national currencies.

The euro crisis has also undermined support for free market capitalism. Solid majorities in only three of the eight countries surveyed – Germany 69%, Britain 61%, and France 58% – still believe that people are better off in a free market system. Moreover, since 2007, before the global financial crisis began, belief in capitalism is down 23 percentage points in Italy, 20 points in Spain, 15 points in Poland, 11 points in Britain, and nine points in the Czech Republic. In comparison, over that same time frame backing for the free market has remained relatively unchanged in the United States.
44% off Italians View the Euro as a Bad Thing, Only 30% a Good Thing

The critical chart is the second one. 44% of Italians view the euro as a bad thing and only 30% a good thing. That is the biggest negative spread in the survey. In contrast, Greece has the largest favorable spread at +20 percentage points.

IPOS Poll Shows Only 50% of Italians Would Vote to Keep the Euro

Inquiring minds are also digging through a May 2012 Eurozone Poll by IPOS.
As fears reverberate through financial markets that Greece could leave the euro zone and throw the region—and the rest of the world—into economic turmoil, a new poll of citizens in some of the most crucial countries engaged in the debate, debacle and damage control—Greece, Germany France, Italy and Spain—indicates that, on average, a majority (60%) with a decided view would support a national referendum in their country to decide whether they should keep the Euro as their currency and if there was such a referendum, an average of six in ten (65%) of decided citizens would vote to keep the currency.

In Italy, half (52%) would support holding a referendum in their country to determine the future of the Euro versus just over one third (36%) who would oppose having one and 12% say they “don’t know”. Backing out the undecided, six in ten (60%) Italians support and 40% oppose having a referendum. Asked how they’d vote in a referendum if it were to take place today, half (50%) of Italians say they’d vote to keep the Euro as their country’s currency while four in ten (38%) would vote to leave it—8% say they “don’t know” how they’d vote and 4% say they wouldn’t vote. As such, backing out the undecided and those who say they wouldn’t vote, of decided Italian voters, six in ten (57%) would vote to stick with the Euro while 43% would vote to leave it.
Totals by Country

Germany: 51% Keep Euro, 38% Leave, Other 11%
Spain: 55% Keep Euro, 32% Leave, Other 13%
France: 62% Keep Euro, 24% Leave, Other 14%
Italy: 50% Keep Euro, 38% Leave, Other 12%
Greece: 70% Keep Euro, 20% Leave, Other 10%

Notice that Italy followed by Germany have the least support for retaining the euro.

As an amusing sidelight, recall that Greek prime minister George Papandreou was forced to resign when he proposed holding a referendum on the euro. That foolish action by the EMU helped give rise to Syriza and the radical left.

Italy Too Big to Rescue

Via a somewhat choppy Google translation, Spiegel columnist Wolfgang Münchau is discussing Just Before the Collapse
The interest on Spanish ten-year bonds are now at 6.8 percent - and in the midst of a recession and unemployment at nearly 30 percent. It is now only a matter of time before Spain itself must be under the parachute. According to an estimate by the U.S. bank JP Morgan has to finance Spain in the years 2012 to 2014 about 350 billion euros of debt or refinance. If you add the 100 billion € at current Bank assistance so that the entire financial cushion for the new rescue mechanism ESM would be exhausted. Because maybe there is still room for Cyprus, but for anyone else

The problem is not just the size of the ESM, but its structure. Here are liable all who are outside of the screen, all for less. If Spain also joins them, two things happen simultaneously. The total guarantees to skyrocket. And there are few countries that stand up for those guarantees. One cannot solve the problem so you should expect to increase the rescue easy.

Italy was never prepared for the euro

Spain still fits just below the screen, but in Italy there is no solution. With long-term interest rates of more than six percent, a debt of 120 percent growth and a structural weakness of Italy can not maintain his membership in the euro. Italy needs € bonds - that is a permanent reduction in financing costs through a joint debt of the euro area - possibly even a debt and a strategy for improving competitiveness.

The appointment of Mario Monti the Italian prime minister last year, the audience first with euphoria in the markets, but the record is disappointing . He sat on the wrong reforms, and he lacks the political power base. His poll numbers have slipped into the basement, and within his coalition to support the leaves also. Some even speak of the necessity of early elections.

Italy's problem is not his prime minister. The country was never prepared for the euro. With the entry of Italy has lost its competitiveness gradually. Even in good years, the economy grows just one percent. And now Italy is in deep recession and has a weak government with a maturity period of a few months.

Italy is not far away from the point at which it can finance itself without outside help is not continued in the markets. But Italy is actually too big for the rescue. According to JP Morgan fund, the Italian government until 2014 a total of 670 billion euros in the markets. Italy and Spain come together around one trillion euros. One would thus doubling the screen to get the two countries including. And then the whole load Germany and France would jointly contribute. That would be an economic and political suicide.

The combination of banking, fiscal and political union would solve the problem. It is not the noble principle of a political union, but the actual debt restructuring that would work here. With a press release it will not solve the crisis. If the Euro-summit at the end of the month on a ten-year timetable for a political union agrees, the effect fizzles out in the markets, because Italy still puts it in a debt trap.

Then in Italy could increase due to the unacceptably high rates of political pressure for a Euro release. In this case I would expect that Italy would no longer service its foreign debt and then. Italy, unlike Spain would be able to do such a thing.
Italy Holds Enough Gold to Prevent Hyperinflation

According to the Telegraph,Italy's gold 'worth only a tenth of bailout it needs'
Italy holds 2,451.8 tonnes of gold – the third highest of any central bank in the world. Only the US, with 8,133.5 tonnes and Germany, with 3.401 tonnes holds more. The International Monetary fund also has reserves of 2,814 tonnes.

One tonne is the equivalent of 32,150.75 Troy ounces. The gold price is currently at about $1,764 per troy ounce, so one tonne of gold is worth about $57.6m. This means Italy’s total central bank holdings are worth around $141bn (£88.6bn).

According to Gary Jenkins, a fixed income analyst at Evolution Securities, Italy requires $1.4 trillion to fully cover its bail out.

This means Italy’s gold holdings are worth about one-tenth of the estimated total amount required.

The cost of repaying Italy’s debt by 2013 is expected to hit £424.9bn, with the country’s total debt currently standing at about $1.9 trillion.
Although Italy's gold is woefully short of what it needs to cover its debt (at least at these prices), having the third highest central bank holding of gold in the world is easily enough to avoid hyperinflation.

Six Reasons Why Italy May Exit Before Spain

  1. Rise of the Five Star Movement
  2. 44% of Italians view the euro negatively, only 30% favorably. That is biggest negative spread in the eurozone. In Spain more view the euro positively than negative, albeit by a small 4 percentage point spread.
  3. A separate poll shows a mere 50% of Italian would vote to keep the euro if given a chance. That is the lowest percentage in the eurozone.
  4. Italy is too big to bail
  5. Interest rates have reached a point where Italy will struggle to roll over its debt
  6. Eurozone Impossible Politics: The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union.

Here is the bonus seventh point: Italy has enough gold reserves that it could avoid hyperinflation if it left the euro.

As I said in November of 2011, Eventually, Will Come a Time When ....
Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.
That person was not Marine Le Pen, perhaps it will be Beppe Grillo.

Regardless, here is the bottom line: If Germany doesn't leave the euro, Italy must.


I posted "Get out of the Euro and default on debt" as one of the rules for the 5-star movement. That is Beppe Grillo's personal position, not a mandate for the Five Start Movement. The error was mine in reshuffling things around and adding bullet points, not Andrea's.

Mike "Mish" Shedlock
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