Italian bonds have continued to rally after the economic guru of the populist 5-Star Movement and Italy’s new minister of European Union Affairs, Paolo Savona, called the euro “indispensable”.
Savona was at the heart of a crisis that saw Italian bond yields surge and the formation of a government nearly derailed. The firebrand Eurosceptic is a former industry minister who served in the short-lived technocratic government of Carlo Azeglio Ciampi over two decades ago.
He is a known as an open critic of the Single Currency and once criticised Germany for using Greece as a proving ground to demonstrate that Berlin is the dominating power in Europe. Savona famously likened the Eurozone to a German prison and called the Single Currency a historic mistake. That interview was later posted on social media platforms by the MS5 leader, Beppe Grillo, who led a campaign against Italy’s “international subjugation.”
Savona’s appointment as economy minister in late May was vetoed by the Italian President Sergio Matterella before a compromise was reached and Savona was given his current portfolio to handle European affairs.
In a conciliatory gesture, Savona offered assurances that the government is not negotiating with the prospect of forcing Italy’s exit, or “Italexit”, from the Eurozone.
“The euro is indispensable for the single market” Savona said during the presentation of his autobiography. He did, however, argue that Italy should have opted out in 1992, like the UK, and “properly prepare” the economy for the Single Currency. Savona has since argued that the European Central Bank should now assume the powers of the US Federal Reserve.
Given the weight of his opinion, Italy’s borrowing costs dropped sharply on June 13. Italy auctioned €5.6 billion, while the yield of two-year government bonds dropped to 0.83%, down from 2.73% two weeks ago. Italy’s 10-year government bond spreads against the German Bund dropped to 235 basis points, well below the 268 at the start of the week.
All eyes are now on Mario Draghi, as markets speculate he could be announcing an end to the European Central Bank’s quantitative easing programme, putting pressure on Italy that is the biggest single beneficiary.
Italy has a debt-to-GDP ratio second only to Greece and an increase in bond yields would make fiscal consolidation harder to achieve. At the same time, other members of the Eurozone are pressing for tighter monetary policy fearing inflation, an overheating housing market, and pressure from fixed income pension funds.