Mario To The Rescue
Maybe this is what Mario Draghi meant when he said he would do “whatever it takes” to save the euro. Back in 2012, as a freshly installed chairman of the European Central Bank, Draghi’s promise finally convinced the markets that the euro zone could muddle through its sovereign debt crisis. By the time a populist Greek government attempted to call the European Union’s bluff, three years later, enough order had been restored that the EU could cow them into submission.
What was surprising was that the markets never attempted to call Draghi on his pledge. The chart below shows the spread of Italian over German 10-year bond yields, the clearest measure of the perceived extra political risk attached to Italy. The yellow line marks Draghi’s speech. Italian spreads have never since approached their level of the summer of 2012; as ECB chairman, Draghi was spared from having to show whether he was prepared to go through with his vow in the event of a speculative attack.
Now, however, it looks as though the debt is coming due. Italy’s last general election was in 2018, and resulted in a bizarre coalition between the left-populist Five Star Movement, and the right-populist Lega. That sent the spread over bunds flying higher, as one of the few things the two parties had in common was their anti-Europeanism. Now, after a botched confrontation with the EU over Italy’s budget deficit, the exit of the Lega from the coalition, and a dreadful pandemic, we are in the outlandish position where Giuseppe Conte, prime minister since 2018, has resigned, and the only person all parties seem to agree on as a new premier is Draghi. While he may be one of the most famous and internationally respected of living Italians, Draghi also happens to be one of the most strongly pro-European. He also happens not to be an elected politician.
Some thoughts on this. First, political science and particularly political institutions are more important to investing than many realize. What has just happened is the equivalent of President Biden and Vice President Kamala Harris standing down because they can’t get their policies through, and the parties in Congress coming together to make Ben Bernanke president. In other words, this just couldn’t happen in the U.S. Whether that is a good or a bad thing, I leave up to you.
Is it good for Italy? The country has done this kind of thing before. The blue lines show the premiership of another Mario, Monti, who had previously been a European commissioner, and was called in to act as premier in the wake of the toppling of the populist Silvio Berlusconi. His appointment briefly calmed the markets; but he still needed Draghi’s intervention to vanquish the speculators, and his premiership was over within two years.
Draghi has the job of spending money that the country receives in Covid relief, rather than Monti’s miserable task of overseeing austerity. And his presence at the center of the EU sharply increases the chances that it can thrash out a way to make some kind of a common fiscal policy work. This will be seen as a sharp reduction in risk for the euro zone as a whole, and with some justification.
Investors might remind themselves, however, that Italy’s voters will get their say in 2023, if not before. Draghi might not be able to face them down as easily as he faced down the markets in 2012.
Survival Tips
You never know what music will raise your spirits. My daughter Andie has persuaded me to listen to the music of Hozier, the young Irish musician best known for his debut hit Take Me to Church, an angry attack on intolerance in general, and the Catholic church in particular. Some of his other songs, however raise a smile. My favorite is Jackie and Wilson; it’s infectious. For an explanation of the underlying philosophy, Hozier handily explains it here. Alternatively, there is Someone New, or Moment’s Silence, which sounds religious, and isn’t. He has a soulful and original voice and I’ve enjoyed listening to him.
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of The Fearful Rise of Markets and other books.