Mario Balotelli’s selection for the Italian football team was always a gamble given his reputation as a fiery and uncontrollable character; prone to acts of petulant aggression as well as moments of footballing genius. Mario Monti on the other hand was installed as the unelected Italian Prime Minister because he is seen as a safe pair of hands; a terribly good chap who could maintain smooth relations with Italy’s euro-partners.
Last night the two Marios were on sparkling form for Italy. In Warsaw a brace of Balotelli goals deprived Germany of a showdown with Spain in the final. In Brussels a stony-faced Monti refused to sign off on the growth pact previously agreed with France and Germany, without further support for themselves and their partners in the periphery.
Technocrat 2: Judgement Day
The Germans’ discovery that even technocrats such as Monti may rise against their human masters has cost them dearly.
In addition to the mutually desired plan for a central European regulator of banks, the anticipated bailout of the Spanish banking system will eventually come directly from the bailout fund, rather than remaining a liability of the already-indebted Spanish state.
Because of this, in the short-term Spain becomes the real beneficiary of Monti’s machismo (although I am sure their gratitude will be set aside when the two sides meet in Sunday’s Euro 2012 Final).
Cause for celebration…
There can be no doubt that these moves are a step in the right direction as Mike detailed this morning. Almost all of the initiatives were represented on the eurozone wish list I published a fortnight ago. Steps have been taken to break the link between banks and the weakened sovereign states – a first step towards continentalising troubled banks. The specific bailout of Spain’s banks will also be without seniority (which was on the wish list and Rob emphasised yesterday).
Equities soared on the news, Spanish and Italian bonds rallied sharply too. Those government bonds still considered risk-free, German bunds and UK gilts, sold-off. The net result is that equities seem set to end the week modestly higher, with gains for peripheral market bonds too.
Curb your enthusiasm…
Another of the key aspects was the ability of the euro bailout fund to support weak peripheral government bond markets with relatively limited oversight but the worries remain regarding the bailout fund’s limited size.
Hopes that the ESM might be granted a banking licence or, our preference, that the ECB administer secondary market purchases as a form of monetary policy, still look someway off. Remembering the Securities Markets Programme of the ECB managed to amass €280bn of liabilities in fairly short order without restoring credibility to the eurozone’s debt sustainability, the current €500bn fund therefore likely needs some significant bolstering.
But there are tentative reasons for hoping that may happen too. After all, the real significance of the current summit (which will continue after this blog entry has been posted), is the point alluded to at the outset: Germany lost.
The realisation that a united front from Italy, Spain and France can out-vote and out-muscle Germany may refocus Angela Merkel’s mind. Now, as she tries to marry the vested interests of the electorate (who want her to safeguard their tax euros) and the Bundesbank (who want her to safeguard their monetary philosophy), she may find she has to choose between them. She seeks re-election late next year which should help her focus her mind.
Head of Portfolio Strategy