Europe rediscovers political risks. Brussels sees with concern future of Italy, with populism already installed in one of great countries of continent. Rome fakes with an economic policy with potential to destabilize euro and which has automatically led to return of feared risk premia. The contagion is felt throughout south: in last hours, with special virulence in Spain, where judgement of case Gürtel and political instability associated with motion of censure against Mariano Rajoy have not yet generated uneasiness in headquarters Of EU, but in market.
"There is no concern with Spain: approval of budgets generates a horizon of stability. The rest are internal political games. We follow m closely: Let's see how y end, "said a high European source this Friday. "There may be uncertainty in markets, but it is difficult to imagine a radical government in Moncloa: true source of problems in continent is Italy," added a spokesman for Eurogroup.More information
- FILES In this file photo taken on December 29, 2017 Spanish Prime Minister Mariano Rajoy arrives to hold his end-of--year press conference in Madrid. Spain's centrist citizens, Prime Minister Mariano Rajoy's ally in Parliament, on May 25, 2018 called for a snap poll after Rajoy's conservative Popular Party was sentenced in a major graft trial. /AFP PHOTO/Javier Soriano Javier Soriano AFPLa motion of censure for ' case Gürtel '
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Italy, in short, is scary; Spain, for moment, No. In end, Spanish economy grows strongly, re are no populist threats to Italian and punishment in markets is — for now — acceptable. Although last episodes in Madrid provoke a mixture of stupefaction and suspicion in EU, with a government that takes several quarters diluted, unable to solve biggest institutional crisis of democracy — Catalonia — and whose paralysis can only go furr after Outcome of Gürtel case and its political implications.
The bizarre combination that forms leftist populism of 5-Star Movement and ultra-right of Norrn League has awakened financial markets, which have been punishing viciously for days in Italy and, to a lesser extent, rest of countries in south. The revelation of a government contract, which defied rules of European gravity and opened door to exit of euro and claimed a cancellation of Italian debt in hands of ECB, ignited all alarms. Rome ended up withdrawing se measures, but markets did not trust: This programme, which is still cancelled, eliminates possibility that ECB will be able to go to rescue of Italy if re is a real mess in markets. "Rome has shot itself in foot: it has made ECB's insurance vanish," said sources of a large investment bank. Italy is unlikely to challenge rules of euro, but Brussels, Frankfurt and Berlin are genuine teachers in letting market do job for m: interest rates on Italian debt multiply by six those of German bonds. "Market Discipline", summarizes Brussels.
The problem with Italy is side effects: Contagion has been felt throughout periphery. In last hours, particularly in Spanish bonds, also weighed down by a disturbing political instability derived from judgement of Gürtel case and motion of censure presented by PSOE, in addition to Catalan crisis. Spain should remain in profile and let in this chapter of crisis is Rome who exposes itself to whip of market, coincide half a dozen sources in Brussels. The European Commission is tempted by formation of new Italian Government, with a possible Antieuro economy minister, and in any case worries about shocks that Trump's foreign policy might cause. "Spain is not among main reasons for alarm because re is no Pens or Salvinis in Madrid. But legacy of crisis is re, in numbers of unemployment and debt, so Madrid should not play with fire, "says one of those sources.
The Spanish government has dedicated its efforts this Friday to reinforce this idea. The Minister of Economy, Román Escolano, had assured on Thursday that Spain is "an anchor of political stability" in EU. The events in Madrid left that sentence out of play in just a few hours. Escolano, however, has insisted on press. "The approval of budgets gives Spain political and economic stability". "Spain is a stable country," he reiterated, "and whoever jeopardizes that stability [in relation to PSOE and its motion of censure] should explain it well." The only thing that Escolano has admitted is that latest news "is bad for Spain and for Spanish economy."
And so bad: The Spanish stock exchange has suffered this Friday its biggest fall since March. The risk premium — notoriously famous difference between 10-year German bond interest rates and Spanish bond — has risen above 100 base-point barrier, with rates above 1.5%. The uncertainty in Spain and Italy has again weakened euro, below US $1.16.
That string of figures tells two very different stories. "The current political uncertainty in Spain is healthy: courts are cleaning up party system. The Italian crisis, however, is very damaging to view that promises of populists are incompatible with rules of euro, "said Daniel Gros, director of Ideas laboratory CEPS. "The concern in EU is not related to South in general, but to Italy in particular, and contagion has so far been limited," added Gros, who does not see a general problem in eurozone as in 2011, but an Italo-Italian mess.
And in end, markets are right. The Spanish risk premium, it is true, is already above 100 points. But Italian has climbed to 200 and it is not clear how far you can climb. Because manguerazos of ECB have turned off all fires since 2012, but Mario Draghi is with his hands tied since Italians amagaron with a non-payment of public debt in hands of Eurobanco. Big mistake. Manca Finezza.