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Europe vs. Itally


The current Italian situation does not concern us (much). Italians own 65% of the Italian debt market. Perhaps Italian yields are higher than in the rest of Europe but perhaps also they are the only ones fairly priced within the common economic zone (yielding about the same as US Treasuries). Unlike what is happening in the rest of Europe where investors are left seeking higher returns in more risky assets, the money that gets paid to service the Italian debt also serves the interest of Italian savers and pensioners. In the case of Italy, at least the higher interest rate charge gets recycled into the domestic economy, transforming itself into a higher purchasing power for its citizens. Hopefully, we get some sort of an agreement and sanctions can be avoided (it would be cynical to see a former French Finance Minister who himself was among the first to violate European budget rules and getting away with it, to impose the first ever sanctions against a member state). Anything else could spell Doom and Gloom for the European construction. It would gratify hedge funds who are short BTP’s and it vindicate a US administration that does all it can to play divide and conquer with Europe. The last example was given yesterday with the US administration granting Italy but not Europe an exemption to keep importing oil from Iran after the sanctions took effect. Picking an EU member and granting him an exception while mocking a pan European initiative aimed at seeking continued business relations (outside of oil) with Iran is a form of denial. The US administration is craving for an unraveling of the European union not least because its currency is currently (CNY, RUB and INR are coming next but not just yet) the only current serious challenger to the dollar as an anchor to the financial system. Europe should gather and unite, have a clear vision of who its (friendly economic) foe is, stand up to him and refrain from drowning into intestine fights. There is no room for an ego battle between Paris and Rome now.

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