Anthony Peters, SwissInvest Strategist
Not all is resolved if one reaches to this morning’s Handelsblatt which carries an interview with Beppe Grillo, leader of the Five Star movement and controller of the balance of power in Rome.
Much has been written about Grillo, the Italian “protest vote” and his refusal to enter into coalition talks with the main parties – or should that maybe not be legacy parties? However, interviews don’t give interpretations of what others believe the interviewee might be thinking but are obliged to tell it as it is. So Grillo’s central statement that “De facto, Italy is already out of the euro” will not go unheard.
Grillo might be a buffoon but he is a democratically-elected buffoon. His line of argumentation is not entirely unknown but in the interview he reiterates his core belief that Europe has been driven to the verge of self-destruction by self-seeking political and financial elites which are prepared to pay any price – or, more precisely, have the people pay any price – in order to protect their plutocracy. He refers to his movement as a kind of “French Revolution without the guillotine”.
Let’s face it: as often as we have questioned the wisdom of the weakest being lumbered with a currency which is too strong for their economic reality, equally often we have forgotten to remember how Germany has thrived on the same currency which is hugely too weak to reflect its economic power and output
He is not clear as to how come Italy is already out of the euro. On one hand he suggests that it is only a matter of time before the core expels it, on the other he speaks of a popular referendum on membership. This is the typically unclear thinking that takes the sting out of his huge electoral success and explains why the five-year CDS spread between Germany and Italy is “only” at 235bp but also why Spain now trades a few basis points tighter in the protection market than Italy.
If the Italians themselves don’t know what they want, how should the market?
Fighting back
In order to control the fiscal imbalances, we either need to make more or we’ll have to take less out of the system than we put in. That’s not rocket science. There are signs that China’s previously unassailable price competitiveness is gradually fading and that both the US and the UK are fighting back. There are reports here this morning that Symington’s, the food group, is repatriating noodle production from China to Hunslet in Yorkshire.
Although raw production costs might still be higher here than there, the logistical advantages of producing closer to home can make up the difference. Inditex, owner of Zara, has shown that in a response time sensitive world – the net has led us to expect everything to happen yesterday – proximity is a valuable asset.
Yes, we are capable of fighting back but it would be either a very brave man or a complete fool who would try to extrapolate from a few individual examples that broad-based global competitiveness is just around the corner. However, without the power to be able to bring one’s currency in line with one’s productivity, room for improvement remains limited. Grillo is neither entirely wrong nor simply joking when he rhetorically asks why Germany is the only country which has enriched itself from what were supposed to be benefits for all?
Let’s face it: as often as we have questioned the wisdom of the weakest being lumbered with a currency which is too strong for their economic reality, equally often we have forgotten to remember how Germany has thrived on the same currency which is hugely too weak to reflect its economic power and output.
In the thinking of the growing crowd of dissenting voters, the euro has ultimately achieved nothing more than to enforce a transfer of wealth from the periphery to the core which to them seemingly sports one single significant member.
What the “system” is trying to do is to redistribute that wealth back to where it has originally come from. Inevitably. that creates resentment in all parts and the German elections of this September will no doubt bring with them a very public and very bitter debate on the issue. However, it has long been politically incorrect in Germany to question the tenets of the single currency and the cost of maintaining it.
Enter, stage left, the Alternative fuer Deutschland, a political party founded a few days ago with a clear and unequivocal eurosceptic agenda. Recent polls have demonstrated that 54% of Germans believe that the bail-out funds which they are providing to shore up the currency union are money wasted and the new party argues that the ruling political elite is steadfastly refusing to contemplate the alternatives; hence the name.
It is surely too late for this movement to seriously impact the Federal elections but those who believed that the eurozone is out of the woods might need to be more cautious in their thinking. Having been told that there is only a binary outcome to the crisis, voters might decide to challenge that and ask whether there might be a third way.