Beppe Grillo, the leader of Italy's nascent Five-Star Movement catapulted into power by last week's Italian elections, is causing a bit of a stir this weekend.
Saturday, Grillo told German weekly news magazine Focus that given the dire straits Italy's economy is in, if things didn't change, Italians would want to leave the euro.
Then, in an interview Sunday with Bild — Germany's biggest newspaper — Grillo said he supports a referendum on euro membership.
Referenda on euro membership in the euro area periphery, which is suffering the pain of record levels of youth unemployment and, in Italy's case, a deepening recession, tend to spook investors.
"I am a strong advocate of Europe. I am in favor of an online referendum on the euro," Beppe Grillo told Bild am Sonntag.
Such a vote would not be legally binding in Italy, where referendums can only be used to repeal laws or parts of laws, but would carry political weight. Grillo has said in the past that membership of the euro should be up to the Italian people.
Not exactly reassuring.
In a recent note, referring to Grillo's party's rise to power, Citi political analyst Tina Fordham wrote, "The outcome [of the elections] also reflects the collision between two macro trends we have long warned of: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation."
Grillo's comments Sunday introduce the sort of headline risk that the Italian elections have returned to the forefront of the euro crisis storyline.
The Five-Star leader has pledged not to form a coalition with Pier Luigi Bersani's center-left party, which means now Bersani has to forge a coalition with Silvio Berlusconi's center-right party in order for Italy to form a government. The problem with that is that Berlusconi and Bersani don't really agree on much and neither is really incentivized to compromise with the other.
However, Wall Street Journal reporter Christopher Emsden notes that there may be a loophole allowing Bersani to duck the problem if Grillo so chooses:
[Grillo's] insistence that he won't form a coalition doesn't mean Mr. Bersani won't be able to form a government with Mr. Grillo's indirect support, however.
Analysts noted that an obscure Senate rule would allow the Five-Star Movement lawmakers to stay out of the room during a confidence vote allowing a government to be installed. Mr. Grillo has said he is interested in supporting legislative proposals on a case-by-case basis, so there would be room for convergence on some points.
In other words, if Grillo chooses to abstain from actively obfuscating the process, there may be a workaround.
BofA Merrill Lynch economists Raffaella Tenconi and Laurence Boone have pointed out that the two parties (Grillo's and Bersani's) could actually agree on a lot of things.
Here are a few items they highlight in a recent note to clients:
- Services liberalisation
- New energy strategy, with the aim to reduce costs in the medium term
- Strengthening the spending review process to cut non-social services costs to finance tax reforms. Reducing the housing tax on lower income families
- Constitutional reforms to streamline the legislative process. Bolder measures to fight corruption
- Reshaping of the labour market: higher unemployment benefits, greater protection for part time contracts and stronger productivity incentives.
- Greater investment in education and infrastructure to support women’s labour participation
- Stronger corporate governance rules
In any event, Grillo's words Sunday indicate that he's clearly intent on one thing: further agitating.
Deutsche Bank fixed income strategists Francis Yared and Dominic Konstam write in their latest weekly outlook that "the outcome of the Italian election poses the first real test to our strategic view for higher core rates and a positive environment for risky assets in general."
Whatever outcome results from the negotiations set to take place in the coming weeks as Italy tries to form a government, the process is sure to be dramatic.
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