The slide show discusses the possible effects and outcomes of the recent Italian Election on the common currency and the EU political union.

1. What’s the Acronym forWhat’s the Acronym for
Italy’s Euro Exit?Italy’s Euro Exit?
Consequence of Recent Elections in Italy and,
Possible Italian Policy and the End of the Euro
Greg Kleponis, PhD(ABV), L.L.M, MA

2.  Recent populist wins in Italy will signal Italy to
take a different path to ending the Euro crisis
rather than “more of the same”
 Germany & France will have to go a bit softly
with Italy
 Eurozone needs a plan to overcome debt and
diverging competitiveness of members
 German policy vis a vis Euro Crisis has been a
100% failure
OverviewOverview

3. Di Maio/Salvini /5 Star Movement/LegaDi Maio/Salvini /5 Star Movement/Lega
 Euro sceptic, right of center parties emergent
 Elected on ending status quo
 Populations losing faith in Euro centric/open
borders ideology and leadership

4. Support for Euro in Italy at Historic Lows –Support for Euro in Italy at Historic Lows –
Hence Recent Election ResultsHence Recent Election Results

5.  Despite mandate from Italian public during last
elections, EU still believed -business as usual
 New Italian government shattering those illusions
 Lower taxes, basic income for everyone and abolishment
of past pension reform= more deficits for Italy- new
leadership rejecting this.
 Past attempts to overcome Eurozone debt crisis with yet
more debt is putting paid to this fairy tale. Flood of
money has suppressed the symptoms but not cured the
cause
 EU needs orderly process to overcome not only debt but
the divergence of competitiveness by Eurozone
members
Italian Elections/EuropeanItalian Elections/European
ExpectationsExpectations

6.  Key among the goals of the common currency
was a convergence of competitiveness
 What is happening is the opposite –
divergence
 High value added industry based countries
within the EU vs lower value non- service, non
innovative economies.
 Bifurcation of economic scale
 “Can’t sell tomatoes and buy Mercedes!”
Divergent CompetitivenessDivergent Competitiveness

7.  EU needs an orderly process to overcome the
burden of too much debt (public & private)
and the diverging competitiveness of its
members.
 Addressing divergence requires restructuring
of membership= (ie. Germany, France,
Netherlands for example leave OR less
competitive Southern countries leave)
 No other real way of handling this – one of
original criticisms of the 1990s
DivergenceDivergence

8.  Is it realistic for a restructure of member
countries? (what would be the point if north
left)
 Before real restructure- debt must be reduced
 Best way (orderly) joint debt restructuring-
joint effort between debtor & creditor nations
(no more brow beatings- us/them must
change to “we”)
RestructureRestructure

9.  Debt overhang (est. €3 trillion) pooled and
paid back jointly over decades
 Creditors & Debtors would pay in and ECB
would underwrite this process by buying into
part of the debt
 Requires big egos of politicians to admit Euro
was a political project (failed) not backed by
economic fundamentals ( this is what has
created larges losses for all and outright
misery for some)
Restructure How?Restructure How?

10.  No leadership from Merkel’s govt
 Played for time- hoping for an ECB miracle
 Didn’t happen
 Continue to deny that Euro is NOT in
Germany’s best interest
◦ (Euro is like GMAC) Just a subsidy (loan)for
Germany’s export industries which Germany
finances by giving credit to customers even though
they won’t ever be able to pay back.
◦ Think Sub—Prime housing loans.
Germany Played for TimeGermany Played for Time

11.  Germany focused on austerity
 Italy believes austerity just makes the
problem worse.
 Germans won’t address diverging
competitiveness
 Past 10 years – German approach to euro
crisis is a total failure.
 Negative effects on both creditors and
creditor- Greeks 27% GDP decline, German
paying bills
Ideology of Germany vs. ItalyIdeology of Germany vs. Italy

12.  Merkel should have opted for debt
restructuring- if she had she would have
been hailed as the leader who saved “Europe”
 Instead she will be remembered as leader who
brought the whole project to near collapse
while simultaneously shifting to open borders
– wildly unpoplar and responsible for
emergence of right-wing parties throughout
Europe
20/20 Rear View Mirror20/20 Rear View Mirror

13.  Merkel must do “whatever it takes” to prevent
Italy from leaving so she will have to placate
Italian right
 Over time, more power has shifted to debtors
within the Eurozone, (Old Saying, “If I owe the
bank €100, I’m in trouble, if I owe the bank €
1million, the bank’s in trouble.”
 May see capital flight from Med states to
northern countries- notably Germany
 Capital flight- Target 2 receivables of
Bundesbank
Germany can be BlackmailedGermany can be Blackmailed

14.  Grown to €1 Trillion –more than €12,000 on a
per capita basis – given by Germany interest
free
 Without amortization- without collateral
 Will increase in Italy- main debtor under
scheme- €450 Billion. Any country leaving
will need to settle their Target 2 liabilities
first. Italy can’t do it. So they just won’t.
T2 ReceivablesT2 Receivables

15.  Italy in a strong position. Italians know this
 Learned from Greece and Syriza- can’t just
“leave” – must prepare for it. Italy is doing
that.
 Mini-BoT’s (non-interest T-Bills) secured by
tax revenues, denominated in euros, but only
printed in Italy and are a parallel currency
(BoT is abbreviation for T-Bill and mini
reflects small denominations)
A Parallel CurrencyA Parallel Currency

16.  Once parallel currency in place, just takes a
decree to switch to a new currency for the whole
country
 Mini-BoTs could be currency used in everday
transactions in Italy
 Threat to Euros as it would demonstrate that the
euro is not irreversible, as claimed by EU elites.
 Markets would then expect others to follow.
Given this prospect, France and Germany will
have to be accommodative despite counter
rhetoric
A Parallel CurrencyA Parallel Currency

17.  New Italian government coalition may ask for
partial debt cancellation by ECB.
 Maybe not crazy. For years has been serious
discussion among economists if debt
cancellation is the solution to over-indebted
world economy.
 Banks should just buy up blocks of debt and
simply cancel them. Central banks can’t be
“insolvent” because they can just “print”
money- a sure and quick way to get rid of the
debt.
Overall Solution? Cancel Debt Held By ECBOverall Solution? Cancel Debt Held By ECB

18.  Con: Critics say loss of trust of value of money=
hyperinflation- Weimar 1920’s
 Pro: As long as it’s a one off there should be no
lasting negative impact
 Japan – relevant policy example. BoJ is currently
holding more than 50% of Japanese debt and will
soon own 70%. Observers expect a cancellation in the
coming years.
 More difficult for Europe. Several countries of
differing economic levels and redistribution of wealth.
Countries with higher debt- benefit most
 Observers suspect German politicians will likely and
eventually be prepared to accept this outcome
Debt Cancellation Pro/ConDebt Cancellation Pro/Con

19.  Italy is in a much stronger position than
Germans are willing to accept
 Bank of America study showed that using
game-theory the most probably result is a
successful blackmailing of Germany by Italy
followed by an Italy exit (what’s that acronym)
 Whatever happens- the end game seems
close. Can no longer prolong the illusion that
the Euro-crisis is going away.
ConclusionConclusion