|Old ways die hard. Two months after Italian voters rebelled in fury against the establishment, the country’s elites have chosen yet another insider to be leader.
Anarchist comedian Beppe Grillo – patron of the Five Star bloc in parliament – called the shadowy manouevres that led to this a “coup d’etat”, orchestrated over a “quiet weekend of vomit”.
Incoming prime minister Enrico Letta is no doubt a decent, steady, honourable technocrat. He has good intentions. He vowed on Wednesday to lead the charge against austerity in Europe.
Yet it is hard to imagine a man less inclined to throw down the gauntlet and force a radical change in EU policy before Italy’s economy chokes to death. He grew up in Strasbourg. He wrote his PhD on EU community law.
He is just as wedded to the EU Project as the man he replaces, ex-EU commissioner Mario Monti, who surrounded himself in Rome with Brussels emigres still on the EU payroll.
Italy’s business lobby Confindustria said this week that austerity policies had caused “devastating damage, comparable with a war”. This follows its warning that the country faces a “full credit emergency”.
One hates to cite Grillo as an authority, but he was more right than wrong to warn on Wednesday that Italy is running out of time. “A firm is closing every minute. By autumn we will have reached the point of no return.”
Let me be clear, Italy is not a fundamental basket case. The European Central Bank’s wealth survey shows that average household assets are €275,000 (£234,000), compared with €195,000 for Germany, or €170,000 for Holland.
Private debt is lower than in Holland, France, the US, Britain or Japan. Its International Investment Position is near balance, unlike the Iberian disaster stories.
It has a primary surplus of 2.5pc of GDP, meaning it can leave EMU and regain competitiveness at any moment it wishes without facing a funding crisis.
It is often said that Italy’s bond yields would surge if it tried, but this muddles “nominal” and “real” rates.
North Europeans might fruitfully ask themselves who really stands to lose most from a showdown as they enforce contractionary policies on Rome.
Italy’s elemental problem is that it is in the wrong currency, with a chronically overvalued exchange within EMU and against the dollar and yuan. All else is manageable. How it got to this point is by now a tedious subject. Suffice to say that 15 years of creeping pay deals under the Scala Mobile have left it high and dry, with unit labour costs 30pc out of kilter with Germany.
What risks turning Italy into an EMU-created basket case is the ill-judged austerity policy forced upon it. There was no economic justification for fiscal tightening of 3.2pc of GDP last year. It was overkill. The budget had been near primary surplus for five years. Public debt was stable at around 120pc of GDP.
The situation had become urgent only because EMU had no lender of last resort at that point. The crisis in Greece, Portugal and Ireland was unfairly infecting Italy.
The ECB has since stepped up to its responsibility. But the quid pro quo for Italy itself was slash-and-burn cuts. This grave error shattered political consensus for the reforms that Italy really does need, and has been largely self-defeating in economic terms.
Bank of Italy data show that the economy contracted by 2.4pc last year, national demand fell 5.3pc, and fixed investment fell 8pc. House sales have crashed and the economy has shrunk by 6.9pc since 2007. This is the profile of a country in depression.
To crown it all, public debt jumped from 121pc to 127pc of GDP last year. Italy is a big step closer to a debt compound spiral after the EU’s medieval cure than it was before.
It risks moving closer yet as Euroland lurches into a seventh quarter of self-imposed recession. Citigroup expects Italy’s GDP to contract by 1.6pc in 2013 and by 1.2pc in 2014, with near zero growth thereafter, ending in debt restructuring anyway.
Without Churchillian leadership, Italy seems doomed to this fate, attempting to restore viability within EMU by means of an “internal devaluation”, with youth unemployment pushing above 50pc in Naples and the cities of the Mezzorgiorno.
If Mr Letta thinks EU policy elites are retreating from the austerity, he will be disabused soon. Yes, Commission chief Jose Barroso let slip this week that Europe is “reaching the limits of the current policies” and must do more to secure popular support, but he says such things on and off.
He also insisted that the policy is “fundamentally right” and working in Ireland, a fond hope that the Celtic comeback – less clear than he states – can be replicated in countries with Ireland’s flexible labour markets and vibrant exports.
The Commission’s position was clear in a joint op-ed last week by currency chief Ollie Rehn. It claimed a string of successes – all dubious – and concluded that “the eurozone has shown a degree of resilience and problem-solving capacity that many observers and policymakers would not have predicted even a year ago”.
This is humbug. Only one thing has changed. The ECB has agreed to buy Spanish and Italian bonds if need be, under strict terms. It did so because the euro would have blown apart last summer if Chancellor Merkel had not authorised the bank to act.
The op-ed was co-signed by the Dutch head of the Eurogroup and two top German officials, and that is the point. The policy is being set by the AAA core. The Commission bends to power, and will not move unless the rest of EMU mobilises superior counter-power. All else has become irrelevant in the euro snake pit.
Mrs Merkel has not resiled from austerity, or “balancing the budget” as she says with seductive simplicity. By the time Mr Letta has learnt the hard way what this means, Italy will have lost yet more time to a pre-modern economic belief system.
it is possible that Berlin will warm to monetary stimulus now that Germany itself is flagging, with new orders crumbling, but it would take more than a quarter-point rate cut to repair the broken credit channels in Italy, Spain and Portugal.
If Mr Letta is lucky, he can hope to hold together a fractious “grand coalition” for a few months. It is hard to see how this can reverse the slow rot of debt deflation and job wastage.
The deeper crisis will grind on until the Italian people find a leader willing to play rough.