Ok. We had this feeling, here in Italy, that things were working out better after Monti met with Merkel. There was hope. Our PM clearly pushed the German leader in an intellectual and political corner: it is not enough to have stability and not enough might turn sour. We need growth, possibly through the European Stability Mechanism, possibly with other concerted action. Italy will not sign a Treaty based on austerity.
And then we get hit in the face by this rating agency downgrade. Clumsy and late, as usual. Backward-looking and risk-averse. Downgrading France and Austria, and God knows what else in the next few seconds. But you can’t blame them, they are like a large ship with a set course. It doesn’t seem to change its route when it is time to. And when the new direction shows, the timing seems odd. But, you can’t blame them too much. Spreads already anticipated the downgrade. This implies that spreads measuring our euro-area risk should not follow too much a further downward spiral. Even though liquidity will be a rare commodity in the coming weeks, especially for those institutions holding French Treasuries, having to find more cash as collateral.
But this negative event should not distract us or lose momentum. Markets are still waiting for a sign of resiliency from euro-governments.
“One country will not suffice. Markets await a coordinated move based on fiscal expansion to boost demand, on the one hand, and reforms to boost supply, on the other, a market-maker told me”. I agree with him. With Germany doing more on the demand side and Italy more on the supply front, I add.
He reminds me that “markets are too fast and governments too slow to react. But this is not a problem if markets perceive there is a sense of direction, planning, leadership by governments. Thinking out of the box is what is needed. The danger, pointed out by Mr. Monti in his interview with Die Welt, is that populism lurks behind the corner. Elections are coming soon. In Greece, in France. We should be alert”
But somehow tonight, when everything seems to unravel and dark scenarios are painted, I feel more optimistic than I have ever been in these past few months regarding the future of the euro. Maybe pride will lead us out of this never ending crisis. Maybe something else. Resilience.