Either the Eurozone as we know it is dead or Italy goes out – latest research

It’s Wednesday and my snippet day, which just means I don’t write as much so that I can write more elsewhere. But today, I summarise some research that has just been released which seeks to assess the sensitivity of the commitment by the Italian population to the euro to tolerating further austerity. The research finds that if the technocrats start forcing Italy into austerity measures via a return to the Excessive Deficit Mechanism (and enforcement of the Stability and Growth Pact fiscal rules) then the majority will prefer to leave the Economic and Monetary Union. The majority are happy to retain the euro but only if there is no austerity and structural reforms imposed on the nation. This is a big swing in public sentiment and will give the neoliberals in Brussels one huge headache. Either their neoliberal monetary union is done, or they will face instability from one of the largest euro economies.

So Brussels is being warned

I read an interesting academic study over the last weekend – Till austerity do us part? A survey experiment on support for the euro in Italy – which was published in the journal, European Union Politics.

The study by Lucio Baccaro, Björn Bremer and Erik Neimanns, who are associated with the Max Planck Institute for the Study of Societies, in Cologne, Germany investigated the sensitivity of Italians to the decision to remain in the Eurozone or not.

Specifically, the research asked:

… how Italian voters would evaluate the trade-off between remaining in the euro and implementing austerity in case of a fiscal crisis. To what extent would they accept the costs of austerity for the promise of a bailout and continued membership in the common currency?

They note that when a Member State can no longer “fund itself” (remembering the 19 states use a foreign currency – the euro) then they can access the European Stability Mechanism (ESM) but only if they accept the requirement to impose “austerity measures and structural reforms as a condition for assistance”, which are deeply unpopular.

They used survey data where they posed “six different hypothetical scenarios to elicit preferences for the trade-off between austerity and euro membership”.

You can read the paper yourself to dive more deeply into their methodology.

Their conclusions:

1. “in the control group, a majority of respondents favours remaining in the euro”. No surprise.

2. But, “informing participants about the conditionality associated with a bailout package changes the majority for remaining in the euro into a majority for ‘Italexit’.”

That result has been brewing for some time.

Remember that Italy had a much lower support tolerance for remaining in the euro than other Member States before the pandemic.

3. “Overall, our results suggest that opposition to further austerity trumps support for the euro in Italy.”

4. While they used a number of other variables to condition the analysis, the “dominant effect of austerity” stood out.

5. While citizens in the Southern European states are “cross-pressured: “on the one hand, they are opposed to austerity; on the other hand, they are attached to the euro” and the latter attachment has been dominant, this study found that the situation is now very different.

A majority of Italians now are no longer prepared to endure the costs of austerity just to remain in the Eurozone.

If remaining requires austerity, then the respondents preferred to exit and take their chances.

So if this research is reliable then it presents the technocrats and neoliberals in Brussels with a major headache.

Essentially, it spells the end of the Eurozone as they have constructed it.

Effectively, the stability of Italy within the EMU, if these survey results are indicative, depends on the continued relaxation of the Stability and Growth Pact rules, which were relaxed under the extreme circumstances allowances within the Treaty annexe.

As soon as the Commission starts reasserting the Excessive Deficits mechanism, which will require massive austerity to bring the nations back within the fiscal outcomes dictated by the fiscal rules, then the instability will intensify.

In other words, the fiscal rules are dead or Italy will be pressured by its citizens to leave.

Further, implicit in all of this is the fact that the ECB continues to fund the Member State deficits through its various government bond buying programs.

If you reflect on that reality then you see how nonsensical the whole arrangement has become.

It set out in the Maastricht process to be the exemplar of mainstream macroeconomic thinking – tight fiscal rules imposed on Member States, no bailouts from the central bank, and all the rest of it.

But in 2021 it has become the exact opposite of that surplus-biased mentality.

It is now ‘allowing’ Member States to run whatever deficits they like, even though none of them have any currency sovereignty, and to make that work, the system is allowing the central bank to fund these deficits and keep funding costs around zero or better.

Think about that for a moment.

An amazing state. And expect the technocrats and mouthpieces to continue denying all this as they try to work out how they can get their neoliberal show back on the road.

While people die in droves because they cannot even organise a vaccination process effectively.

Music – J.J. Johnson

This is what I have been listening to while working this morning.

This song – Gone with the Wind – features – Jay Jay Johnson – on trombone and was released on his 1957 album – Blue Trombone (Columbia Records).

I put this record on when I just want to cruise along in a hard bop sort of way and collect my thoughts etc.

The foot doesn’t stop while listening but it clears the mind a bit.

J.J. Johnson was a pioneer of the trombone in the bepop tradition, making the transition for the instrument from trad jazz and dixieland music into bebop.

The early bebop bands didn’t particular favour the trombone because they considered the sliding intonation (rather than the valve-based trumpets etc) was ill-suited to the fast tempo changes that characterised the genre.

J.J. Johnson proved them wrong and it was – Dizzy Gillepsie – who gave him his break.

He had a terrific career, particularly during his Blue Note label period

After contracting cancer, and still mourning the death of his wife, he committed suicide in 2001 at the age of 71.

The other players (who were in the J.J. Johnson Quartet) are:

1. Tommy Flanagan (piano).

2. Paul Chambers (bass).

3. Max Roach (drums)

Before the more modern bass players turned the bass into a solo instrument, Paul Chambers created beautiful bowed solos on his double bass and played with Miles Davis for 8 years betweeo 1955 and 1963.

Unfortunately, he was an alcoholic and became addicted to heroin and died of tuberculosis at the age of 33. A big loss.

Max Roach is, well, Max Roach – one of the greatest drummers in the history of bebop.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 24 Comments

  1. On Jan 27th this year Michael Hudson put an article on his website called The rentier resurgence and takeover: Finance Capitalism vs. Industrial Capitalism.

    It is brilliant and could be used as a political party speech at any political party conference. Stand up and say that in a huge stadium live on TV and it would have to be reported on by the press. It exposes what has been going on. All we need now is a political party willing to say It and economists of all stripes to rally against financial capitalism. Instead of taking back handers from the FIRE sector to further their career.

    It is similar to reclaim the state book by Bill and Thomas Fazi. Thomas has written similar things on his blog regarding what is happening. Zach Carter covers some of it in his book the price of peace.

    In all cases it is history condensed into one piece of work and saves you reading 2,000 economic articles in journals you have to pay to access. In order to find what has happened over the last 100 years.

    Leaving the Eurozone is just the very first step of a very long road ahead if democracies intend to escape finance capitalism.

    I will never understand voters who vote to remain in the EU. Who voted for the status Quo and then expected change. Whenever they meet a leaver they should thank them for any change that takes place.

  2. The EU is now beeing run by McKinsey,
    The funny looking characters we see on TV, meeting with the Turkish goon, are puppets on the hands of bankers that control McKinsey.
    The sofagate sketch is a telling sintome of what’s happening home: COLAPSE.
    Though it was created to disguise what they were doing in Turkey, it shows the utter marshland the EU became.

  3. The sad part is that the austerity mindset is so ingrained in our rulers that, even though the inmates have been allowed to take a stroll in the prison courtyard, they dare not venture out of their cells. In Spain the government is desperately trying to contain its deficit which has resulted in steeper declines in GDP and one of the worst performances in dealing with the pandemic.

    The general budgets of public administrations for 2021 only allowed for increases of 6% of government final spending in the face of a massive collapse of GDP and an unemployment rate of 16%. No new hires allowed in the public sector.

  4. “…. a majority for ‘Italexit’.”

    As a portmanteau word for the departure of the peninsula from any – or all – of the European institutions, “Quitaly” is so much more elegant!

  5. A majority of Italians now are no longer prepared to endure the costs of austerity just to remain in the Eurozone.

    I would like to see some evidence for that statement. The responses to a survey are not enough. If Italian citizens wish to end austerity, they only have to choices – direct action (and I see little evidence of that*), and electoral politics. But the political options are limited; voters do not have a large menu of choices. Let us remember that during his first official speech, the current Prime Minister stated “that his government would adopt a strongly pro-European position, and emphasised the importance of Italy remaining within the Eurosystem” (Source). This position has the support of the great majority of the political class.

    * If I do a web search for “MMT Italia” most of the hits on the first page are for companies making excavators and electronic sensors.

  6. Even the Davos set has come to realize that the pandemic has radically altered the global economic landscape, giving us, almost providentially, a glimpse of what ecocide has in store for us in the longer run. RIGHT NOW, whether it is openly admitted or not, neoliberal capitalism is as dead as Kelsey’s nuts. And thus also is the EU, at least in its current form as a neoliberal bastion. If we are survive the current pandemic, which has only BEGUN to do its work (see mutations), and if we are to avoid, as much as possible, the ecocide looming in the not-too-distant future, then (1) we should first join the Davos effort to legally redefine the purpose of the corporation to include human and environmental flourishing as well as profit-seeking, and (2) then begin to move from that better yet insufficient basis into various forms of full-blown eco-socialism as alluded to in “Reclaiming the State.” Granted that we are FAR from having political traction at this moment to take this second step, the recent Davos rhetoric, coming from the neoliberal plutocrats themselves, gives us leverage to pursue the first. The last thing we need is, unfortunately, precisely what we’re getting: derision of the new Davos rhetoric from the so-called progressive left. Though they see themselves as prophetic truthtellers, which they were pre-pandemic, they have now become IMHO a major part of the problem. Which is not even to mention that segment of the radical left which sees the entire pandemic as a plandemic, merely the latest plutocratic plot to further entrench and expand their elite interests.

  7. Ultimately,I think the EU will just quietly abandon these fiscal rules- to make the euro zone work.

  8. Great music.

    Bill, have you been to Birdland Records at the Dymocks Building in Sydney?

    They carry a lot of the music you share here. Great store.

  9. Must admit I’ve not read the research, but I assume the in/out balance is pretty close even with an assumption of further austerity. Add to that the fact that the Italian political elite plus the full weight of European institutions will go into full-on Project Fear mode, I would not be confident Italians would vote for Italexit. I also imagine Italians (for historic and geographical reasons) are more sensitive to the threat of disunity in Europe than Brits are.

    That said, it appears to be a threat Brussels cannot ignore. I wonder how this will influence future relations between the EU and UK. More punishment beatings?

  10. has anyone done any serious work on exactly how you leave the euro.

    how do you get around the currrent payments system architecture.

    i have heard warren mosler talk about a transitionary dual currency framework where citizens can hold currency balances in both euro and the domestic currency, and you slowly nudge the payment system towards the domestic currency over a period of time.

    wouldnt we need to create a whole new payment system to sit in parrallel to the existing one, and that seems like a project of manhatten project proportions.

  11. “has anyone done any serious work on exactly how you leave the euro.”

    It depends entirely upon whether you run the computer systems that underlie the TARGET2 system. The Italians do. The Greeks didn’t.

    The Eurozone is a three tier system. The local banks clear with the National Central Bank (Banca d’Italia in this case) and the central banks clear with the ECB. The ECB is essentially the central bank’s central bank.

    The way you leave the Euro is then straightforward. You stop doing TARGET2 transfers between Banca D’Italie and the ECB system at par and start doing normal currency swaps at the prevailing swap rate. The result is that the Italian Euro starts to float against the other Euros rather than being pegged via TARGET2.

    You can only do that if you physically control the computer systems on which the central bank runs. The Italians do have part of the Eurosystem under their control, whereas the Greeks are entirely outsourced which is why the Hellenic Central Bank was held hostage by the Eurosystem when the Greeks elected a government that didn’t want to impose austerity.

  12. The Greek experience clearly shows that having the support of voters’ majority isn’t enough to force a government to implement the will of people into political action. When Tsipras ran a referendum in July 2015 on whether to adopt austerity measures in dealing with the debt crisis, the outcome was a deafening OXI (NO) with almost 63% of the votes. However, this didn’t stop SYRIZA to completely ignore the will of people and surrender to the demands of troika. It’s being documented that the then Finance Minister Yanis Varoufakis had worked out a well designed credit/debit parallel payment system involving every taxpayer’s account and the Ministry of Economy to be used during the transitional period until the creation of the new national currency. This would be just one of several mechanisms that could be adopted to facilitate a country exiting the Eurozone. As for Italy exiting the common currency, definitely isn’t gonna happen with Mario Draghi.

  13. @Neil Wilson, that’s very interesting.

    Do you have any references where I can learn more? About the system in general and about the Greek outsourced thing also, it sounds weird to me.


  14. Look up “Eurosystem – Single Shared Platform (SSP)”.

    “The infrastructure that Banca d’Italia, Banque de France, and Deutsche Bundesbank have developed for TARGET2. The three banks operate the system on behalf of the Euro system.”

    Each NCB in the Eurosystem has a tenancy on the SSP, so you have Target2-GR, Target2-Malta, etc.

    What that means is that the central banks are users of the SSP and can effectively be held hostage by them.

  15. Dear Neil, dear Demetrios. Thanks for your knowledge share. Roll on Quitaly.

  16. Few Italians (or Greeks, Spaniards, Europeans for that matter) want to leave the euro. That’s all that matters. They’ll put up with austerity. The euro and the EU are here to stay.

  17. Dear Mike Norman (at 2021/04/15 and 11:50 pm)

    I reported research findings, you replied with your opinion.

    No-one really believed that the UK would leave the EU either.

    best wishes

  18. thanks neil for the explanation,

    the accounting for the italian or greek banking system would all be in euros , right?
    so wouldnt you have to do a complete software build so everything works in dracmas or liras.

    and where is all the data stored, within italy or greece for that matter? wouldnt you have to build a domestic network architecture, so you arent compromised if you try and pull the plug on the ecb.

    and then, what do we do about the euro currency balances that people have in their bank accounts. do we just re denominate them into lira or dracmas, and then let the floating exchange rate do its job?

    the wealth effects of such a process, could cause capital flight, so do you try and stop it , or do you just make sure the domestic central bank has enough liquidity , so in time the exchange rate will re balance the external flows.

    varoufakis, said they had looked at it for greece, but it was put in the too hard basket.

    if the powers that be at the ecb agree to let go , then transition is smoother, but if they play hard ball , it would be easier to get out of the mafia 😉

  19. @ mike norman,

    covid19 has pretty much taken austerity off the political menu, although there might be a few hardcore true believers that need a bite of a reality sandwich.

    the history of the last 120 years has been that currency unions or fixed exchange rate systems eventually get dismantled because of market and political forces .

    so either the euro zone changes the rules , which in a backhanded way the ecb has done, or it will tear itself apart.

    there is this under current in the mainstream economics fraternity, that once we sort covid we can go back to business as usual.

    aint going to happen. central bank balance sheets are too large and will only get larger, and the world has started to develop more autarcic tendencies. autarcy eventualy leads to war. so stay tuned for a few a rebellions around the traps , where we wouldnt normally expect them.

    covid19 is the begining of what could be a very ugly period of human hitsory, not the end, if past pandemics are anything to go by.

    for mmt, wuhan is the new chicxulub crater , and covid19 could end up being the comet that took out the neo libral dinosaurs, and then people like bill can go about restoring the dignity of the economics profession.

  20. @ demetrios gizelis,


    i cant see how you get around having to build a completely new payments system or banking system for that matter. at a very minimum you would have to mandate that the banks create domestic currency balance accounts for the citizenry. two types of accounts within the system, domestic currency accounts and forex accounts for euro balances, and then i suppose you try and slowly over a period of time create restrictions on what payments can be done in euros.

    as long as the domestic ncbs provide enough liquidity to cover any capital drain , it may work, but i cant help think , you might get a rebellion on your hands because people are a lot poorer due to devaluation.

  21. I’m no expert, so don’t take this as true.
    1] Italy creesa new parallel system. It pays wiith its new money.
    2] It doesn’t worry about capital flight, because banks can lend with no depsits if necessary. Loans create deposits.
    3] Ital. banks can only lend in the new money.
    4] If Ital. wants its citizens to bring back their money it can raise the interest rate its banks pay on deposits.

  22. What if they never reinstate the fiscal rules but just continue to threaten to do so? (a) how likely do you think that”ll be? (b) could that over time morph into amnesia that there were ever fiscal constraints that mattered? What should we call that? Would it be “Anti-austerity on a knife edge,” or “Austerity sucker punching only”?

  23. At a recent GIMMs talk with Phil Armstrong, I think it was Sarah Holland who mentioned MMT education in Italy. Apparently it is going gang busters (comparatively at least) they are in schools and all over the place in Italy. I would not be surprised if they do soon go back to Lira, maybe within 5 years, just my gut feeling. Institutional/oppressor class (don’t like calling them “elites” anymore) people are the obstacle, but with what sounded like near mass public education on MMT I think something has to give.

    Can any Italian residents confirm any of this?

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