Analysts have been paying close attention to the relationship between Italian Prime Minister Mario Monti and German leadership since June.
That's when Monti and Spanish PM Mariano Rajoy refused to go along with EU summit plans unless German Chancellor Angela Merkel and other EU leaders would agree to address sovereign borrowing costs in Italy and Spain.
Ultimately, no one got what they wanted.
However, Italy and Spain's strong stance led EU leaders to make plans for a banking union, a bank recapitalization using EU bailout funds, and some purchases of Spanish and Italian bonds. That last plan appears to be moving forward, according to hints from the European Central Bank.
But now everyone's talking about the battle between Monti and Germany, which has exploded amid statements he made at recent interviews with multiple news organizations. Analysts conclude that Monti is pointing a finger at Germany, suggesting that its aversion to stemming the euro zone crisis stems from the benefits it is reaping from maintaining the status quo.
Take a look at the following comments Monti made during a recent interview with Der Spiegel (emphasis added):
"Much of what Germany and France have done in the rescue of Greece has also helped German and French banks, who for a long time were major creditors for Greece and Greek banks. That practically doesn't apply to Italy at all, though. Seen in this way, Italy has not only not been the recipient of any aid, but we have actually given more than France or Germany if you consider the net return ....
It is because of the risk of a euro collapse that the difference between Italy's interest rates and those of Germany is so great. In this way, the high interest rates that Italy is now having to pay are subsidizing the low ones that Germany pays. Without this risk, Germany would pay somewhat higher rates. In addition, no one can deny that Germany, simply because it is big, so productive and so efficient, is the greatest beneficiary of the common market."
The consequences of Germany's hesitation, have actually led Monti to threaten Germany with disaster. As Monti pointed out before, an Italian default would wreak havoc on the French and German financial systems. Monti said in an interview with WSJ last month:
"What we ask is that European authorities certify Italy's good conduct by translating that into interventions to keep spreads within reasonable limits. I have often told Merkel that, if this isn't done, she risks finding herself before an Italian parliament that repudiates Europe, monetary stability and the euro and is not friendly toward Germany."
Investors have taken note of these comments, and Italy's new apparent strength in controlling the policies enacted by EU leaders to stem the crisis.
From a note by Jefferies Managing Director David Zervos today:
"And so there we heard it — loud and clear — the Italian President accusing Germany of 'benefiting' from the crisis. Reading between the lines, Monti is basically saying that it is in the financial interest of the German leaders to create and perpetuate the crisis. Monti continues the interview with some veiled threats to the Germans. Specifically, he says that if they continue to press the flesh on the crisis, the Italian people will revolt at the polls in April, sending Silvio, or possibly even Beppe, into power. Of course, here he is basically threatening exit if the Germans do not agree to stop the financially lucrative crisis perpetuation rhetoric and actions."
What is ironic is that Monti is an unelected technocrat, more or less shooed into office by German leadership that was exasperated by Silvio Berlusconi last year.
It would appear that Monti has reached the end of his rope on enforcing the harsh austerity measures that Germany and the rest of Northern Europe demanded.
Monti signals with these statements that he has done enough and purposefully lost his domestic credibility for it.
His statements earlier this week about the inefficacy of democracy to address Europe's problem were little more than a veiled dig at the German-led EU leadership of earlier this year. To the chagrin of German politicians, he told Der Spiegel, "If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a break up of Europe would be a more probable outcome than deeper integration."
In particular, Monti is capitalizing on a dive in Merkel's domestic popularity. Brown Brothers Harriman's Marc Chandler writes in a note out today that Monti is highlighting a potential game-changer in the euro crisis:
"One has to recognize that there are numerous voices in Germany. The German government is one voice among many ... If [Europe's economy falters] Merkel may see her own support wane. This is the game changer: regime change. An SPD-Green alliance replaces Merkel's CDU/CSU/FDP coalition next year. The SPD ... is critical of Merkel for misdiagnosing the problem, which they don't see as simply a function of the lack of fiscal discipline. That produces the wrong cures. The problem, the SPD argues, is that the euro project is fundamentally incomplete. It needs fiscal and banking union, and common financial and tax policy."
The fact of the matter is that the alliance between former European Commissioner Monti and the German Merkel — once dubbed "Merkonti" — has not materialized. Instead of bending to the whim of German leadership, Monti has instead rebelled against it, publicly blaming Germany for Italy's problems.
Germany's demands are slowly being forced off the table, and that constitutes an important shift in the crisis to date.
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