Mario Monti's government found out today that it has to pay as much to borrow money as the previous administration ? and there are no quick answers
Changing the players at top of Italian politics was the easy bit. Reducing the cost of borrowing for Italy looks as hard as ever. Mario Monti's administration discovered today that it can't borrow at cheaper rates than Silvio Berlusconi's.
Italy had to pay 6.29% this morning to raise ?3bn (�2.6bn) of five-year money, considerably higher than the 5.3% secured only a month ago. So much for the Monti bounce. Yields on 10-year Italian bonds are already back at 6.75% ? potentially ruinous if Italy were forced to pay similar rates throughout next year when it must raise ?300bn.
Investors cannot be accused of acting irrationally. Amid intense speculation about when the resolve of the European Central Bank will be broken and when intervention by the central bank will follow, there was a robust response from one of the key players today. Jens Weidmann, president of the German Bundesbank and a member of the 23-strong ECB governing council, told the FT he doesn't think anything has changed at all. "What we are facing in Italy is an acute confidence crisis, and only the Italian government can resolve that crisis," he said.
Others on the governing council may disagree ? who knows? ? but it should be clear that it would take something remarkable to produce a U-turn in policy by the ECB any time soon. Nor is the ECB stepping up its bond purchases under its established Securities Market Programme: it bought half as much last week as it did before.
Nor can investors look to Angela Merkel for quick answers. The German chancellor declared in a speech to her CDU party today that "political union" is the ultimate goal and made plain that she means changes to EU treaties to enforce budgetary discipline across the eurozone. New treaties, however, do not happen overnight, even if the electorates can be frightened into providing their consent. In the meantime, it seems, the much-derided European Financial Stability Facility is still supposed to hold the line.
Or maybe Merkel is waiting for investors to rethink and applaud Monti's arrival. Unfortunately, the urgency and difficulty of Monti's task is apparent. La Repubblica reported that a further ?25bn deficit-reduction package is under consideration, a policy that could test the sudden, but fragile, consensus within Italian politics. Structural reforms, don't forget, take years to reap benefits. Thinktank Capital Economics calculates that it could take two decades for the Italian government to get its debt-to-GDP ratio down from 121% to 100%. At some stage, one suspects, Italians will elect a government that doesn't play according to the Frankfurt Group's vision of virtuous economic behaviour.
So what will happen if those Italian yields again explode above 7%? The best guess is probably that the eurozone will try to muddle through ? it is, after all, the approach that has been adopted throughout this crisis.
In the short term that implies an attempt to defy the scepticism and achieve lift-off for the EFSF. But Italy, if it were to be bailed out, can't offer guarantees on loans to itself, so more of the burden would fall on other member states and France is in no position to pick up the slack without jeopardising its own AAA-rating. The only way around that problem is to call upon the ECB ? but, again, one runs into the objection that debts are being mutualised before political union is a reality.
Until that problem is addressed, the eurozone seems no closer to finding an exit from the lobster pot.
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