Watching the Eurozone limp along has proven to be an instructive exercise in how long political and financial legerdemain can keep a fundamentally untenable situation going beyond its sell-by date. European technocrats managed to avoid forcing writedowns and restructurings upon banks but the price of that maneuver was heavily-indebted national governments, low growth, and rising risk of deflation. Now, the biggest existential risk to the Eurozone is that Germany continues to insist on contradictory things: it wants to continue to export to the rest of the Eurozone, yet is unwilling to finance its trade partners, which is a requirement of running persistent trade surpluses. Yes, there’s been discussion of measures such as an infrastructure bank that if done on a big enough scale and with fiscal spending, could provide enough stimulus to the periphery countries to serve as a quasi-Federal overlay and reduce the importance of German exports in the Eurozone economy, thus also reducing the pressure of financing them. But as we discussed, that proposal is long on optics and short on viability.

Many analysts have come to believe that the big danger to the Eurozone is political, not economic, that the loss of sovereignity, the continued squeeze of ordinary workers and the inability of countries to depreciate their currencies to help exports, make the benefits of Eurozone membership look questionable relative to the costs. But most political commentators have downplayed this risk, arguing that the benefits of Eurozone membership are so large that no incumbent would relinquish it. And indeed, the noise-making has come from parties like UKIP, who have no realistic odds of forming a government. Up until now, France’s Marine Le Pen, leader of the National Front, has seemed like the most likely contender among Eurozone-exit-favoring party leaders, but she is seen as more able to move France’s Overton than get France out of the Eurozone.

But Wolfgang Munchau, in the German edition of Der Spiegel, argues that a real shift has taken place in Italy. Unlike other countries, where the anti-Eurozone parties are seen as fringe players, in Italy, two factions that could realistically rule are both pushing for leaving the Eurozone.

From Munchau’s article, translation courtesy Google Translate:

One of the reasons why we even have the euro, was the broad political consensus in all countries who would later take part in it. No matter whether government or opposition, they were all for it. Just the consent of the opposition parties was important because in the course of 15 years, all have times over the government – the SPD in Germany, and the Socialists in France and Spain. The euro has characterized the many changes of government since its inception nearly 16 years ago survived. With the euro crisis, this consensus has relativized. In Germany the government and opposition are still largely for the euro. In France, it is formally the same way. Only the Front National is there, however. Unlike in Italy. There are now all opposition parties against the euro. First, the does not mean anything. The Italian Social Democrats under its chief Matteo Renzi have a large majority in parliament. And they enjoy a great, albeit not overwhelming support in the population. But in democracies oppositions come eventually to the government. And then of course it is important to know whether such a government would implement its anti-euro policy. The five-star Party, the largest opposition party, had spoken before the European elections for a referendum on the euro. The party was by then EUR critical, but the positions were not then as hard as now. Party leader Beppe Grillo has revealed its stance recently. His party, the euro zone as soon as possible to leave. In the regional elections in the northern Italian province Emiglia Romana Although Renzis party won almost, but the Northern League came on 30 per cent, which no one would have expected. The Lega is not just for a separation of northern Italy and southern Italy. It is now also include a separation from the euro. And this position was rewarded by voters. Italy’s exit would be the worst of all scenarios And that has now brought Silvio Berlusconi on the taste. Really friendly europe Berlusconi was of course never. Opportunistic as it is, after all, he is now the future of the euro in question. Moreover, he and his party Forza Italia, the second largest in Italy, have an elaborate plan. Berlusconi wants to win back the monetary sovereignty by introducing home a parallel currency which is freely traded against the euro. Wages and salaries and of course the prices in the shops would be enrolled in this new currency. One would exchange their legacy euro and the new Italian Euros first one to one. Then the new currency would be released, whereupon its foreign currency would collapse immediately, probably 30 to 50 percent. The Italian economy would be competitive again with one blow. For the rest of the euro zone, such a withdrawal of Italy would be the worst of the crisis scenarios. The country is no longer effective growth in the euro since the entry. Unemployment is high. Youth unemployment frightening. The anti-euro strategy of the opposition One should therefore not be dismissed as pure demagogy or populism. An exit from the euro would technically solve the Italian problem at a stroke. The companies would be competitive again. It would also convert the debt to the new currency, because otherwise the act would not be worthwhile. The foreign owners of Italian government bonds would have to accept a loss.

Yves again. The 30% vote in regional elections for the Northern League was a surprisingly strong comeback. From the Telegraph a year ago:

The new head of Italy’s Northern League party has called for full independence for the wealthy north of the country, and described the euro as a “crime against humanity”. The Northern League, which was a coalition partner in Silvio Berlusconi’s last government but is now out of power, is looking to rebuild its support base at the European Parliament elections in May with an increasingly strident anti-EU message. The party is one of several Right-wing, anti-EU movements that hope to win votes at the May elections amid a surge of discontent with the EU, the economic crisis and austerity policies. The party was discredited in the last year by a corruption scandal which forced the resignation of its former leader, Umberto Bossi… n recent years the Northern League had moderated its original demands for independence for “Padania”, its designation for a collection of regions in northern Italy including Lombardy around Milan, Piedmont on the border with France and Switzerland and the Veneto, which includes Venice… At the height of its success, the League won 10 per cent of the national vote, but the corruption scandal, and a rift with Mr Berlusconi’s People of Freedom Party, meant that in February’s general election it gained just four per cent.

Even though the Northern Front showing was troubling, the real cause for pause is Forza Italia not merely advocating a Eurozone departure, but putting forward a credible plan. And remember, Ambrose Evans-Pritchard has long deemed Italy as the country most able and likely to leave the Eurozone. And as he pointed out in October, Italy’s economic situation is only getting worse, and Eurozone policies are only making a bad situation worse:

Mr Renzi….snatched power in an internal party coup in February…on the assumption that Italy had touched bottom after six years of depression, a 9.1pc fall in output, a 24pc crash in industrial production, and youth unemployment of 43pc. He believed the mantra, so widely put about, that Europe was on the cusp of a fresh cycle of self-sustaining recovery, lifted off the reefs by world growth, and that all he had to do was to float on the rising tide. Instead, it has crashed back into slump… Italy is already in a triple-dip recession, its output back to levels first reached fourteen years ago. The OECD says the slump will drag on through most of next year. Growth will be just 0.1pc in 2015… Antonio Guglielmi from Mediobanca warned last month, that this is “catastrophic for the finances of the country”. The debt will automatically rocket towards 145pc next year (under the old measure, cut to 140pc under new accounting rules). “It is going to take a nuclear bomb to turn this around. If Draghi ends up doing almost nothing, Italy is dead,” he said. This is not a moral failing by Italy over recent years. It is a mechanical “denominator effect”, the result of a rising debt burden on a shrinking base of nominal GDP. The point is very simple. The average interest rate on Italy’s public debt is still around 4pc, so interest payments are near 5.5pc of GDP. Unless nominal GDP grows at the same speed, the debt ratio must keep going up. Structural reform is no doubt desirable as an end in itself, but it has nothing to do with the matter at hand. Italy’s current crisis is ENTIRELY due to monetary policy failure and the refusal of the ECB to meet its inflation target, or to comply with its own Lisbon Treaty obligations to support growth. (And yes, it does have a dual mandate under EU Treaty law.) The more that Italy carries out drastic reforms in these circumstances, the worse it will get. The short-term effects of reform are famously contractionary.

The right ing parties advocating a Eurozone exit is a sign that the Italian business community is coming to the point of view that the cost of membership outweighs the benefits. And Munchau warns Der Spiegel readers that they are right. He correctly points out that a departure is not imminent but when a conservative coalition wins an election, it will move either to depart the Eurozone or extract large waivers in order to remain. But the Eurocrats seem so conditioned to rely on “kick the can down the road” crisis responses that they are unlikely to take steps to alleviate mounting economic stress and resulting anti-Euro political resolve in Italy.