The Italians and Greeks remind me why we were right to vote Brexit

The new Italian government, led unofficially by right-wing “populist” Matteo Salvini, is articulating themes that resonate in Greece – and in Eastern Europe, too. The Macron-Merkel monster controls Europe’s purse strings – but not its heart…

The view across a wine-dark sea…

Never miss an issue of Master Investor Magazine – sign-up now for free! Read the latest Master Investor Magazine

I find myself this week in the beautiful Greek island of Corfu. I am on the trail of two of my literary heroes – Lawrence Durrell (The Alexandria Quartet), and his much nicer younger brother, Gerald (My Family and Other Animals). As I write, sitting on a balcony overlooking this narrow isthmus of the Adriatic, I gaze upon a range of stark terracotta-purple Albanian mountains, receding into the distance as they have done for countless millennia, across the width of a narrow, palpitating, wine-dark sea.

The mood amongst the ordinary people I speak to here is hardening – just as it is in Italy, where I spent some time in July. At least in this corner of Old Europe there is no recrimination against the British about Brexit – as I fear there is in France.

The Greeks used to call the British elutheria (ἐλευθερία) – the lovers of freedom. That was because the British supported the Greek struggle for independence against the Ottoman (Turkish) Empire. Lord Byron, who died in that war, is still venerated here. (Though, how much fighting he did in that struggle is questionable. He seems to have had lots of fun before dying of sepsis in Missolonhgi in 1824.)

I met a man running a modest convenience store here this morning who claimed to have a degree in economics from the LSE. (I believe him.) He told me that the modern Greeks are trapped in the EU labyrinth – and that they will never escape. Their politicians are corrupt. Nobody can run a business except on the black because taxes are too high. And all the money ordinary people pay in taxes goes abroad – either to the fat cats’ offshore bank accounts, or to the ECB in Frankfurt…Despite the supposed resolution of the 2010 bailout last month, the Greeks are, to put it mildly, disconsolate.

Byron himself had a classical education, which included learning ancient Greek – as did, more recently, Mr Johnson and Mr Rees-Mogg. (Byron went to Harrow, the other two to Eton.) Alas, I was not privileged to go to public school – but I have more than made up for that.

Il capitano a Roma

Matteo Salvini is not even Italy’s Prime Minister – he is Deputy Prime Minister and Minister of the Interior – but ordinary Italians now call him il capitano. He is the man driving the agenda of the curious coalition between his own Lega and the Five-Star Movement led by Luigi di Maio (who is the other DPM). The nominal Prime Minister, Giuseppe Conte, is a jurist of no fixed political address, parachuted in to create a functioning government. Basically: a nobody.


Signor Salvini is technically responsible for policing, national security and immigration but his influence goes far beyond those realms. He does a kind of political stand-up in which his catch-phrase is: Italians first! (Does that sound familiar?) He is increasingly popular – and one of the reasons is that Italians like his refrain that Europe must change. Greeks, as I have found this week, respond to that phrase too.

The fact that foreign leaders choose to meet Signor Salvini suggests he is the pivotal figure in the new Italian government. On 07 September, that standard bearer of the alt-right, Steve Bannon, made his pilgrimage to Rome. His mission is apparently to create a coalition of populist parties across Europe to fight the May 2019 election to the European parliament on a united anti-immigration ticket. Signor Salvini summarised the meeting thus: “We are working to re-establish the European spirit that has been betrayed by those who govern this union”[i].

The march of the “populists”

Some people think that Britain’s vote to leave the European Union on 23 June 2016 was the harbinger of a wave of “populist” anti-EU sentiment across Europe. Others contend that it was in fact the crest of a xenophobic wave that has since subsided. We should recall that Britain, in fact, has no “populist” representation in its parliament at all – while many European parliaments do.

Back in March this year the “right-wing” Lega (plus affiliated parties) took 17.4 percent of the vote, while the “populist” Italian 5-Star Movement took 32.7 percent – so the combined share was around half the popular vote – a good mandate for a coalition.

Never miss an issue of Master Investor Magazine – sign-up now for free! Read the latest Master Investor Magazine

France’s Front National – personified by Madame Le Pen – took 21.3 percent of the vote in the first round of the French presidential election in April last year. Last September, in the German Federal election the anti-immigration Alternative für Deutschland (AfD) scored 12.6 percent – coming from almost nowhere. And in the Netherlands general election of March 2017 the right-wing Freedom Party got 13.1 percent of the vote. In the Swedish general election two weeks ago (09 September), the anti-immigrant Swedish Democrats got 17.53 percent of the vote and 62 out of the 349 seats in the Riksdag.

In contrast, in the UK general election of June 2017 UKIP got just 1.8 percent – so it is actually the UK which is an outlier in this political divergence from the past. In Hungary, Denmark, Austria and Poland there is ample representation by “populist” and so-called “right-wing” parties.

What European “right-wing” and “populist” parties have in common with UKIP is that they dislike the EU, they are nationalist – and they oppose mass immigration, particularly by non-Christians. If they tend to be socially conservative, in terms of their economic policies, however, they are certainly not economically conservative. Rather, Signor Salvini talks like an old-fashioned Keynesian: southern European governments, with low growth and high unemployment, need to spend their way out of recession. And damn the deficit – and the Maastricht criteria too. All this spooks the Macron-Merkel.

Actually, these “populist” and “right-wing” parties are nothing new at all – they are just traditional conservative parties, the nominal conservative parties (like the UK Conservative Party) having been taken over by extreme liberals who obsess about multiculturalism and diversity.

It is total nonsense to liken these movements to the fascists of the 1930s. They are overwhelmingly pro-Israel (unlike left-wing parties, which are often anti-Semite) and highly amenable to gay rights. (That latter argument is pretty well done and dusted in Europe – it is in the developing world, especially Africa, where gays are having a terrible time.)

But do these post-modern conservatives actually want to pull out of the EU as the British are doing? Do they really want to ditch the euro to regain control of their economies? British Eurosceptics who can’t wait for Article 20 Day next year (29 March 2019) will be disappointed by my answer:

No, on both counts. But let me explain why…

What the European “populists” want

Like the supporters of President Trump and many Brexiteers, European “populists” see the struggle as between the people and a remote liberal elite which imposes its values on the less well-off, regardless of the consequences. They want to repatriate powers from Brussels. They want total control over their own borders – and not to be sent migrants at Brussels’ behest – while at the same time allowing the free movement of goods. They want total control over their national budgets without interference from European busybodies. They want less interference from distant bureaucrats who do not understand the conditions on the ground. They want respect.

These desires are being expressed at a moment when both the Italians and their Greek neighbours are in despair about the inept systems of government to which they have been subjected for so long. The immigration crisis – overwhelmingly an influx of young, often aggressive, African and Middle Eastern males brandishing smartphones – has changed everything. This exodus, from a trickle beforehand, exploded during the Syrian Civil War – and has been the catalyst that has radicalised ordinary working class people much more than the European sovereign debt crisis of 2010-13 when Italy and Greece were both captured by the European Central Bank.


During the Italian election campaign, Signor Salvini promised to deport 500,000 illegals. La pacchia è finita (the party’s over), he declared. Since gaining power he has blocked NGO rescue boats from Italian ports because, under the EU convention, migrants must be granted settlement in the first country in which they land. But Italy is the closest European landfall to chaotic Libya where the people-smugglers are in de facto control.

(By the way, Libya is in utter chaos largely because ex-Prime Minister Cameron of the UK and ex-President Sarkozy of France thought it necessary to bomb its security apparatus into the ground.)

In early September, Signor Salvini hosted a visit by Hungary’s combative nationalist Prime Minister Viktor Orbán in his home-town of Milan. Mr Orbán called his Italian host his comrade in destiny. They were both somewhat unflattering about the French president, Monsieur Macron, who, as I explained in a recent article, has taken it upon himself to abolish both race and gender in France. (They simply do not exist – because the State decrees so…)

President Macron retorted: If they want to see me as their main opponent, they are right to do so…

Another point of contention – somewhat more unsettling for British readers in the current climate – is that Signor Salvini wants to drop the sanctions against Russia that the west imposed after Russia’s annexation of Crimea in 2014. The Lega and Mr Putin’s United Russia Party even signed a cooperation agreement earlier this year. On 18 August, the Austrian foreign minister, Frau Kneissl (technically an independent but an ally of Austria’s pro-Russian governing Freedom Party) curtsied to President Putin when he arrived at her wedding. At this rate, Mr Putin could be forgiven for thinking that things are going nicely his way.

Money worries

Italian government bond spreads have been widening since the new government took over. As I write (20 September), the 10-year Italian government bond is yielding 2.828 percent – that is a fulsome 234 basis points above German Bunds. (Greek bonds of similar maturity are yielding 4.057 percent).

In October, the ECB will halve purchases of eurozone government bonds to about €15 billion a month. By the end of the year the long, drawn-out programme of quantitative easing (QE) on the part of the ECB will cease altogether. So, by the beginning of next year, the Italian government will have no guarantee that new bond issues will be purchased in their entirety.

We may therefore expect that Italian bond spreads will widen further – possibly to a point where the debt burden becomes unsustainable. Add to this the high probability that the new government will soon push the fiscal deficit above the critical three percent level – at a moment when the European economy is slowing.

Never miss an issue of Master Investor Magazine – sign-up now for free! Read the latest Master Investor Magazine

We know that a number of hedge funds have already positioned themselves to profit from an Italian financial collapse. If the Italian state gets into trouble, its only recourse will be to one of the emergency bailout funds that have been set up since the first Greek bailout of 2010 – most probably something that goes by the name of the European Security Mechanism (ESM).

Any future bailout of the Italians by the ESM would be on draconian terms – otherwise it will not get the approval of Berlin (both the Chancellor and the Bundestag). But that would be unacceptable to the government of Signori Conte, Salvini and de Maio. Nor will they permit the European elites – the Macron-Merkel – to unseat them, as Signor Berlusconi and Mr Papandreou were toppled in 2011. At that point then, Italy’s populist government might resort to its well-publicised nuclear option.

This is a scheme devised by Italian economist Claudia Borghi (a former trader at Deutsche Bank) to launch a parallel digital currency which would be legal tender along with the euro (though presumably not in paper form). Note that this is not the same as ditching the euro, which would remain the currency of choice. But the Italian state would pay its obligations in the digital currency, the value of which would fluctuate.

I personally fail to see how this scheme would work. Nobody is going to buy euro-denominated bonds if they fear that they will be repaid in digital funny-money. Remember Gresham’s Law[ii]: bad money drives out good.

If the Italian state were to become insolvent, that is one thing. An even more frightening scenario would be the systemic failure of the Italian banking system which could result from that. Italian banks are the major holders of Italian government debt. Moreover, as we know, they have huge portfolios of non-performing loans. UniCredit (BIT:UCG) – Italy’s largest bank – has also been hit hard recently by its large exposures to Turkey.

On the other side of the coin, Italy is stronger than it looks. As I pointed out in my piece for the August edition of the MI magazine, Italy has the EU’s second largest manufacturing sector. It has a current account surplus of 2.8 percent of GDP. It is a net contributor to EU coffers. Italians enjoy higher levels of personal net worth even than Germans (something the Germans resent). The interest cost on its admittedly large national debt is a fraction of what it was in the days of the Lira when interest rates often stood at 15 percent.

Yet, since the advent of the euro, which it entered with high levels of national debt, the country’s growth record has been pitiful and that debt pile has got much bigger – despite so-called “austerity”. Indeed, Signor Salvini has even blamed the catastrophic collapse of the Morandi Bridge in Genoa on that austerity. So, despite the fact that Italian GDP growth is “flirting with zero” (according to Bank of America) Signor Salvini wants to ramp up spending. A proposed flat tax and a universal income for the less-well-off alone would cost €50 billion. Delays in the pension reform programme advanced by Signor Renzi would cost a further €8 billion. Not to mention a massive infrastructure spending programme.

The reckoning

So, if push comes to shove, would Salvini & Co. actually take Italy out of the euro in order to regain control from the European dictatorship?

Let me answer that question with what my Greek shopkeeper friend (a trained economist, remember) told me when I asked him why Greece couldn’t leave the euro. He said that, in that scenario, the country would wake up with a worthless currency. The government would not be able to meet its obligations and the country would default. Further, all the banks would crash and the cash machines dry up. The government would not be able to raise the resources to re-capitalise the banks (unless, perhaps, it went cap-in-hand to China – who would extract a terrifying price). It might be good news for foreigners, however, who would buy up everything in sight, leaving the Greek people destitute in their own country.


This analysis is very much along the lines of that advanced by Greek economist Yannis Varoufakis in his excellent book Adults in the Room. He explains why, though it is easy to enter into a currency union, it is almost impossible to leave one without triggering financial Armageddon. That is why Greece’s Eurosceptic Syriza government under Mr Tsipras capitulated in 2015 and condemned Greece to a regime of unremitting austerity (and Mr Varoufakis had to resign as Finance Minister).

Italy has much more clout than Greece – its economy is about ten times bigger (roughly 2 trillion dollars versus 200 billion dollars). But the canny Italians know that Mr Borghi’s Medici Florin (as he proposes to call it) will plummet against the euro even before it has been minted – making their providential savings pots almost worthless at the stroke of a mouse.

If the choice is between Italy First and their own wallets, the Italians – whom I know and love – will choose their wallets.

The bigger picture

Never miss an issue of Master Investor Magazine – sign-up now for free! Read the latest Master Investor Magazine

Italians will still vote for Signor Salvini, just as Greeks still vote for the maimed Mr Tsipras – aspiration trumps economic reality, after all. And Signor Salvini really could make a difference to the European agenda – though not in the economic or monetary sphere, but rather in the social one.

All eurozone members are now colonies of the two countries that control it – Germany and France – in the economic sphere. They will have to acquiesce to indeterminate austerity and endless fiscal harmonisation for evermore. They will never have any say over monetary policy. They will continue to be punished if they contravene the sacred Maastricht criteria (unless they are France, which always gets away with want she wants).

But on the migration front, there is no question that Signor Salvini, together with allies like Mr Orbán, will continue to resist Brussels’ attempts to foist more immigrants upon them. Spain’s new unelected Socialist government has cast itself as the migrants’ friend – and then sign-posts them towards the French border. But down here in Europe’s soft underbelly, people have had enough.

As I prepare to return to my damp, misty homeland, I reflect that my people (once again) had a lucky escape from tyranny. Mr Blair would have taken us into currency union servitude – but the unloved Mr Brown stopped him. Mr Cameron would have signed up to an emergency brake, after which the EU would have had its revenge – but the great British people blew a raspberry in his face…

This equinox, the British look forward to a long and fractious winter. Bring it on, say I: for soon we shall be free.

[i]Quoted in The Most Feared Man in Europe, by Vivienne Walt, Time, 24 September 2018.

[ii]Sir Thomas Gresham (1519–1579) was an English financier during the Tudor period.