Salvini taunts the EU

Sometimes a quote bears repeating. So here is Matteo Salvini, deputy prime minister of Italy, speaking in Warsaw yesterday about nationalising Banca Carige.

I am sure that Europe will allow Italy to do what is good for Italians, that is to bring it under state control ... If there are profits, the state will receive them, not some private bodies.

This is one of the most succinct taunts to emerge from the ongoing tensions between Italy and the EU. The full FT story is here, and here is an analysis on Poland and Italy’s “new European Spring”.

For Italy, the current battleground is banking. In the post-crisis era, Brussels has designed a set of rules, which rely on banks issuing bonds that absorb losses at times of distress or failure. These rules, which “bail in” bonds at the discretion of Brussels and Frankfurt decision makers, aim to eliminate the need for the taxpayer bailouts which characterised the crisis. Similar rules now apply in the US.

Now, we have the deputy leader of Italy explicitly calling for a bailout.

The banking rules were never designed with careful consideration of their political implications. This point was already made clear in the cases of regional banks Vicenza and Veneto, which were partially taken over by Intesa in 2017.

The problem with those banks was that many of the bonds which would be affected under the new approach were held by retail investors (many of whom thought of them as savings deposits). The state intervened, leading to inevitable criticism (Five Star politician Carlo Sibilia: "this is a €5bn gift of Italian citizens’ money to the banks and to the bankers, to save them from their nefariousness and their problems; from the loans they made to their friends, and the friends of their friends")

The idea of transferring risk from taxpayers to bondholders was partially dependent on bondholders being some abstract and inexhaustibly wealthy entity, rather than someone’s hard-working grandparents in rural Veneto. This was an initial complication with the rules. The more politically organised the bondholders, the heavier the backlash against their implementation. In electoral democracies, direct savings of the elderly are highly politically organised (more so than, say, the much larger sums flowing through so many institutional layers that their political potency is diluted).

The Carige situation is slightly different — the sensitivity is to do with the depositor base. But yesterday’s Salvini quote makes it clear that the issue is not just one of unexpected political discord, but also of enforcement. How exactly would the EU stop them? This is about much more than banking. It is a familiar problem built into the architecture of the system.

France and Germany first broke EU rules on deficits not exceeding 3 per cent of GDP in 2003. Unsurprisingly, you will find various articles in The Telegraph and The Express pointing out that Germany breaks EU rules. But here is Handelsblatt, pointing out that the country faces 74 infringement proceedings for "failing to adequately and timely convert EU rules into German law".

The problem is not only that enforcement in a non-militarised federation of highly sovereign, multi-lingual countries is difficult, which it obviously is. It is that precedents are continuously being set which weaken the case for enforcement, or give rise to claims of inconsistency.

There are patterns at play that echo the debt forgiveness debate. If one borrower's debt is forgiven, the argument goes, other borrowers will demand the same thing. Similarly, if past breaches of EU rules are forgiven, other countries will demand the same thing.

The debate about which EU rules — banking, environment, agriculture — constitute greater or lesser importance descend into infinite calculations. At the merest hint of controversy, they are drowned out by the national interests expressed through traditional political channels, like voting in a referendum, or rioting in Paris. Or bailing out the banks.