The man tipped to be the finance minister of Italy in any future eurosceptic government has said that the least traumatic way to break up the euro is for Germany to leave first. Professor Claudio Borghi, a former broker for Merrill Lynch and Deutsche Bank, who is a leading light in the Northern League party, said that the cleanest option is for the Eurozone’s dominant economy to exit, allowing the other weaker economies — including Italy — to extricate themselves with minimal damage. Talking to the Daily Telegraph, professor Borghi said that if that is not possible, Italy could pass a law to convert its debt obligations into lira overnight — or the “Florin” as he prefers to call it, harking back to the days of Florentine ascendancy under the Medici.
Borghi, now a professor at the Catholic University of Milan, is being seen in Italian political circles as the man who could run the country’s finances if a consortium of populist parties seize power in the country’s upcoming elections. The once-unlikely and remote prospect of an anti-euro government in Italy is suddenly becoming a real possibility, threatening to rock the European Union to its foundations within weeks. Events in Italy are moving with lightning speed. Key figures in the Democrat Party of Prime Minister Matteo Renzi have joined the chorus of calls for snap elections as soon as February to prevent the triumphant Five Star Movement running away with the political initiative after their victory in the referendum last Sunday. Renzi has not yet revealed his hand, but close advisers say he is tempted to gamble everything on a quick vote, which could open a way for a tactical alliance of Five Star, the Northern League, and a smattering of small groups, all critics of the euro in various ways. Prof Borghi is chief economic strategist for the Northern League.
What is emerging is a tactical alliance between his party and the Five Star Movement, which has more in common with the Left. The two together are running at 44 per cent in the polls. Their economists are now working together in what is becoming a closely knit school of eurosceptics. Borghi is under no illusion that leaving the euro can alone solve Italy’s deep-rooted problems, but insists that “Italexit” is a minimum condition. “It is going to be hard, but without our own correctly valued currency, we are not going to be able to do anything however hard we try,” he said. “We are coming to the point where Italy must make the real decision: Are we for Europe or are we against it?” “What is emerging is a list of four parties or groups who all have one thing in common. We all agree that nothing is possible until we leave the euro,” he said. Borghi said the landslide 59:41 result in last Sunday’s constitutional referendum in Italy is a shock to the country’s powerful vested interests, or “poteri forti”. “They are absolutely scared because none of their tools of control are working any more,” he said.
He went on to explain withdrawal from the euro would be messy, but there are ways of mitigating the effects, first by creating parallel liquidity and letting it seep into daily life. “The Italian treasury has 90 billion euros (Dh355.47 billion) in arrears on contracts. These could be paid with treasury bonds issued for as little as euros 50, euros 20, euros 10, or even euros 5, giving us time to create a second currency. “When the time comes we can then switch to this new currency. It can be done electronically. We don’t even need to print paper,” Prof Borghi said. “The losses would shift to the national central banks through the Target2 system,” he said. This means the Bank of Italy would repay euros 355 billion euros on liabilities to Eurozone peers (chiefly the Bundesbank) in devalued lira. The Bundesbank would face instant paper losses on its credits — reaching 700 billion euros in the likely event that an Italian exit would lead to a general return to sovereign currencies. The sums are in one sense an accounting fiction.
The trial run was the collapse of the Swiss franc peg against the euro in January 2015. The Swiss National Bank suffered vast theoretical losses on its holdings of Eurozone debt when the franc revalued, but life went on regardless. “I don’t see any disaster. There is no way to smash our currency since we have a trade surplus. If we had a weaker exchange rate we would have an even bigger surplus,” Borghi said. “All the EU has achieved is a collapse in Italian banking stocks by 85 per cent since last November. You have to step in to save the banking system in a crisis, otherwise everything is destroyed,” he said.
— The Telegraph Group Limited, London, 2016
Ambrose Evans-Pritchard is the international business editor of the Daily Telegraph.