Berlusconi plans Paris-Rome axis to humble European Central Bank

[Arthur Gordon Pym]

Berlusconi plans Paris-Rome axis to humble European Central Bank

By Ambrose Evans-Pritchard

16/04/2008

Silvio Berlusconi's return to power in Italy is a nightmare come true for the European Central Bank, opening the way for a Rome-Paris axis with the political muscle to force a change in monetary policy.


Silvio Berlusconi does not share the EU-loyalities of the outgoing government


The billionaire politician has pledged an alliance with France's Nicolas Sarkozy aimed at humbling the bank and asserting the primacy of elected leaders over interest rates and the currency.

"A very strong euro is hurting Italy's economy. I will discuss intervening with the ECB with Sarkozy," he said.

The threat brought a sharp retort yesterday from the ECB's German governor and chief economist Jurgen Stark. "I would recommend to political leaders in Europe, newly elected and re-elected, to read the European law on the ECB," he said.

Mr Berlusconi - who is setting up a temporary office in Naples to tackle the city's long-running rubbish crisis - inherits an economy trapped in near slump conditions. The country has lost 40pc in unit labour cost competitiveness against Germany since 1995, largely due to anaemic productivity gains and an inflationary wage-bargaining culture. Yet it cannot use the old method of devaluation to claw back parity.

The International Monetary Fund forecasts growth of just 0.3pc in both 2008 and 2009, levels that are certain to cause a renewed rise in the country's national debt. Italian car sales plunged 18.8pc in March, and the Alpine lender Credito Valtellinese has just become the first European bank in living memory to miss a redemption on a callable bond - raising concerns of deeper troubles brewing in Italy's financial system.

Mr Sarkozy has repeatedly attacked the ECB's tight money policies, blaming it for causing the euro to surge 27pc in two years to a record $1.59 against the dollar. He says the ECB risks bankrupting Airbus and driving much of Europe's industry off-shore. Until now he has lacked the allies needed to impose his will.

"Politics is everything in EMU, and the re-election of Berlusconi represents a big shift in the political balance of power," said Bernard Connolly, global strategist at Banque AIG. "Spain will probably join France and Italy before too long, so you will have three of the big four eurozone countries in the same camp.

They can set 'broad guidelines' for the ECB. It is a total misperception that the ECB should not be subject to political influence."

Article 111 of the Nice Treaty gives politicians power to set a fixed exchange rate for the euro (by unanimous vote), or to shape the exchange rate (by qualified majority vote). This power gives EU ministers an indirect means to force the ECB to cut interest rates. The treaty article has never been invoked but it hovers in EU affairs like Banquo's Ghost.

Mr Berlusconi does not share the EU-loyalities of the outgoing government. Ex-premier Romano Prodi was once the president of the European Commission, the public face of the euro. His finance minster Tommaso Padoa-Schioppa was a founder of Europe's monetary union.

The last time Mr Berlusconi was in power, two ministers from his coalition partner 'La Lega Nord' called for a return to the lira to escape the constraints of the euro system. While he did not endorse the comments, he appeared to relish their effect on his enemies in Brussels and Frankfurt.

[source]