B
e careful what you wish
for in Italian politics. The
exile of the volcanic
Matteo Salvini is a
Faustian bargain for the
EU establishment and the
defenders of the euro project.
There must be a high chance that
the Lega strongman – and de facto
leader of the Continent’s anti-EU
rebellion – will sweep back into power
with an overwhelming majority next
year or soon after.
He may then be strong enough to
push revolutionary changes through
the Italian constitutional system,
including a New Deal spending blitz
backed by a politically controlled
Bank of Italy and a parallel “minibot”
currency that neutralises the
enforcement tools of the ECB.
His departure this week means that
others will be left to grapple with
Italy’s intractable stagnation. It is they
who will have to push through €23bn
(£21bn) of austerity cuts to comply
with the EU’s stability pact and the
fiscal compact, the paraphernalia of
arcane budget rules concocted by
lawyers and unworkable in a serious
downturn. Mr Salvini’s hands will be
clean. “It is a win-win situation for us,”
said Claudio Borghi, the Lega’s
economics chief.
The radical Five Star Movement has
embraced its arch-enemy – the pro-EU,
centrist Democrat Party (PD) – and
formed an awkward coalition with no
obvious mission other than holding
power for its own sake.
The arrangement may not last a
week. The Five Star’s techno-anarchist
base are disgusted by what they deem
political betrayal. Many may vote to
reject the deal on their internal
“Rousseau” website. This is a party
that has long defined itself by
revulsion for the PD party and the
insider elitism it stands for. Yet its
leaders are suddenly doing a backroom
deal for reasons that look all too like
patronage politics.
Italy’s president has opted for this
odd coalition rather than accept a snap
election that would double the Lega’s
parliamentary seats and force him to
accept Mr Salvini as premier – albeit at
this point as a constrained premier
without a super-majority. It is a
gamble. Lorenzo Codogno, from LC
Macro Advisors, says Five Star and theItaly’s Salvini more dangerous to
the EU now than in government
Lega strongman
Matteo Salvini has
called the new
administration a
pawn of ‘Merkel
and Macron’ambrose
evans-pritchardtchardI
n the swashbuckling days of
Lord John Browne, BP’s crack
team of expert geologists
targeted “elephants” – monster
oilfields in far-flung places that
had the potential to transform
profits in the blink of an eye.
In recent years, the world’s oil
majors have been withdrawing from
many of the more extreme destinations
around the world but BP’s decision to
pull out of the icy waters off the coast
of Alaska is the most significant retreat
of all. The oil giant is offloading its
entire Alaskan operations to Hilcorp, a
specialist producer run by Texan
billionaire Jeffery Hildebrand, for
$5.6bn (£4.6bn).
BP has spent decades drilling in
Alaska and the US state has proven to
be one of its most bountiful hits. Its
gigantic 214,000-acre Prudhoe Bay
field is the most prolific in US history.
When production began, BP
predicted a haul of 9.6bn barrels but it
has managed to extract more than
13bn thanks to the latest drilling
technology. Its
stake in the
800-mile
Trans-Alaska
Pipeline, one of
the world’s
longest, is also
being offloaded.
Under Browne,
BP also piled into
the Gulf of
Mexico, snapping
up licences and
eventually becoming the biggest
player in the region. However, the
Deepwater Horizon tragedy changed
everything, forcing the company to
reverse much of its global expansions.
Bob Dudley, the current chief
executive, has done an exceptional job
of reshaping BP and attempting to
restore shareholder value, despite
having to fork out an exorbitant £54bn
in fines to US authorities.
Like its big rivals, BP has been
backing away from costlier, more
carbon heavy conventional
strongholds and maturing assets,
betting on riskier methods of
extraction such as shale drilling‘BP has been
backingaway from
costlier, morecarbon heavy
conventional
strongholds’BP’s Alaska
retreat
signals end
of an era
Ben
Marlowlow
instead. Investor pressure to pull out
of more remote and challenging
environments is intensifying. Far-
flung locations such as Alaska come
with greater risks and costs, and there
is growing scrutiny of the
environmental impact of oil drilling.
Crude prices are another factor – the
further they fall, the less economic
bigger and more expensive projects
become. Production in Alaska has
been in steady decline since the late
Eighties but specialists such as
Hilcorp, who can operate at a fraction
of the costs of the majors, are only too
happy to squeeze the last
remaining drops of oil out of
overdeveloped fields.
BP has chosen instead to join a new
oil rush in the American heartland of
Texas, Oklahoma and Louisiana, with
the £9bn takeover of BHP’s shale
operations last year.
The wilderness of the Deep South
still presents sizeable challenges, even
for a trailblazer like BP, but it can’t
compare to the big-game hunting of
Lord Browne.Out of puff
Investors despise nil-premium,
all-share mergers, so it’s no wonder
that shares in both Philip Morris and
Altria plunged after plans for a $200bn
blockbuster tie-up of the tobacco
giants was smoked out.
A total of $13bn was wiped off the
combined market value of the pair.
Shares in Marlboro-maker Philip
Morris suffered their largest one-day
drop in 16 months on Tuesday, falling
7.8pc to $71.70.
Still, it’s a measure of the cloud that
has engulfed the industry that two of
its biggest names are prepared to
perform a total about-turn and reunite
just a decade after becoming separate
companies.
The tobacco market is changing
rapidly. Smoking rates are tumbling in
the Western world. Indeed, although it
remains the UK’s biggest killer, public
health officials believe the habit is in
terminal decline.
Only last month, the Government
pledged to end smoking by 2030. Both
companies have warned that sales are
declining more quickly than expected
in major markets such as the United
States, Japan and Russia.
To its credit, Philip Morris has been
more alive to this existential threat
than any of its rivals. It has publicly
pledged to transform itself into a
company that makes only smoke-free
products and has even urged
customers to quit the evil weed.
The company, which also makes
Chesterfield and L & M, has invested in
iQOS, a device that heats tobacco
rather than burning it, while Altria
paid $12.8bn for a 35pc stake in the
popular electronic cigarette Juul
last year.
Yet, American regulators are
trying to combat a surge in teen
vaping and have threatened to ban
Juul devices entirely if under age use
continues to rise.
This mega-merger is fraught with
risks, much like smoking itself.PD will have to stick together through
thick and thin for the next three years,
and hope that the world will be a
different place. “If the government
collapses after six months it will be a
tremendous gift to Salvini,” he said.
Bond markets love the new
arrangement for now. Risk spreads on
Italian 10-year bonds have dropped to
a 15-month low of 171 basis points.
Technocrats and the eternal mandarin
class will be in full charge of the
economy. The satisfaction in Europe’s
high circles is palpable. Mr Salvini has
been seen off.
The Lega leader has certainly
suffered a big setback. He misjudged
the landscape by precipitating the
break-up of his party’s insurgent
coalition with the Five Star. The public
blames him for a needless summer
crisis. Lega support has dropped from
39pc to 34pc.
But this snapshot of irritation tells
us little. The Noto Sondaggi polling
group said Mr Salvini may have lost
some gloss but over the long run he
will be more menacing in permanent
campaign on the opposition benches.
The Lega leader calls the new
government a pawn of “Merkel and
Macron”. It is Mario Monti all over
again, he says, evoking the technocrat
regime imposed on Italy in the white
heat of the EMU banking crisis in 2011.
This time the pro-EU forces aim to
ensure a compliant government in
budget talks.
Italian GDP is still 5pc below its
pre-Lehman peak with insidious
effects on debt dynamics. The
economy has been bouncing along in
recessionary conditions since early- The debt ratio has crept up to
133pc and is on an unsustainable
course for a country that cannot issue
its own currency. Nobody knows
when this might come to the boil.
Right now markets are driving down
yields everywhere to historic lows.
Several European junk bonds are
trading at negative yields. Italian
state debt looks cheap by
comparison. But this is a treacherous
state of affairs.
The new Five Star-PD government
may soon find itself having to manage
the poisonous consequences of a
world recession, one clearly signalled
in inverted yield curves across the
global bond universe. World trade is
contracting at a pace of 1.4pc. Markets
have latched on to talk of policy
stimulus but the ECB is impotent.Cutting rates further – beyond
minus 0.4pc – hits the “reversal”
threshold where it does more harm
than good through multiple
mechanisms: damage to banks; driving
down inflation expectations and
therefore raising real rates; and
causing higher “precautionary
savings”. All this is contractionary.
Nor is there meaningful fiscal
stimulus on the way. Reform of the
stability pact – the so-called “SGP 2.1”
paper – is years from reality, assuming
the northern bloc ever agrees to it.
Daniel Hui, from JP Morgan, says fiscal
expansion will not happen in Germany
until there is a “deep recession”. It will
not be pre-emptive. Donald Trump
wants tax cuts but he is stymied by a
Democratic Congress. “We think bothGerman and US fiscal stimulus
headlines are likely red herrings,”
said Mr Hui.
Italy is cornered. A corpus of
academic work blames the country’s
malaise on sclerotic labour markets,
broken courts and lack of supply-side
reform across the board. This is all
true. It is why productivity in the
non-tradable sector has fallen a
staggering 15pc (IMF data) since 1992.
Yet once a country gets into this
predicament it takes drastic action to
break free. My view is that Italy can
escape the trap only through the
electro-shock of a 30pc devaluation
against the D-mark states, a 50pc debt
haircut and fiscal expansion behind
temporary capital controls – in other
words, an IMF-style programme once
it leaves the euro.
We are not there yet. The existing
euro order in Italy is entrenched and
will not give up without a fight. But as
a matter of self-interest it surprises me
that Italy’s “poteri forti” do not see the
Machiavellian advantage of letting Mr
Salvini win an election and take
responsibility for the nasty 12 months
that surely lie ahead, to soak his hands
in blood so to speak.
Comparisons with Germany from
1930-1932 should be made with
caution. The Lega is not ideologically
fascist, and circumstances are
different. But it should not be
forgotten that the Nazi party was able
to snatch the whole institutional
system only after Germany’s political
centre had immolated itself – by means
of the Brüning deflation – on the pyre
of the broken interwar Gold Standard.
The Italian and EU elites may regret
allowing Matteo Salvini to sit out the
coming slump with the irreproachable
alibi of opposition.‘The new government may
find itself having to manage
the poisonous consequencesof a world recession’
Business comment
CLAUDIO PERI/AP30 ***^ Thursday 29 August 2019 The Daily Telegraph
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