Billionaire investor George Soros yesterday warned that the European Union faces an "existential crisis" and must “reinvent itself” or risk triggering the next global financial meltdown as markets shuddered under the strain of Italy’s growing political turmoil.
Italy may be forced to return to the polls as soon as July after Prime Minister designate Carlo Cottarelli failed to assemble a cabinet.
European leaders including Commission president Jean-Claude Juncker and Council president Donald Tusk scrambled to reassure the Italian public that the EU and financial markets are not seeking to impose their will on voters.
The political crisis was triggered by a presidential veto of a cabinet proposed by the populist left-leaning Five Star Movement and the far-right Northern League, the two parties who gained the biggest vote share in March elections.
Juncker said that the EU will work with the founder member of the bloc “regardless of which political party may be in power”, in an unprecedented statement responding to comments by EU budget commissioner Gunther Oettinger who appeared to suggest financial markets would force Italians to reject populist parties.
Tusk added his own rebuke to the commissioner, asking EU institutions to “respect the voters.” He added: “We are there to serve them, not to lecture them.”
Oettinger later apologised for his comments, saying he “did not mean to disrespectful.”
The prospect of a rerun election in which continued EU membership is likely to be a central bone of contention has prompted investors in Italian assets to run for cover. Milan’s FTSE MIB index suffered another day of heavy losses, falling by 2.65 per cent. Big banks such as Banco BPM and Unicredit both shed well over five per cent as investors eyed the prospect of an exit from the Eurozone.
David Owen, chief European financial economist at Jefferies investment bank, said: “‘Twas ever thus, but the fate of the Italian banking sector remains entwined with that of the sovereign, something that the market understands only too well.”
Unicredit boss Jean Pierre Mustier tried to calm investors selling the bank’s shares.
“Of course there is political uncertainty, but I think the fear of Italy leaving the euro or leaving the Eurozone is overdone,” Mustier said in a television interview with Bloomberg.
“We should go back to reality. Italy will not leave the Eurozone and we need to look at good fundamentals of the country.”
Italian central bank boss Ignazio Visco warned that Italy risks “losing the irreplaceable asset of trust” in both its political institutions and its savings.
The yield on a two-year Italian bond rose by the most on record as investors dumped the debt.
Meanwhile, the spread between Italian 10-year government bonds and German Bunds of the same maturity, a political risk barometer, rose as high as 3.24 percentage points yesterday, the highest since 2013, according to Tradeweb. The bond trading platform has this week seen a 75 per cent increase in volumes for Italian government debt relative to average weekly volumes in 2018 so far.
Soros called for European politicians to back down from plans to pursue greater integration and to instead take a "multi-track" approach which gives countries more flexibility to decide the role they take within the EU to stop the populist surge.
Speaking at the annual meeting of European think-tank the European Council on Foreign Relations, giving a keynote on "how to save the European Union", Soros said that "everything that could go wrong has gone wrong" for Europe.
He blamed the financial crisis and the refugee crisis for causing a rising tide of anti-European populism which, when combined with fiscal austerity, has the potential to rock the EU's economies.
In Westminster, foreign affairs committee chair Tom Tugendhat yesterday echoed Soros’s criticisms, arguing that the Western world is turning away from multilateralism and towards the nation state.
“The EU’s centralising, supranational instinct is out of kilter with the temper of our times,” he said, in a speech at the Royal United Services Institute’s Whitehall headquarters.
Additional reporting by Catherine Neilan