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The Italian populist government – a crisis still waiting to happen

By Michael Knox - posted Thursday, 7 June 2018

The economic program of the incoming Italian government is based on the work of Paolo Savona. Savona's plan to leave the Euro may yet go into effect.

Were the Italian people to look for a candidate to be Finance Minister of Italy it is difficult to imagine they could find an esteemed economist more qualified than Paolo Savona. Savona entered the Italian central bank The Bank of Italy in 1961. While at the bank he directed the working group that constructed the first econometric model of the Italian economy that the central bank ever had. The model was called M1BI (model one bank of Italy). Just as Mario Draghi was later to do, Savona then studied at MIT.

Savona was then seconded by the Bank of Italy to the Board of US Federal Reserve in Washington DC. He specialised in the area of international liquidity creation.


In 1976 Savona became General Director of Confindustria (the general confederation of Italian industry). This is the major association of manufacturing and service companies in Italy. Savona remained in that post till 1980.

From 1980 to 1989 he was the President of the Chief Regional Bank of Sardinia. He continued to serve as a president of major banks until 2010. Savona was Minister of Industry Commerce and Craftsmanship in the Italian government in 1993 and 1994. He is the author of many papers and books on international monetary economics.

In spite of this august background, Savona has generated some controversy. The paper of his, which has generated attention recently, is one delivered by him at a public presentation on 3 October 2015. This is called "ORIGINS, MEANINGS AND FUNCTIONS OF A PLAN A and B FOR ITALY IN EUROPE".

He begins. "I start with the popular saying 'there are none so deaf as those who WILL not hear'."

He note,s "since July 2011, I have invited the Italian authorities to prepare a Plan B: that is to prepare for the worst."

He suggests that the problem is that despite the repeated declaration that Italy has turned the corner and the economy is improving, forecasters suggest that Italy may not reach full employment again till as late as 2030.


He notes "the Italian economy has not emerged from the quagmire in which it was placed adhering prematurely and without preparation to the Euro and getting rid of the classic adjustment instruments (devaluations, credit for development and public spending)".

He said "My proposal for a Plan B did not propose a display of theoretical knowledge, but it dealt with the reality that we faced".

He described the crises that Italy faced when he was an advisor to government in 1971, 1974 and 1992-1993. He said that Italy "managed to recover using traditional intervention tools (exchange rate devaluation, interest rates, monetary creation and fiscal policy)".

He notes that having given away these indispensable tools to the control of the European Union, the Italian economy refuses to recover. Savona presents the components of a Plan A (what to do to make the Euro function properly).

The Contents of Plan A

Savona suggests the following policies to allow the Euro to survive:

1. Assignment to the ECB of a Statute similar to that of the main central banks (Fed, BoE, BoJ, PBoC) with a dual objective (monetary stability and real growth) and free choice in the use of all the known instruments (loans to banks abroad and the Treasury), including the full operation as the lender of last resort function;

2. Assignment to the European Commission, under the supervision of the European Parliament, of a Common Financial Stabilisation Fund to accommodate the excess of national public debt compared to the Maastricht parameter of 60% of the public debt / GDP ratio on time and at cost countries that require to be part of it, in return for compliance with the zeroing of the public budget deficit introduced by the fiscal compact directive;

3. Full use of the European Investment Bank, as envisaged by the Maastricht Treaty, to finance infrastructure adaptation and development plans of European significance, with a section specifically dedicated to the elimination of structural duplication;

4. Complete fiscal harmonization to avoid the distorting effects on real growth and financial flows of the tax gaps, with the granting to the European Commission, under the supervision of the European Parliament, of the functional tasks for the elimination of income and employment growth gaps;

5. Introduction of the prohibition to maintain trade surpluses abroad beyond the agreed times and methods for their reabsorption;

6. Creation of a common European school at all levels and true free movement of persons within the Community.

The Contents of Plan B

Savona begins "I do not ask to leave the Euro, but be prepared to do so if the future of the country is compromised." He goes on "personally I am still convinced that the logical construction of a common European market, with a single currency is valid. In the current context of competition between densely populated areas". He says it is necessary to arrive at a supranational form of state. He says this condition was at the basis of the birth of the Euro.

But should Plan A fail, then Plan B for exit from the Euro must be provided. First it is necessary to immediately carry out an extraordinary operation to lengthen the maturities of public debt and reduce current and potential charges.

While this operation is being carried out, one must:

1. Prepare a technical plan for an immediate return to a national currency to govern quantities, rates and foreign exchange, accompanied by a directive to settle domestic and international debt and credit positions;

2. Enter into international alliances with countries interested in protecting the political autonomy of Italy or opposing the influence of the block of countries that gravitates on Germany, which provides concrete commitments to act as a lender of last resort to deal with the speculation associated with the decision to abandon the Euro;

3. Create a Consultation Committee composed of the main bank, business, labour and economists with operational experience and international prestige to assist the Government in the transition;

4. Block any increase in taxation until the completion of the return to normal of the financial and real markets;

5. Undertake to constantly inform the public internal and international opinion of the choices made and their effects on development;

6. To replace the state leadership that has shown a strict dependence on European influence and poor respect for national sovereignty.


Esteemed Italian economist and banker, Paolo Savona, was nominated by the incoming populist government of Italy as their Finance Minister. The President of Italy resisted this nomination. Savona instead became the Italian Minister for European Affairs.

Savona drafted a plan to save the Italian economy while remaining in the Euro. This he called Plan A. Savona's sin was that he also drafted a possible plan to save the Italian economy while leaving the Euro. This he called Plan B.

It is our belief that Savona's plan A and B are an essential part of the program of the incoming populist Italian government. These issues will not go away. The detail of Savona's plans will emerge again as components of Italy's bargaining condition with the rest of the Euro Area over coming months.

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This article was first published by Morgans.


The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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