I can’t have war in Europe to have peace in Italy.

I can’t have war in Italy to have peace in Europe.

Mario Monti, quoted in today’s Corriere della Sera

Italy’s spread over Germany has declined from 531 to 421 from January 9 to today, by 110 basis points. This is good news. Even better news however is the fact that Italy’s spread over Spain is collapsing, from 159 to 67 in this same period, by 92 basis points.

So 92 of the 110 basis points decline in the Btp Bund spread is due to Italy’s overall better performance and only 18 points are due to an improvement in euro conditions. But, we might add, it is likely that since Italy is such an important actor in the perception of the riskiness of the whole area, part of those 18 points are indeed again due an improved perception of Italy.

We can certainly take this (ongoing) positive result as a sign of market approval of Monti’s proposed reforms. Since those reforms are not going to improve the short-term scenario for growth, this 10 year spread mostly indicates greater trust, in the event that the euro does not break-up, in Italy’s capacity to improve over that time span.

What now remains to be seen is how far and how fast the perception of a euro-break up can be dismissed. 420 basis points is still a huge spread and spreads all over Europe remin way way too high.  Part of this improvement again depends on Italy’s capacity to convince Mrs. Merkel to engineer a German-led growth of the euro area through expansive fiscal policies.

Everything is connected. Most importantly, peace in Italy and peace in Europe are heavily in the hands of Italy. And that can only make us proud and hopeful.