As I write, I am listening to the regicide in Rome, the last parliamentary debate before Silvio Berlusconi’s long overdue resignation.

This past week has been an immense roller-coaster ride for Italy and it is now clear that only such a tidal wave that pushed Italian spreads higher than ever thought possible was necessary to budge Berlusconi from his seat of power.

Italy and Greece will be seeing what we might call “EU kommissars” heading their technocrat governments, as the events of the last few days have literally forced the two delinquent countries to surrender any hope of sovereignty and freedom to the diktats coming from Berlin and Frankfurt.

Other countries who have had difficulties in recent months, such as Spain, Portugal and Ireland, have escaped this kommissar imposition. Maybe this is because they took steps to redress the situation in their countries, but maybe, too, because these three countries have had elections that led to a change in government – in other words, because their response was political rather than technical. There is a link between these two statements.

Apart from other considerations, one must still doubt if a government headed by a technocrat can find the political will to force through the austerity measures and corrective measures that will have a serious impact on people’s lifestyles.

Having said that, one must also take note (nothing about this has made it to our shores) that the earlier optimism that the EFSF €440 billion fund can be leveraged into enough ‘bazooka’ to be able to cope with Italian problems has now dissipated. What the EU leaders were so impressed with and welcomed with open arms at their hasty two-day meeting in Brussels now turns out to be ineffective.

It is for this reason – realising that this succession of hopes raised by EU summit quick-fixes has not stemmed the rising tide – that voices are being heard, especially in Berlin, that the weaker countries inside the Eurozone must be forced out.

Europe’s crisis is spiralling into a new stage, said Bloomberg yesterday, as investors bet on which countries are most likely to quit the euro, starting with Greece. The risk is that this will make it harder for debt-laden countries to convince investors they can get their finances in order and for policy makers such as Merkel, Sarkozy and European Central Bank President Mario Draghi to bolster the euro’s defences.

Angela Merkel and Nicolas Sarkozy ignited speculation that the euro area could contract at around midnight on 2 November in Cannes, when they warned outgoing Greek Prime Minister George Papandreou that a planned referendum on his country’s latest bailout would have to serve as a ballot on whether or not Greece wanted to stay in the euro.

“The referendum will revolve around nothing less than the question: ‘does Greece want to stay in the euro, yes or no?’” Merkel said then, with Sarkozy at her side.

While the ploy worked, and Papandreou shelved the referendum, it undermined the message of the euro’s founding treaty that membership was “irrevocable” – a line Sarkozy and Merkel had stuck to in the two years since the crisis erupted.

Sarkozy and Merkel opened a Pandora’s Box, said Stephen King, chief economist at HSBC Holdings in London, last week. Countries unable to play by the euro’s rules may now have to leave the bloc, overturning the assumption that “once in the euro a country could never escape”, King said in a note to clients. Now “what’s true of Greece may now also be true of Italy”.

Some politicians are already working on a plan to push out errant members that cannot get their finances in order. Merkel’s Christian Democratic Union may adopt a motion at an annual party congress this week to allow euro members to exit the currency area, said Norbert Barthle, the ranking CDU member on the German parliament’s budget committee.

Yesterday, Bloomberg quoted from a report last month by the London-based Economist Intelligence Unit, entitled After Eurogeddon?, that said any fracturing would likely leave the euro in the hands of a strong northern core featuring Germany, Austria, Belgium, Finland, Luxembourg, the Netherlands, Slovakia, Slovenia and Estonia.

While France would suffer from a likely surge in the new euro, it would remain a member because its monetary union with Germany is fundamental to France’s political and economic interests, the report said. Greece would be the first to leave, followed eventually by Portugal, Ireland, Italy, Spain, Malta and Cyprus, it said.

That’s where we come in, and where tomorrow’s Budget Speech is absolutely crucial. This is no longer the time to play around with Arriva and the buses on our roads, nor for the silly games that politicians play to stay in power or to trip up those in power.

Malta, along with Cyprus, Belgium, Hungary and Poland, have become the first EU member states to receive an “early warning” letter from Brussels. They have been asked to send the Commission convincing evidence, by the end of December, of “sufficient and permanent fiscal measures” to rein in their structural deficits in a sustainable manner.

The early warning system forms part of a new economic governance mechanism that gives Brussels closer scrutiny of the fiscal affairs of member states. The EU executive can recommend fines for member states that keep ignoring its warnings and recommendations.

Economic and Monetary Affairs Commissioner Olli Rehn was quoted as saying that Malta is one of those member states which the Commission is forecasting will not be able to stick to its commitment and reduce its deficit to under three per cent of GDP by the end of this year.

“I have already given an early warning to the ministers of these countries during the last Ecofin Council (held on Tuesday) and will be sending letters with our requests to these specific member states,” Commissioner Rehn was reported to have said.

“I hope they will use the time until mid-December to put their fiscal houses in order and send us full and detailed plans of their budgets for 2012.”

Minister Tonio Fenech seemed to have tried to calm anxieties in his reaction published in The Times. He explained away the Commissioner’s warning and said he was just “using the new tools given by member states for effective economic governance”. And he remained convinced that ‘his’ deficit reduction plan for the next two years will work, despite the Commission’s negative prediction.

To this one may add the quotes given to yesterday’s Times by two economists who are commonly perceived to be near opposite political poles. Both Lino Briguglio and Joe Vella Bonnici questioned the Commission’s findings on the basis that they did not know the methodology that supports this nor the model it uses.

Other countries have reacted differently. In Cyprus, which admittedly is in a far worse situation than Malta, new austerity measures will be announced within days, the government said on Friday only hours after Brussels threatened Cyprus with immediate sanctions if measures were not put in place to lower its deficit.

On Thursday, Rehn highlighted Cyprus and Belgium “as examples of those which could be at risk [of EU sanctions] if they do not make significant adjustments to their public finances in the next couple of months.”

Rehn was speaking after the release of the EU’s autumn forecasts, which said Cyprus’ deficit in 2011 will reach 6.7 per cent, while growth will be marginally above zero, at 0.3 per cent.

If no action is taken, the EU said, the deficit in 2012 will fall to 4.9 per cent, with flat growth and is expected to remain at a similar level in 2013 – 4.7 per cent, the EU said. Growth will reach 1.8 per cent.

In Nicosia, Finance Minister Kikis Kazamias said new measures are currently being processed and will be announced within days.

“When we are ready, and it is a matter of a few days, we will make the announcement,” he said after meeting President Demetris Christofias.

The minister declined to go into detail but did say that taxing wealth and luxury is included in the measures being processed, as were provisions concerning the state sector.

In the past year, Cyprus has been repeatedly downgraded by ratings agencies over the state of its economy and its banks’ exposure to Greek debt.

The latest downgrade came from Moody’s last week, which cut the island’s credit rating by two notches to Baa3, one level above junk, forecasting the government would have to bail out its banks next year due to their exposure to Greek debt. So other countries are indeed jumping through the hoop when the EU blows its whistle. We instead oscillate between defensiveness and questions about the Commission’s methodologies.

The end result, as I see it, is that if the tidal wave hits us it will find us completely unprepared. The Commission has long been warning us that the government’s predictions about 2012 were way too optimistic and when the targets are not reached the deficit will deepen and corrective measures will be required in increased measure, and maybe they will also be too late to stem the tide.

This government and its leader have been very clever at swerving and twisting to avoid the pitfalls and traps set by the Opposition and also by the government backbench. Will they be as capable of leading the country away from the edge to which other countries have been dragged and away from what’s coming if any country is forced out of the euro?

Here is the link to what the Commission had to say about Malta. Readers can read it themselves and see whether the Commission was being alarmist or rather our government is taking things too easily. The government’s four-string spin over the coming two days to push its public presence will be just more beer froth to hide the vacuum underneath.

http://ec.europa.eu/economy_finance/eu/forecasts/2011_autumn/mt_en.pdf

PAC delayed by HBC

With reference to what I wrote last week about the Public Accounts Committee taking too long to come up with guidance for the testimony of witnesses called before it, I have been justly reminded that for many weeks the House Business Committee delayed providing these guidelines as it was discussing the modalities of the divorce debates.