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Out of the Box: The Decline and Fall of the Roman Empire

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“Rome – the city of visible history, where the past of a whole hemisphere seems moving in funeral procession with strange ancestral images and trophies gathered from afar.”
– George Eliot

The Romans and their empire were at its height in 117 CE. It was the most extensive political and social structure in western civilization. By 285 CE the empire had grown too vast to be ruled from the central government at Rome and so it was divided by Emperor Diocletian (284-305 CE) into a Western and an Eastern Empire. Rome eventually collapsed under the weight of its own bloated empire, losing its provinces one by one. In September 476, a Germanic prince, named Odovacar, won control of the Roman army in Italy. After deposing the last western Emperor, Romulus Augustus, Odovacar’s troops proclaimed him King of Italy, bringing an ignoble end to the long, tumultuous history of ancient Rome.

Now, here we are 1,543 years later, and history seems to be rhyming once again. The names have changed of course, and the innocents desire protection, but the country is once again bloated and may be grinding to an ignoble end.

The EU’s fourth largest economy hasn’t just fallen short of complying with the European Union’s budgetary rules but its government has openly and repeatedly flouted them. The EU tried leniency last year, and then it tried finger pointing. Now the European Commission is likely to throw the textbook at Rome, and soon, in my opinion.

An EU ruling could lead to an initial fine of up to 3.5 billion Euros ($4 billion) and tighter oversight of Italy’s fiscal policy. Italy could, in fact, be fined up to 0.5% of GDP, and lose loans, and the purchasing of its sovereign and corporate debt, by the European Investment Bank and the ECB. Also, any plans to issue new debt might be controlled by the European Commission, and not by the government of Italy.

Edward Gibbon, in his classic work on the fall of the Roman Empire, describes the Roman era’s declension as a place where “bizarreness masqueraded as creativity.” We are rhyming again here too, as evidenced by Deputy Prime Minister’s Salvini’s plan to issue mini government bonds, with no interest or maturity, and in denominations of 10, 50 and 100 Euros, which is a bizarre concept, without doubt.

The plan is to give them to private companies that are owed money by the Italian government. The reality of implementing this “mini-BOT” strategy is that the Italian government is actually issuing their own currency, which would compete with the Euro. Salvini has even contended that these notes would not increase the public debt, already at 132% of their GDP, because the mini government bonds would be off Italy’s balance sheet and not be counted as public debt. Italy’s Confindustria business lobby stated, “To think that the problem of public debt can be solved with mini-BOTs is like trying to solve it with Monopoly money.”

“The vicissitudes of fortune, which spares neither man nor the proudest of his works, which buries empires and cities in a common grave.”
– Edward Gibbon, The Decline and Fall of the Roman Empire

Salvini’s crowd has stated, in the past, that these mini-BOTs could replace the Euro as legal tender if Italy were to leave the Eurozone. Well, “Itexit” or “Itsgone” may be on the way and I wouldn’t be ruling the possibility out. Last week the Italian parliament unanimously approved a motion backing the idea of mini-BOTs which makes you wonder just what they are considering behind closed doors. Agnese Ortolani, an analyst at the Economist Intelligence Unit, said the vote was “a signal that some prominent figures, within the ruling

League party, might still be working on their Euro exit plans.”

Even the ECB’s President, Mario Draghi, has waded into the controversy. Last Thursday he said mini-BOTs “are either money and then they are illegal, or they are debt and I don’t think there is a third possibility.” Fabio Sabatini, an associate economics professor at Rome’s La Sapienza University, argues that the mini-BOT scheme only makes sense if seen as a way to make Italy’s Euro exit possible, without making the plan explicit. People like Salvini “are creating the conditions for a ‘perfect storm’ that would put us out of the currency union. The intention is to leave the Euro, but without taking political responsibility for it, which would be devastating,”
Sabatini stated.

“Justice, humanity, or political wisdom, are qualities they are too little acquainted with in themselves, to appreciate them in others.

Valor will acquire their esteem, and liberality will purchase their suffrage; but the first of these merits is often lodged in the most savage breasts; the latter can only exert itself at the expense of the public; and both may be turned against the possessor of the throne, by the ambition of a daring rival.”
– Edward Gibbon, The Decline and Fall of the Roman Empire

Salvini is the “daring rival.” Italy and the European Union, in my view, are either set-up for an internal battle where various minorities team up and overturn the control of the EU, as they wrest power from Germany and France, or where Italy gets to the point where they say, “Enough” and they leave the EU on their own, either before or after the Brexit occurrence. “End-Game” may be approaching.

Gird for battle.

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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