December 5, 2016
Another battle between insiders and outsidersPosted in Sunday Business Post · 112 comments ·
Today, Italy votes on a referendum that will change the course of not just Italy but the entire EU. While we gripe about water charges, bogged down by our own incompetence, the world around us is changing dramatically. These changes will have enormous ramifications for us.
Italy could easily become Europe’s Wisconsin. By this I mean that Wisconsin was a banker for the Democrats in the US election. It was a traditional Democrat state, but this time it swung dramatically to Trump.
Italy is similarly a traditionally pro-EU country — a European Wisconsin — but is it now swinging against the EU?
We will have the answer later tonight.
The Italian referendum was called by the youthful prime minister, Matteo Renzi, in order to secure a mandate to govern Italy in a more slimmed-down, centralised fashion.
Renzi fears that the dysfunctional Italian political system can’t deal with the simultaneous challenges of massive debts, low growth, an imminent banking crisis and mass migration.
He may be right, but polls suggest that Renzi’s gamble appears to have backfired and the opposition is arguing successfully that his reforms are totally undemocratic.
Although technically the referendum is about the Italian constitution, it has become more than that. The referendum has become yet another battle between the insiders and the outsiders.
Lined up on one side seeking a yes in the constitutional referendum are the insiders – the establishment, the government and, of course, the EU, the Commission and the ECB.
On the other side is a bizarre Fellini-esque alliance of Outsiders centred on the leftist/populist Five Star Movement led by the clown Bepe Grillo, who is joined by various environmentalist groups, communists and single-issue regional agitators. These guys are now also in bed with, right over on the other side of the political spectrum, the right wing and the quasi-fascist Northern League. The League wants the rich north of Italy to secede from Rome and therefore break up the country. It’s another popular insurrection à la Trump and Brexit.
Interestingly, both the populist/leftist Five Star Movement and the right-wing Northern League want Italy to pull out of the euro, having identified the euro as the cause of Italy’s economic torpor.
I visited Italy two weeks ago and it does seem like a country on the verge of a nervous breakdown. Its once dynamic economy has hardly grown in a decade, youth unemployment is among the highest in Europe, tens of thousands of young educated Italians are leaving and the country is on the frontline of mass immigration. 155,000 migrants arrived in Italy, mainly from Africa, this year alone.
There is a real sense that Italy can’t cope, or at least that the establishment doesn’t have a plan.
The EU has said that Italy should pay for and settle the migrants. The Italians respond that they have no money because the Germans insist on the Italians running a budget surplus.
The Italian banking system is on the brink.
Eighteen per cent of the total loans made by Italian banks are now non-performing. The Italian banking system has less than 50 per cent of the capital it would require to cover the bad debts. Estimates are that Italian banks may need €40 billion just to remain solvent. Where will the Italian banks raise this sort of money, in a hurry?
The Italians want to bail out their banks with more sovereign debt, but the Germans want the banks to pay from their own resources because the Germans want to ring fence Italian banks to Italy. Italians want a European solution – after all they are part of the euro.
Ordinary Italians are not waiting around and fear that what happened in Cyprus will happen in Italy, prompting a massive bank run. As a result, they are moving their cash out of Italy ahead of that bank run.
I am almost certain that Italy will have a huge banking crisis in 2017.
In short, Italy is turning into a big Greece, and the EU is looking the other way.
Italy’s shrinking economy
All the time, the Italian economy is shrinking. While the rest of the OECD has more or less recovered after the crash, since 2008 the Italian economy has shrunk by 11 per cent, and personal income by 13 per cent. While household consumption in the OECD is now 7 per cent above its 2008 levels, Italian household spending is 12 per cent below where it was in 2008.
The Italian savings rate is down from 15 per cent to 11 per cent, implying that Italians are dipping into their savings to maintain even these diminished levels of spending.
Italy has long been Europe’s second-biggest manufacturing power, beaten only by Germany.
But Italian industry is under huge pressure.
Almost one manufacturing firm in five shut between 2009 and 2012.
Production is now 26 per cent below 2007’s peak. Industrialists are blaming the euro.
In the past, Italy used to devalue the lira every now and then. This would give Italian industry a shot in the arm and the Italians could remain competitive against the Germans. Since the adoption of the euro they can’t devalue. They were forced into austerity and demand has collapsed. Is it any surprise that Italy’s opposition both on the left and the right want to return to the lira and jettison this euro experiment?
So the stakes today are extremely high, not just for Italy, but also for the EU itself.
However, the one thing we know about Italy is never to write off the country. Compromise and deal-making are in the Italian DNA. Indeed, the fluidity of its governments – more than 67 in 60 years – attests not to political fragility but to durability in the sense that with compromise so central to the political process, the system can deal with anything. Contrast this with Britain, which after years of supposedly stable single party governments allied to an absolutist first-past-the-post system, faces, not just an exit from the EU, but a possible break-up with Scotland all triggered by one ill-conceived referendum.
Which system is more fragile: the flexible, compromise-driven Italian system or the rigid, absolutist British system?
Put simply, the Italians would never be so politically naive as to bet the house on a 50/50 outcome. But what the Italian vote today will signal is which way the wind is blowing. Will Italy fall to Outsiders and suffer a Brexit and Trump popular insurrection? Will Italy be a dress rehearsal for France? If so will defeat for the establishment in Rome thus embolden Le Pen in Paris?
That for Ireland is the big question because if Le Pen wins in France, the EU is toast.