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December 01, 2016

Will Italian expats swing the referendum result?

As ever we treat referendums as utterly and fundamentally unpredictable - and we are still holding to that line even at a time when a No victory now appears widely discounted based on the pre-elections polls, which ended some time ago. As La Repubblica reminds us today, one possibly decisive factor is the position of Italians living abroad, who were not sampled in any poll and who are believed to be overwhelmingly in favour of Yes.

It appears that Matteo Renzi himself seems to have given up hope that he could win the referendum among resident Italians, but he is holding on to the belief that he has a chance of snatching a narrow victory nevertheless if Italian expats turn out in strong numbers. He said if the Yes votes captures a two-thirds majority among expats, it might be enough to swing the result in favour of a Yes vote. La Repubblica notes that in the 2013 general elections there were 3m registered expat voters (out of a total of 46.9m). Of those, 1.1m actually voted. Renzi said that maybe this time the turnout could increase to 1.5m. If two thirds of those vote Yes, i.e. 1m, he might have the critical number. Based on the participation rate of the European elections, with 28m voters, or 58%, a total of 1m yes voters would translate into 3%, the paper calculates (which is incorrect: if 1m expats vote yes, and 0.5m expats vote no, the net impact is 0.5m, which is 1.8% of the total voters in 2014.) 

Let us recap the math: There need to be three conditions in place for the expat vote to swing the results:

  1. the vote among resident Italians would have to be narrow;
  2. a high turnout among foreigners;
  3. and a large majority of those in favour of Yes among foreigners. 

Condition number three seems realistic. The first two are highly uncertain. Expats tend to vote differently than residents, but they are not uniform either. A two-thirds majority is very large, among any subgroup. 

Another issue to beware of are legal consequences. The No campaign argues that the safeguard mechanisms for secret ballots are not as strict for the expat vote as they are domestically. If the expats were to swing the vote in favour of a yes, expect a legal challenge.

One other development yesterday has been Romano Prodi's public declaration in favour of a Yes vote. He has held back because he had reservations about the reform, and still has. It was a reluctant decision, based in part on his assessment of the consequences of a No vote. Prodi quoted his mother that it was better to suck a bone than a stick. But there is no meat in the reforms.

Prodi's unenthusiastic endorsement points to the real problem of the Yes vote. It is very hard to get enthusiastic about a huge constitutional reform with the sole purpose of cementing the power of the existing establishment parties and to discriminate against newcomers. It does not solve Italy's political and economic problems, for sure. A well-designed political reform would have involved shifts in the power balance between the judiciary and the state, the size of the public administration, or the inter-connections between political parties and banks and industrial companies. Italy's bicameral system is by no means perfect, but it is good enough and perfectly capable of producing stable coalitions - such as the one we now have. Without this referendum there would be no question of early elections. The political system itself is a lot more stable than the economy.

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December 01, 2016

Why we keep on misreading the polls

With two important votes this Sunday, the Italian referendum and the Austrian presidential elections, this is a good moment to reflect on why pollsters had such a bad year. It is worth reading Tim Harford, who makes the point that the problem is not the polls themselves, but the way we read them. We are making a number of avoidable cognitive errors. 

The most important of those cognitive errors is wishful thinking - people are forecasting what they want to happen, as opposed to what they think will happen. He points to a fascinating psychological experiment that confirms this specific tendency. Wishful thinking was clearly the main cause of forecasting error ahead of the Brexit referendum and the US elections. The second one is a lack of self-criticism. He noted, as a positive example, Nate Silver. He got the Republican primaries badly wrong, but was self-critical and modest. During the presidential elections campaign he stressed, time and again, that based on the polls the chances of Trump winning were not that low.

The third cognitive error is a tendency to mix probability with certainty. The proverbial dart-throwing ape does not get it systematically right either, but at least does not overrate his chances. Harford's conclusion, which is similar to our own thinking, is that it is best to approach the future in terms of scenarios, which ensures that at least you keep an open mind. Readers may recall that we did not predict the Brexit vote either, but stressed the polls did not give conclusive evidence in favour of one or the other proposition. The same is true now with the Italian referendum polls if you add in the large number of undecideds and expats (see our separate story on this issue). A Yes vote is within the realm of the possible, just like a Trump victory always was.

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December 01, 2016

Si vis pactum, para bellum

The last couple of days have shown that the future Brexit negotiations will be very accident prone, with a non-trivial risk of a failure. The now much-publicised spat between Theresa May and Angela Merkel over the existing residents is a good case in point. The EU-27 agree on a single thing only - not to do anything until the UK formally triggers Article 50 - while May wanted an early agreement on the EU expats to reduce uncertainty. We are with May on this issue, as the equivalence of rights for UK and EU residents in their respective jurisdictions is the one and only uncomplicated and unentangled part of the Brexit process. We find it hard to wrap our brain around why this should be denied for anything other than tactical reasons. We think that May is now right to assume a hostile negotiating stance, which in our view is what Britain should be preparing for.

How will this affect the interim agreement? Naturally, if there is no deal two years after Art 50 is triggered, then Britain would leave without an agreement. A more likely scenario in our view is for Art 50 to end in only a minimal agreement including a transitional period of at least two years (we would prefer five). An FTA would then be negotiated during that time.

But the UK has to at least prepare for a hard Brexit. And that would naturally have to involve readiness to agree trade agreements with third countries, and an immigration control regime. As the Guardian reports, the UK government is preparing for a visa-based system applying to both skilled and unskilled workers, with restrictions at all levels. EU citizens would enjoy preferential treatment, and visa-free arrangements for short-term business visits and for tourists.

The UK is pursuing a parallel discussion of an emergency brake, which would leave immigration unrestricted until a threshold number is reached. May said she wants to keep that option on the table for now, but this is not her preferred deal. In any case even an emergency brake is compatible with the single market, at least for the UK, because the EU has no intention to make arrangements for what happens when the emergency brake is triggered. Retaliate with an emergency brake for British goods?

It is clear that immigration control is going to happen at the end of the transition period, but it cannot happen during it, when the UK will still be bound by the Four Freedoms and the ECJ. The purpose of the transitional phase will thus not be to bring about Brexit in stages but merely to give more time for preparations.

We still do not believe that Germany in particular will be able to maintain its current hard line, in view of Britain's role in Nato, the UK security council seats, its nuclear deterrent, and Germany's obscene bilateral trade surplus. If these negotiations become really hostile, the EU will need to do some thinking too about the potential downsides.

George Eaton, meanwhile, has an excellent analysis of the shifting trends in UK politics in the Brexit debates. He notes that the remainers were as unprepared for defeat as the leavers were for victory. The early stop-Brexit campaign is now morphing into a campaign in favour of single market membership - something we recall having urged right after June 23. Theirs is a long game, Eaton writes. The House of Commons will not vote against Brexit as such, but they will try to hang on to the single market for as long as possible - and possibly forever.

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