December 06, 2016
Doubling down in Rome
The unfolding story of the anti-liberal insurrection reminds us of the plot structure of older action movies. The bad guy in the original Die Hard movie turned the FBI's mechanical response into an essential element of his scheme. All he needed to do was to wait. And this is where Beppe Grillo and Silvio Berlusconi are sitting right now. Italian politics is infinitely more complicated than even the most intricate movie plot. But the Italian establishment can be guaranteed to misread the signals of crisis, and the political action needed to confront it.
Comforted by the lack of a strong market reaction to the referendum result, Italian president Sergio Matterella decided to keep Matteo Renzi on the job for another two weeks, ostensibly, as Corriere della Sera puts it, to portray a sense of calm and stability to the European allies. The situation of the banks did not improved yesterday, as we explain below, so this means that any resolution will have to wait as well until after Renzi goes, because it is unthinkable that he would bail in hundreds of thousands of subordinated bondholders as his last act in office.
Meanwhile, as the paper reports in another article, Renzi is now preparing to double down. He considers the 40% Yes vote as a personal endorsement of himself - which is, of course, delusional, and the opposite of what he said during the campaign. And, at 40%, he notes the PD would clearly be the largest party in the country and most certainly the party of government. Renzi wants Pier Carlo Padoan to succeed him as a technical PM - we presume, so that Renzi can dissociate himself during the upcoming election campaign from the dirty work of the technical government. And he wants elections in January or February. Renzi is taking the art of doubling down to a new level. He is not only plotting his come-back, but he also wants it now.
The reality of Italian politics, before and after the referendum, is that the PD is the only party openly in favour of euro membership while the two main opposition blocks, the Five Star Movement and Berlusconi’s Forza Italia, either want a referendum, or are openly opposed. Since opposition parties eventually come to power in a democracy, Italy will at some point have a government that no longer supports the euro. We would surmise that, at that point, the game would be over not because we understand the procedural mechanisms through which this could happen - no one does - but because of a self-fulfilling dynamic that will set in at this point. Economic misalignments eventually filter through to politics. The alternative way, of a series of economic reforms that would increase productivity and render Italy's eurozone membership sustainable, is politically unrealistic. They would have been done by now.
Stefano Folli, the political commentator of La Repubblica, is sceptical of Renzi's strategy. He notes that Renzi’s appropriation of the 40% will create friction in the centre-ground of Italian politics, and in particular in the PD where there has also been opposition to Renzi’s constitutional reform. The healing of the wounds in the party would require a strong leader, not a leader who is just coming from a humiliating defeat. And, for political reasons, Renzi will now require a weak technical government he can dissociate himself from during the election campaign.
The eurozone, meanwhile, will offer no reprieve to Italy. It said in a statement that the 2017 draft budget would lead to a 0.5% increase in the 2017 deficit, while the rules foresee an 0.6% reduction. On that basis, significant additional measures would be needed.
We are often critical of the deeply conservative German economic position take by Frankfurter Allgemeine, but its Italian commentator Tobias Pillar is right when he says the following:
“Tragically, [Renzi] has invented illusion that will reverberate for a long time. This includes the idea that the economic difficulties of Italy could be resolved in a short time, indeed that most had already been accomplished. Moreover, Renzi has said that long-term economic growth is only a matter of easing European austerity policies, as though more budget deficits could automatically produce sustainable growth. Because Renzi’s direct access to the state television network and subtle control of the Italian media, a self-critical evaluation of Italy’s position is missing.”