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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.”

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December 06, 2016

On the Supreme Court's Brexit case

The FT has a useful summary by David Allen Green, who has a very optimistic interpretation of what the Article 50 Supreme Court case is all about. It deals with procedure, he writes, not only the question of the parliament's involvement but also the interaction with Scotland and Northern Ireland, which are new aspects in the Supreme Court case. But it is not about stopping Brexit. 

"If the government loses the Supreme Court case, a bill will need to be passed by Parliament, empowering the prime minister to make the Article 50 notification. This will have to be done soon to meet the prime minister’s March 2017 deadline, yet there is no reason to believe that the government will be unable to do this. Subject to one possibility ... there is nothing in this week’s appeal which will necessarily delay any Article 50 notification.

This appeal, therefore, is not about blocking Brexit. The case is instead about the constitutionally correct manner in which the notification to leave the EU should be given. The case is ultimately about constitutional form and process, rather than the substance and merits of the Brexit decision."

While this is true in a narrow technical sense, a referral to the ECJ could delay the process by another nine months, which could be politically very difficult for the UK government. The backdoor-Remainers know they have no majority in the House of Commons to block Article 50 now, but a delay may change public perceptions. We think that a delay of the Article 50 trigger would be extremely damaging, also in UK relations with the EU. The accident potential is massive - the accident being not a return to the EU, but a far more violent departure than the one the government is planning for now. Thus, we do not share Green's rose-tinted view of orderly constitutional processes re-established. If the supreme court goes beyond a mere demand on the government to legislate, the impact will be devastating, and in our view it will undermine the British public's confidence in the legal system.

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December 06, 2016

When a refugee commits a murder

This is the story that was not supposed to happen, and when it happened it was not supposed to be told. A young woman, a medical student at Freiburg University, was murdered a few weeks ago, and it has now come to light by sheer accident that her murderer was an Afghan refugee. The story, and the way the media has handled it, shows just how dangerous the refugee issue still is for Angela Merkel, despite the fact that the number of new refugees has come down.

If you read the British tabloid press, you can find out the young woman's name, see her picture, and learn that she was the daughter of one of  Germany's most senior European Commission officials, information withheld in the German press where she is identified anonymously as Maria L, in accordance with the usual practice on the reporting of capital crimes. More importantly, In the British press you hear the chief of the police union blaming Merkel's policy for the woman's murder.  

Tagesschau, the German news flagship programme, decided not to report the story at all, ostensibly for journalistic reasons. We don't see a conspiracy. This was merely a case of self-censorship by an editor who takes himself too seriously and who believes he needs to protect the chancellor. The major of Freiburg, who is a member of the Green Party, also went out of his way to explain that this murder would not have been any less appalling if had been committed by a German citizen. That statement is logically true, but misses the point that there may be a legitimate issue involved. Confronted with an outcry about this journalistic own-goal, Tagesschau's editor relented and has now ordered his minions to cover the case, in the usual politically correct language of German television of course.

We are reporting this incident because it demonstrates just how dangerous the refugee story remains for Merkel in her election year. The gang rapes in Cologne at the last News Year's Eve was also suppressed, not be the media but by the police, in Cologne and possibly higher up in the chain of command. That has raised suspicions among the public of an establishment cover-up. The refugee story isn't over, and we expect it will get a lot worse next year as we are approach the German federal elections.

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