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May 30, 2018

Italian pro-Europeans repeat UK Remainers' error

We would like to dissect a couple of Italian narratives that struck us in the last few days. The first is the narrative that the Italian economy is perfectly okay because the deficit is below 3%, the current account is in surplus, and the recession is over. We noted a tweet by Francesco Papadia who said the economic fundamentals of Italy were solid. And Federico Fubini notes in Corriere della Sera this morning that economic and financial explanations cannot be behind the rise in the spreads, but that it was political instead.

This separation of politics and economics is futile in our view. It reminds us of the Brexit economic debate. It was a crucial mistake for the Remain campaign to rely on past economic statistics showing that the UK did rather well relative to the eurozone, and forecast that Brexit would endanger the country’s economic performance. What their statistics didn’t show was that the income of the median voter had stagnated, and that people had become increasingly concerned about their own future. 

In Italy the pro-European centrists also fail to understand the difference between aggregates and averages on the one side (the stuff of economic statistics), and the median on the other. From the perspective of the median voter, eurozone participation has not been a happy experience for Italians. That explains the politics. 

The other narrative we would like to debunk relates to the formal argument, based on Italian constitutional law, that Sergio Mattarella acted according to solid principles. Dilette Tega and Michele Massa make this argument in a well-argued legal article. They point out that the offending part of Paolo Savona’s Plan B for an Italian euro exit was its secretiveness. There is nothing unconstitutional in Italy deciding to leave the eurozone, for as long as this is the result of a democratic and legal process. That is, it would require constitutional change. 

The argument reminds us of similar dilemmas the German constitutional court faced when making various eurozone rulings. The problem is that the eurozone is an inherently unstable construction. As such it brings different legal principles into conflict with one another. The weakness of any orthodox legal argument, as in this case, is the force majeure caused by a financial crisis. If Italian banks were cut off from the eurozone financial markets, then of course an Italian government would be under an obligation to find alternative ways to provide liquidity. The legal controversy over Savona’s Plan B is precisely the reason why the current construction of eurozone governance is not sustainable. If your constitution rules out exit then it must logically allow for bailout, but that is ruled out by the German constitution, and by European law depending on how you interpret it. The eurozone has given rise to impossible legal dilemmas.

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May 30, 2018

Commission shakes up structural funds

On a normal day, the big European news would be the shakeup of the cohesion funds proposed by the European Commission for EU's next budget period of 2021-2027. Regions are still divided into less-developed, transition and more-developed regions, and the allocation of funds is still mostly based on GDP per capita. However, the Commission is introducing new criteria to influence the final allocation. These include youth unemployment, education level, climate change, and the reception and integration of migrants.

The result of this reform is that, despite a 10% reduction in the overall cohesion budget, crisis-hit countries see their receipts increase: this includes Greece (+8%), Italy (+6%), Spain (+5%) and Cyprus (+2%); but also Finland (+5%) which, despite being a northern creditor country was hit by a strong recession since the crisis. Contributions to Romania (+8%) and Bulgaria (+8%) also increase. As Politico points out, the additional money for the southern countries comes with strings attached. There will be a mid-term review of the allocations, tied among other criteria to whether countries are achieving their country-specific recommendations in the European semester. The Baltic countries, whose economies are doing relatively well, lose a significant amount of funding. The Visegrad four are hit by the double whammy of both being relatively wealthier than 7 years ago, and the Commission's new criterion of reception of migrants. Except for Latvia which only loses 13%, the Baltic and Visegrad countries lose over 20% of their funding, about the same as Germany.

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May 30, 2018

Democracy lessons from the Irish referendum

Fintan O’Toole compares the referendum in Ireland with the Brexit vote in the UK, and looks at the lessons that can be learned. Both referendums were on emotional subjects, but the Irish vote was not subverted. There was no lack of trying, though. The two main groups against the removal of the anti-abortion clause from the constitution hired experts from Cambridge Analytica and used social media apps like the ones used in the Brexit and Trump campaigns. Voters were subjected to the same polarising tactics, with fake facts, contempt against experts and deliberately shocking images. Still, the final vote confirmed that Irish democracy resisted. This leads to a democracy playbook with at least four good rules.

First, trust the people. An assembly with 99 randomly chosen but demographically representative voters listened to 40 experts, affected women and 17 different lobby groups. They came out with recommendations that were much more open than expected, recommending unrestricted access to abortion up to 12 weeks. Parliament endorsed their recommendations in full.

The second lesson is to put all cards on the table. Technically this vote was about a revocation of a clause in the constitution. But the government laid out the whole legislative proposal that would follow. This allowed its opponents to pick at it and distort it, but it also undercut paranoia and conspiracy theories.

Third, the campaign tactic was to talk to everybody and make assumptions about nobody. Yes campaigners, among them many young people, went out of their comfort zone to talk to people typically framed as conservative, and listen without prejudice. And with success. A majority of farmers and 40% of the over-65 voted for repeal.

The last lesson is about the power of personal narratives. Irish women told their own painful stories in public. Exit polls suggest that this was by far the biggest factor in determining how people voted. 

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