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.