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May 31, 2019

Salvini’s frightening strength

One of the questions we have been asking ourselves recently is whether the European elections were good or bad for the nationalists. Our answer to the question is: both. The nationalists failed to build a powerful presence in the European Parliament, see our separate story on this below. But they came out strengthened in some of the key member states, especially Italy. We were told last night of a plausible scenario in which Matteo Salvini and his fascist allies, the Fratelli d’Italia, together could capture a two-thirds majority in both houses of the Italian parliament - a threshold that would allow them to change the constitution without the need to hold referendums.

It is a scenario only, not a forecast. Other scenarios are equally plausible. But the political threat posed by Salvini is for real. He has been persistently underestimated by Italian political commentators and opinion pollsters. 

We see Salvini as the political revenge of two lost economic decades. Italy has had almost no productivity growth since it joined the euro. But, unlike in Japan, stagnation in Italy led to the impoverishment of electorally-important social groups. Electorates do not immediately adjust to secular economic trends. Nor do they adjust in a continuous path. The rise and fall of Matteo Renzi was a break from the trend. But electorates do adjust eventually. 

As the EU and Italy are heading towards a confrontation on Italy’s fiscal policy, we are asking ourselves a related question: to what extent the EU's excessive deficit procedure against Italy will harm or benefit Salvini. Federico Fubini writes in Corriere della Sera this morning that the procedure is now very likely. The Commission will accelerate the timetable and push the whole procedure through the economic and financial committee in time for the next Ecofin on June 20. The European Commission is clearly determined to counteract what it regards as Italy's unsustainable fiscal trajectory.

We agree with the Commission’s economic assessment, but we are more caution on the politics. The thinking in Brussels is that governments are eventually disciplined by financial markets. This has been the European experience. It is quite possible that a financial crisis could happen before the next Italian elections and thus tilt the Italian electorate against supporting fiscally-irresponsible parties. But that depends very much on whether Italians blame their government for this, or the EU. Salvini is a very effective campaigner - someone who thrives on crises and, like Donald Trump, is left unscathed by political scandals. So be careful what you wish for. He could blame the EU for deliberately undermining Italian democracy and frame an election on that basis. If he were then to win an absolute majority, the political consequences for the cohesion of the EU and the eurozone would be troubling.

We very much agree with the comment by Stefan Lehne in Austria’s Der Standard this morning. He argues that the way to power for the populists is not through the European Parliament but at national level and indirectly through the European Council. Lehne’s ultimate conclusion is more optimistic than ours when he argues that the national and the European political levels are becoming increasingly intertwined. This is true in some policy fields, but our scepticism is rooted mainly in our specific eurozone perspective, and the dangerous fault lines inherent in the eurozone's present construction. 

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May 31, 2019

The significance of Corbyn’s latest flipflop on the referendum

It is confusing to keep track of Labour’s ever-changing latest position on the referendum. It appears to us that Jeremy Corbyn is now reverting to the status quo ante on the issue. He said yesterday that he first wants elections. Then he wants to negotiate in Brussels. And then he'd put his own deal to a vote. It is worth savouring the ifs and buts in the comments he made in Dublin yesterday. This is according to the Guardian:

"We don’t back a rerun of 2016. That happened. That is gone. What I do say is that if parliament comes to an agreement, then it’s reasonable, and if parliament wishes it, there should be a public vote on it but that is some way off."

We reported on a recent poll showing the Tories, Labour, Brexit Party and LibDems at roughly equal size. The Times has a poll out this morning in which the LibDems and Brexit Party come out on top - followed with a small gap by Labour and the Tories. We are not interested in the actual numbers, but what these polls do politically is to signal to the Tories that they will need to get Brexit over and done by October, or else risk obliteration by the Brexit Party. As we also noted in our Italian story above, first-past-the-post electoral systems can be highly sensitive to relatively small electoral swings. If Nigel Farage managed to unite the pro-Brexit vote behind his party, while the Remain spectrum splits around the other three parties, he could easily gain an absolute majority. 

At the general elections in 2015 Farage failed to capitalise on his 2014 electoral triumph at the European election, but this was because David Cameron promised a referendum on EU membership. We caution against a complacent extrapolation of this historic episode. Our expectation is the following: if the Tories deliver a version of Brexit - any version - by October, we reckon that the Farage threat will go. If the Tories fail to deliver Brexit by October, and instead opt for a long extension or a second referendum, we expect Farage to devastate the Tory party at the next general elections. These are not scheduled to take place until May 2022, but might happen earlier because the Tories are defending a thin parliamentary majority relying on the DUP, a majority that is unlikely to hold for much longer. 

It is not that easy to construct intermediate real-world scenarios. At the time of the next general elections, Brexit will have been delivered or not delivered. The polls that shows a split between the parties mostly reflect this uncertainty. We would expect to see either a swing towards the Brexit Party and the LibDems if Brexit is not delivered, or a move back to the Tories and Labour if it is. This means that both Corbyn and the next Tory leader have a strong incentive for Brexit to happen on time - so they can see off the threat by the LibDems and the Brexit Party.

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