Renzi’s
Great Gamble
John Mauldin
There
is an extremely important election coming up, and I am not talking about the US
presidential election. The upcoming referendum in either October or November in
Italy may have as much or even more macroeconomic impact on the world as the US
election, but hardly anyone outside of Italy is paying much attention to it –
yet.
I have been saying for some time in interviews
around the country that I think the referendum in Italy has even more potential
impact than the Brexit vote did in the United Kingdom. And just like the Brexit
vote, it is rife with emotion and political turmoil, making the outcome too
close to call.
If you are a voter in Italy, your frustration (or
maybe even anger) is entirely understandable.
The current prime minister,
Matteo Renzi, has basically bet his career on this referendum, which would
allow him to enact what most of us would see as much-needed reforms – in fact
they’re the very Italian reforms that I have written about in my letters over
the last five years and that I talked about in my previous two books. Italy has
about as sclerotic a governmental process as any country in Europe, and that is
saying something. There is no end of corruption and crony politics, with each
faction wanting to keep the status quo and not have to give up any of its perks
but wanting everybody else to give up all of theirs. Not unlike a country close
to where I reside (I say with a smile and a sigh).
Seriously, friends, this needs to go on your
economic radar screen. If the “no” vote wins, Renzi has promised to resign,
which will throw Italy into a political crisis. Then there will be a real
potential to elect parties that would call for a plebiscite on whether to stay
in the European Union – Italexit – and is not at all clear today what the
Italians would decide to do. Know this: the European Monetary Union really does
not work very well, if at all, without Italy, and a “no” vote would be the
death knell of the euro, at least as we know it today.
Nick Andrews, who writes for my friends at
GaveKal, has done an excellent summary of the situation in Italy, and his
latest posting is this week’s Outside the Box. This is not a long
essay, but it is worth every bit of your attention.
I have just about recovered my operational
abilities here at Mauldin headquarters (which is actually my office at home).
We are taking steps to make sure there is never a repeat of this computer
debacle. I can point fingers here and there; but as they say, the buck stops
here.
I hope the weather where you are is as pleasant
as it is here in Dallas. Have a great week. I will be writing this weekend
about why I am so disturbed about the negative interest rates set by current
monetary policy that is in control of the economies of the world. It should be
interesting.
Your wishing he had been in Tuscany for a few
weeks this summer analyst,
John Mauldin, Editor
Outside the Box
Renzi’s Great Gamble
By Nick Andrews and Stefano Capacci
Prime ministers come and go in Italy – four since
the financial crisis – but precious little seems to change. The latest
incumbent, Matteo Renzi, has pursued structural reform more energetically than
his predecessors. But for all the progress he has made, he might as well have
been wading through molasses. Now, in a bid to secure a popular mandate for his
restructuring program, Renzi has bet his premiership on a referendum over
badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins
the vote, which is due in either October or November, his proposed measures
will streamline Italy’s legislative process, breaking the parliamentary
gridlock which has crippled successive governments, and opening the way to
far-reaching economic reforms. If he loses, Renzi has promised to step down – a
pledge that has turned the referendum into a popular vote of confidence in the
unelected prime minister, his Europhile policies, and by extension Italy’s membership
of the eurozone itself. As a result, a “No” vote in October will not just
precipitate the fall of Renzi’s government; it could throw Italy’s long term
membership of the eurozone into doubt, plunging the single currency area once
again into crisis.
Policy no man’s land
Italy’s fundamental problem is that it is stuck in
a policy no man’s land. Its old economic model, in place for much of the last
three decades of the 20th century, relied on a combination of
currency devaluation to maintain international competitiveness together with
fiscal spending to support the poorer regions of the country’s south.
Signing up to the euro put an end to all that,
preventing devaluations and prohibiting budget deficits at 10% of gross
domestic product. However, the design of Italy’s bicameral parliamentary
system, in which the upper and lower house – the Senate and the Chamber of
Deputies – wield equal legislative power, made it almost impossible for any
government to push through the structural reforms necessary for Italy to
compete and prosper within the eurozone. The result has not just been depressed
growth and relative impoverishment, but an outright decline in living
standards, as Italy’s real GDP per capita has slumped to a 20-year low.
Such a below-par economic performance has led to a
build-up of bad assets on the balance sheets of Italy’s banks, where 18% of all
loans are now classed as non-performing. In turn, this bad loan overhang has
eroded the ability of the banking sector to extend new credit to the thousands
of small businesses which are the engine of Italy’s economy and which normally
power employment growth. The result is stagnation.
To stand any chance of escaping this low growth
trap, Italy needs to enact wholesale structural reforms to enhance its
competitiveness relative to its eurozone neighbors. Notably, it needs to make
the labor market more flexible to encourage job creation, it needs to lower the
barriers to entry that protect much of the country’s service sector, it needs
to overhaul a judicial system so sclerotic that bankruptcy proceedings can last
10 years or more, and it needs to restructure its fragmented and dysfunctional
banking system.
The prescription might be clear, but Italy’s
political system makes enacting reform all but impossible. Renzi has already
tried to overhaul Italy’s labor market by attempting to dismantle the generous
protections that make it difficult and expensive for companies to dismiss
staff, and which therefore encourage businesses to hire only temporary workers,
heightening economic insecurity among the young.
But Renzi’s attempt ran into bruising opposition
from Italy’s powerful and well-subscribed trade unions. The results were a
watered-down reform package that entitles existing permanent staff to a
near-guarantee of lifetime employment, and a severe dent in Renzi’s popularity
from which he is yet to recover. It’s a familiar story in Italy. Entrenched
interests, whether represented by local and regional political leaders, unions,
protected professions, or established private sector companies, exert enormous
influence over the political process. All profit from the status quo, which
promises they will continue to benefit from special protections and payouts.
And because of the equal balance of power in Italy’s parliament, which means
the Senate can block government legislation indefinitely, the consequence is
political – and economic – stagnation.
Bloated and wasteful
Renzi’s referendum aims to change that. The prime
minister is seeking popular approval for constitutional reforms that promise to
cut the size of the upper house from 315 to 100 senators. Under his proposals,
senators will no longer be directly elected, but will instead be chosen by
regional councils, nominated by the mayors of big cities, or – in the case of
five – be appointed by the Italian president. The reform will not only cut the
costs of the notoriously bloated and wasteful upper house, where senators have
traditionally enjoyed lavish expenses and generous pensions. Most importantly,
it will downgrade the political power of the Senate so that it will no longer
be able to obstruct government legislation entirely, but only to propose
amendments that will be adopted at the discretion of the lower house (although
the Senate will retain a say on constitutional ma tters, including the
ratification of European Union Treaties). The objective is to increase the
executive power of the government, and to tackle entrenched interests with
additional measures that allow for new laws to facilitate popular referendums
and to promote citizen participation in the political process.
Unlikely alliance
However, powerful forces are arrayed against Renzi,
and a “Yes” vote is far from assured. The proposed reforms have attracted
opposition not only from establishment voices who benefit from the current
arrangements. They have also drawn fire from constitutional lawyers and
anti-establishment parties, including the populist 5-Star Movement, which
argues the 50% simple majority needed to win the referendum is too low for
constitutional changes that promise a concentration of political power
unprecedented since the formation of the Italian republic in 1946.
Perhaps more importantly, Renzi’s pledge to resign
in the event of a “No” victory has raised the possibility of a protest vote
against the prime minister himself – the third unelected head of government in
succession – from a broad cohort of the electorate which is thoroughly
disillusioned with Italian politics. Increasingly disgruntled, these voters are
sick of the corruption and self interest of politicians, and fed up with
painfully austere policies that they believe to be dictated from Brussels and
Berlin, and which they hold responsible for Italy’s poor economic performance.
The chances of a “Yes” vote in the referendum have
not been improved by the slump in Renzi’s personal popularity following last
year’s attempt to reform the labor market, and a series of small bank
restructurings that saw retail savers “bailed-in” – forced to take losses –
under new European Union banking regulations. From 40% after Renzi entered
office two years ago with optimistic promises of reform, the approval rating of
the prime minister’s PD party has fallen to little better than 30% today, much
the same as that of the opposition 5-Star Movement. As a result, with two
months to go the referendum is too close to call. Opinion polls indicate the
“Yes” and “No” camps are running roughly equal, with a large proportion of
voters still undecided.
If Renzi loses the referendum, not only will Italy
remain in policy limbo, but it is highly likely his subsequent resignation will
trigger a parliamentary election. Under new election laws passed last year, if
a party fails to win 40% in the first round of voting, the top two parties go
through to a second round. The latest opinion polls put Renzi’s governing PD
party on 31% and the 5-Star Movement on 29%, with the next two largest parties
– Silvio Berlusconi’s Forza Italia and the anti-establishment Northern League –
level pegging on around 13%.
In recent years, Renzi’s PD government has represented
the best hope for structural reform and economic modernization. But even if the
PD party were to win a post-referendum election, there is a risk that,
following Renzi’s resignation, the left wing of the party would wrest back
control from the reformist center-right faction, damping hopes for further
restructuring. Such a swing to the left would hardly be unique to Italy. In the
UK, the militant left has captured the leadership of the main opposition Labour
Party. In Spain, Podemos has split the left wing vote, and in France the ruling
Socialists have come under pressure in the polls from the radical and
Euroskeptic Left Party led by Jean-Luc Mélenchon.
At the moment, an election victory for the 5-Star
Movement, which identifies as neither left nor right, appears at least as
probable as a second round win for the PD. The Movement has already scored
significant victories in mayoral elections in Rome and Turin, and enjoys increasing
support across the country. Its broad stance is anti-establishment and in favor
of direct participatory democracy rather than representative democracy, which
it regards – with some justification in Italy – as an invitation to corruption.
Beyond that, however, its platform is so vague that it is hard to pinpoint any
concrete policies, except its call for a referendum on Italy’s membership of
Europe’s single currency.
Leadership vacuum
Perhaps the biggest problem for 5-Star, however, is
that it has no clear leader. Its founder and leading voice, Beppe Grillo, was
found guilty of involuntary manslaughter in 1980 following a fatal road traffic
accident, and so cannot run for public office under Movement rules barring
candidates with criminal records. Without Grillo the parliamentary party would
be leaderless, meaning 5-Star has no obvious prime ministerial candidate even
should it secure a majority in the election.
All this means that the possibility of a “No” vote
in Italy’s constitutional referendum come October or November is the biggest
clear and present danger to the euro’s survival. Both 5-Star and the Northern
League are promising a plebiscite on euro membership should they come to power
in a post-referendum election. That does not mean a vote on Italy’s eurozone
membership would lead directly to its exit – many likely “No” voters in this
year’s constitutional referendum favor continued euro membership. However, a
“No” vote come October would effectively be a vote against the structural
reforms needed to ensure Italy’s economic growth and prosperity within the
eurozone.
In other words, in the event of a “No” vote in
October, the only economic choice for Italy would be between continued
stagnation, or a return to the old economic model of successive devaluations.
The latter course would naturally mean exiting the eurozone anyway. But even if
Italy were to take that path, it would hardly be a less painful way to restore
the economy to health. Whether inside or outside the single currency, Italy
still needs structural reform to ensure future growth. The only potential
benefit to leaving the eurozone would be that deep devaluation of a
reconstituted lira could help to ease some of the transitional pain (although
it is probable the palliative effect would be more than offset by the
additional economic and financial damage wreaked by an exit).
Europe in microcosm
Clearly investors should be concerned. Italy is the
third biggest economy in the monetary union and one of its core members. Its
departure would surely hasten the break-up of the whole euro project. What’s
more, the political and economic tensions within Italy ahead of October’s
referendum mirror those at work across the eurozone as a whole. In Italy the
wealthy north makes up the industrial heartland which drives the economy, while
the south is underdeveloped and poor. There is little enthusiasm for structural
reforms, and throughout the country populist movements which promise to tear
down the self-serving political establishment are rapidly gaining ground.
Italy is the wider eurozone in microcosm. In the EU
as a whole, progress towards creating the political and economic institutions
that could ensure the success of the single currency project have been
comprehensively obstructed by narrow – but deeply entrenched – national
interests. This failure to advance, and the economic hardships and sense of
disempowerment that have resulted, has fueled the rise of populist political
parties from Greece to Finland – parties that are challenging an increasingly
distrusted political elite and questioning not just the status quo, but the
whole European project. If Renzi wins come October, the eurozone has fresh
hope. But if he fails, Italy fails, and very likely the eurozone fails too.
0 comments:
Publicar un comentario