Italy’s heading for its own Brexit moment

19 November 2016

9:00 AM

19 November 2016

9:00 AM

Though he is a big fan of the European Union, Barack Obama brings bad karma to it. So perhaps he should not have chosen Greece and Germany, the two countries which illustrate so poignantly why the euro is doomed, for his last foreign tour.

His farewell visit is, if not a kiss of death, surely a bad omen for the EU and most immediately for one of those present in Berlin to bid him goodbye: Italy’s prime minister, Matteo Renzi, who has called an all–important referendum on constitutional reform for 4 December. If he loses, as looks ever more likely, it could cause a run on Italy’s sclerotic banks that could engulf the eurozone.

Obama was certainly defying the gods last month when he gave his last state dinner at the White House — ‘a swirl of Dolce Vita diplomacy’, CNN called it — in honour of the 41-year-old Renzi. The Italian prime minister, who is the leader of Italy’s former communist party and the third unelected leader of this troubled country in five years, was praised by Obama as ‘bold’ and ‘progressive’. The outgoing President was generous enough to add: ‘I am rooting for [his] success.’ Renzi might ask David Cameron how that kind of support tends to work out.

Ten days later, a massive earthquake destroyed the Basilica of San Benedetto in Norcia, near Perugia, built on the site where St Benedict, patron saint of Europe, was born in about AD 480.

So, as Italy gets ready to vote, the omens are not looking good for Renzi, whose motormouth oratory about tough but progressive reform to drag Italy’s economy out of the mire earned him the nickname ‘Il Rottamatore’ (demolition man) — and catapulted him from being mayor of Florence to prime minister in February 2014 without so much as a general election.

Nor are the opinion polls — the modern equivalents of haruspicy (as practised on animal entrails in Ancient Rome) — looking much better. These show the ‘no’ vote in the referendum, which is constitutionally binding, consistently ahead by three or four points. They also show that up to a third of Italians have yet to decide. This is hardly surprising: only one in five, according to other polls, understands what the referendum is about.

And who can blame them? For here is the byzantine question they are called to answer with either a ‘sì’ or a ‘no’: ‘Do you approve the text of the Constitutional Law concerning “dispositions for the overcoming of equal bicameralism, the reduction of the number of parliamentarians, the containment of the running costs of the institutions, the suppression of the National Economic and Labour Council and the review of Title V of Part II of the Constitution” approved by Parliament and published in Gazzetta ufficiale n.88 on 15 April 2016?’

In essence, Renzi wants to curtail the powers of the upper house, the senate, and to cut the number of senators — who would no longer be elected, but appointed by regional governments — from 315 to 100. If he succeeds, his economic reforms should be easier to pass.

The two houses of parliament currently have equal power which, according to Renzi, causes huge delay, hobbles decisive law-making and causes weak government. In fact, Italy spews out more laws than the British, American, French and German governments, — many of them bad. What it needs is fewer, better laws, and a decent judicial system to enforce them, not the abysmally slow, politicised and inconclusive one it is cursed with.

The reason Italy has had 60-odd governments in the past 70 years — all coalitions — is not thanks to its senate but to its electoral and party systems, which make it impossible for one party to win a majority of the seats.

The referendum proposes many other things, including electoral reform. The idea is a version of proportional representation which awards bonus seats to any party that gets 40 per cent or more of the popular vote right away — or in a run-off between the two most popular parties. The winning party will thus be guaranteed 340 seats in the lower house, an impregnable majority.

Only twice since the war has a single party got more than 40 per cent in a general election, in 1948 and 1953.


Admittedly, Renzi’s Democratic party is ahead in polls when Italians are asked which party they would vote for in a general election, at roughly 30 per cent, but only slightly ahead of the populist Five Star Movement that was founded by the comedian and internet comedian Beppe Grillo and whose slogan is Vaffa! (fuck off) to more or less everything, including the euro but excluding wind farms.

Grillo has dismissed the referendum question as ‘incomprensibile’. His movement and most of what remains of media tycoon Berlusconi’s party, Forza Italia, will vote ‘no’ in the referendum. So too will the right-wing populist Northern League party, which also wants Italy out of the euro and illegal immigrants out of Italy. On top of that will be a significant tranche of Renzi’s own party.

So this has become a referendum not just on constitutional reform but on Renzi — and if not on Italian membership of the EU, certainly on the euro. The Brexit vote, the triumph of Trump and the populist spring tide sweeping Europe are sure to convince many Italians to vote against Renzi.

The Italian economy, meanwhile — which Renzi boasted he would sort out — is a prisoner of the euro and remains mired in recession. Italy’s GDP has shrunk by 8 per cent since 2008 while Britain’s, for example, has grown by 8.2 per cent. Italy’s unemployment rate remains stuck at around 12 per cent (youth unemployment is nearly 40 per cent). Public debt keeps growing and is now 135 per cent of GDP — the third highest in the world by that measure. Italy’s banks — including Monte dei Paschi di Siena, the world’s oldest, founded in 1472 — are in deep trouble. They are badly undercapitalised and hold €360 billion of bad loans — the equivalent roughly of a fifth of Italy’s GDP.

In short, things are hotting up. What finished Berlusconi was not bunga bunga but the spread between Italian government bond yields and German ones, which had soared into the meltdown zone. The spread is rising rapidly once again and all eyes are on the referendum result. The more the spread rises, the more the interest Italy has to pay on its stratospheric public debt. If Renzi loses and resigns, there will be even more political instability in Italy than normal. Even if he does not, there probably will be anyway.

Joseph Stiglitz, a Nobel prize-winning economist and former adviser to Bill Clinton, recently warned that the eurozone is heading for ‘a cataclysmic event’. Asked if the Italian referendum could be it, he replied: ‘That is a big risk.’ He said the only solution, however, was to cancel the referendum.

Last week, while filming a referendum video, Renzi took down the EU flags that for years have stood alongside the Italian flags behind the prime ministerial desk at Palazzo Chigi. Perhaps he too is getting a little superstitious. But win or lose on 4 December, there is big trouble ahead for Italy — and for the EU.

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