After the UK Brexit and the Trump triumph in the US, the rise of anti-establishment Italy is hardly a surprise. It is the effect of half a decade of failed austerity doctrines in Europe and decades of failed political consolidation in Italy – ever since the notorious Tangentopoli scandals.
While Italy’s constitutional referendum heralds a political earthquake that will eventually affect both France and Germany, the immediate result is more uncertainty in economy, political polarization and market volatility.
End of an era in Italy – and Europe
Only hours after Italians had cast their ballot in the referendum on constitutional reforms, Prime Minister Matteo Renzi announced his resignation after heavy defeat.
Renzi’s ‘Yes’ camp included most of his Democratic Party (DP) and centrist allies, and the tacit support of moderate voters, including some from Silvio Berlusconi’s Forward Italy (FI). In turn, the opposition lineup featured Beppe Grillo’s Five Star Movement (M5S), the regional Northern League (NL) led by Matteo Salvini in alliance with the far-right Brothers of Italy’s (Fdl) and Berlusconi’s Forward Italy (FI), a significant minority of PD allies, a number of small leftist groups.
According to projections, almost 60% of voters rejected constitutional changes. “My government ends here,” said Renzi from Palazzo Chigi. Moments later, he acknowledged that his pledge to resign if defeated at the polls had been a mistake.
“Democracy has won, the times have changed” concluded Beppe Grillo, the leader of the opposition’s Five Star Movement (M5S), calling for elections to take place as soon as possible. In his tweet, NL’s Salvini left little doubt about his preferred international partners: “Long live Trump, long live Putin, long live Le Pen, long live the Northern League.”
Again, media headlines reflect a “surprise,” an “upset,” a “disruption.” But by now, such views are plain silly. Last summer, I projected that Renzi was about to undermine his rule because of his pledge, which ‘politicized’ the constitutional referendum. Indeed, since the onset of the European sovereign debt crisis in spring 2010, I have argued that the policy solutions at Brussels and the core EU economies – including multiple “bailout” packages and the broad austerity regime – have been misguided, flawed and inadequate. Well before the UK referendum, I predicted the Brexit outcome. In effect, the outcome of the Italian referendum was fairly clear already in summer, when I forecasted the demise of the Renzi regime.
The problem is that most mainstream policy observers and media remain far too close to the political class and its financiers in Washington, London, Brussels, Rome and other advanced economies.
Few days ago, Alessandro Di Battista, a rising star of Grillo’s M5S issued a call to arms. Renzi’s referendum, he told the crowd, was just the latest gambit by a political class determined to insulate itself from the people it should serve. “There are two Italys: on the one side the very wealthy few who look after themselves, and on the other the masses who live every day with problems of transport and public health.”
Battista’s words were followed by the Five Star chant, “A casa! A casa!” (“Send them home”). M5S got what it wished for.
Despite neo-liberal dreams of continuity for Renzi’s regime, the triumph of Beppe Grillo was only to be expected. The same goes for the rise of government bond yields after the referendum and the relative weakening of the euro. These, however, are likely to prove temporary reactions.
If M5S takes charge of the government, the responses of the financial and currency markets will be more destabilizing and capital outflows are likely to escalate. Italy’s volatility could also result in a new sovereign downgrade, which would undermine the perception of stability that the European Central Bank (ECB) has struggled to maintain since the early 2011.
The political future of Italy will be harder to forecast, especially in the near term. First of all, Renzi’s constitutional referendum will be followed by Italy’s general election, which should take place already by summer 2017. If Renzi had won the referendum, his fragile political victory would have had to cope with the opposition’s attacks. Since the opposition won, that could pave way to a new referendum on Italy’s Eurozone membership, which, in turn, could result in an ‘Italexit’ – a fatal blow to European integration.
But how likely is this sequence of events?
As Italy has now rejected the constitutional referendum and given the M5S the critical political mandate, the latter should solidify its leadership in the general election while promoting its plan to hold a referendum on the Eurozone. Since almost every third Italian voter today supports M5S, this sounds viable but it will not be easy. After all, the Italian political landscape remains fragmented and fluid. Moreover, unlike its rivals, M5S shuns political alliances, which it would need in the post-referendum transition to consolidate its political might.
Ironically, in the absence of the kind of streamlined governance that Renzi proposed, neither Renzi’s PD, nor Grillo’s M5S, or any possible third (most likely center-right or radical-right) party will find it easy to manage the post-referendum transition. Indeed, Renzi’s referendum, despite its stated objective to make Italy more governable, has made Italy more ungovernable, at least in the short term. And that, in turn, will favor economic uncertainty, political instability and market volatility.
At the regional level, this environment could initiate end-game in Europe. As long as the sovereign debt crisis was limited to small Eurozone economies – Greece, Portugal and the like – which each represented less than 3% of the regional economy, bailouts were adequate to delay structural reforms. That period, however, ended in 2011, when the crisis spread to Italy and, to a degree, France. Together, these economies account for almost 30% of the regional economy. Today, bailouts are no longer an option. Economic solutions require structural reforms, which the Italy’s establishment shuns because these policies are seen as political suicide.
In contrast, opposition has seized the window of opportunity. If the center-left, anti-establishment and Euro-skeptical M5S fails to consolidate political power, it will open the door to radical right, particularly the Northern League, and the center-right opposition party Forza Italia.
Like M5S, the NL strongly opposed the October referendum. Unlike M5S, it represents radical right and is willing to form coalitions. The NL has been reorganizing its ranks to become a national party, with a Euro-skeptic platform. The party’s rising star Matteo Salvini perceives himself as Italy’s Marine Le Pen.
Salvini sees the euro as a “crime against mankind.” He is opposed to illegal immigration. On economic issues, he supports flat tax, fiscal federalism and protectionism. In demonstrations, he dons a Mussolini-style black shirt to court Italy’s extreme right group Casa Pound. In foreign policy, Salvini emulates Le Pen’s ideas, opposes the international embargo against Russia and supports Italy’s broader economic opening to Eastern Europe and Asia. In the US, he endorsed Donald Trump whom he met in Philadelphia last April.
Renzi’s fall, Grillo’s rise
Nicknamed il Rottamatore (the scrapper), the 42-year-old Renzi, former mayor of Florence, became the youngest person in history to be Italy’s Prime Minister in February 2014; younger than Mussolini. By then, the longest recession in Italy’s postwar history had ended. However, the Italian economy was a tenth smaller than before the crisis, while unemployment had doubled to over 12 percent since 2007.
Even today, unemployment remains at 11.6%, while youth unemployment exceeds 36%. The figures are the lowest since 2012, but after two decades of stagnation and half a decade of failing living standards, it’s no consolation.
By December 2014, the ratings firm Standards & Poor’s lowered Italy’s long- and short-term sovereign credit ratings to ‘BBB-/A-3.’ Nevertheless, S&P expected Italy’s government to implement reforms, and the ECB’s monetary policy to support a normalization of inflation. In Italy, that was easier said than done. To achieve change, Renzi needed structural reforms and to implement those reforms, he needed constitutional reforms. Italians were sympathetic to the idea of streamlining politics in the Eurozone’s third-largest economy in which a gridlocked legislature and unstable governments sustain a seemingly endless ping-pond between the two chambers of parliament. However, by staking his own political future with the outcome of the referendum, Renzi “politicized” the referendum.
Internationally, Renzi was regarded as social-democratic, progressive by outlook and reformist by inclination. Representing much-needed generational change in the aging Italy, he hoped to reverse the country’s decline by launching huge projects, starting with a new electoral law to consolidate political decision-making, reforms in the public administration, and the tax system. In reality, he leaned onto Italy’s neoliberal forces, supported eagerly the North Atlantic Treaty Organization (NATO) which leaves many Italians ambivalent and even gave his symbolic vote to Hillary Clinton in the US election, which left him stranded after the Trump triumph – in both Washington and Rome.
All of these forces fueled the support of the M5S, which was launched by Beppe Brillo, a popular comedian and blogger, and Gainroberto Casaleggio, a web strategist, right after the global crisis in 2008-9 right before the onset of the European sovereign debt crisis in spring 2010. After Casaleggio’s death last April, Grillo has led the party with a directorate of five leading members of parliament.
In the US and Western Europe, neoliberal media has labeled M5S “populist.” In reality, the party is anti-establishment, environmentalist, anti-globalist and Eurosceptic. Moreover, it sees itself more as a ‘movement’ than a ‘party’ and shuns the traditional left-right paradigm. Indeed, the “five stars” of M5s highlight the role of public water, sustainable transport, sustainable development, right to Internet access and environmentalism. It advocates direct democracy, non-violence and sees degrowth as the issue of the future. Many M5S goals can be seen as reactions to Rome’s ruling class, including the ‘zero-cost politics’ (politics is a temporary service, not a money-making machine), no criminal records (to increase transparency) and the no-alliances policy to ensure that M5S can push all of its tenets.
In effect, the reasons for the nightmare scenarios about M5S in the neoliberal media stem mainly from the fact that both Grillo and M5S are no fans of the US-led NATO and have explicitly condemned Western military interventions from the Middle East to South Asia, as well as US intervention in Syria.
Despite wide differences in the political platforms of Europe’s radical left and right, the common denominator from France’s Marine La Pen to Italy’s Grillo and the Spanish Podemos is the critique of NATO, US interventionism in Europe as well as certain respect for Putin’s Russia. That’s why these parties are habitually criticized by the mainstream media, which tend to rely on neoliberal capital.
Political losses, economic stagnation and banking fears
Despite half a decade of promises of deleveraging, Italy’s general government debt is still at 134% of the GDP; second-highest in the Eurozone right after Greece, and higher than at the onset of the European debt crisis. Even as Italy is amid a cyclical rebound, its real GDP growth will be around 0.9%-1.0% in 2016-17.
Without Rome’s reduced fiscal burden and the European Central Bank’s continued easing, Italy would have to cope with deflation. After all, living standards remain today where they were in the mid-1990s. Yet, in structural terms, this may be as good as it will get. Thanks to aging, slowing productivity and de-industrialization, growth is likely to decelerate to 0.8 percent or less and remain at that level until the mid-2020s. As challenges are about to increase, economic muscle will shrink. This benign scenario does not presume major economic or political destabilization – despite looming challenges in the banking sector.
Since the summer, Renzi has been willing to defy the EU and pump billions of euros into Italy’s troubled banking system. As the result of the country’s three-year recession and years of stagnation, bad loans restrict the bank’s ability to lend, which, weakens government’s efforts at rejuvenation and contributes to unease in Brussels. Earlier in the year, Brussels signed off some $170 billion worth of precautionary measures to support Italian banks’s with short-term liquidity challenges. Yet, it is the pressure on capital that’s the greater concern, as evidenced by stress tests in July.
These concerns were particularly associated with Italy’s third-largest bank, Banca Monte dei Paschi di Siena (BMPS), which has close ties with Renzi’s center-left Democratic Party (PD). While BMPS claimed it had secured underwriters to back a turnaround, the stress tests found the bank to have the greatest challenge out of 51 of Europe’s top banks to cover its toxic loans in adverse economic conditions.
In Italy, the inability to cope with a substantial share of non-performing loans (NPLs) in the banking sector may well subdue bank lending, which will keep brakes on consumption and investment.
In summer, the rating agency DBRS placed Italy’s last “A” credit rating on review citing uncertainty over the October referendum. DBRS is one of the four major agencies whose rating the EBS can use to keep Italy in the top band for collateral requirements for its lending to banks. A downgrade would bring Italy’s sovereign rating to BBB, which would raise the cost for Italian banks of using government bonds as collateral for ECB loans.
Recently, the neoliberal Financial Times reported that as many as eight of Italy’s troubled banks “risk failing” if Renzi lost the referendum and ensuing market turbulence deters investors from recapitalizing them, citing senior bankers. The timing of the report indicated tacit support for Renzi; the message, in turn, has been well-known in banking circles for quite a long while.
The recent shareholder approval of BMPS’s €5 billion recapitalization is an early step to save the bank. But far more is needed, even though the timing could not be more unfavorable.
After the UK Brezit referendum, the Trump triumph in the US and the overthrow of the Renzi regime, Italy’s banking crisis is contributing to a longer-term destabilization, which is likely to reinforce the fragmentation of Europe. In Washington, that is typically seen as the result of “populism” in Italy or elsewhere in Europe. In contrast, Italian opposition forces tend to argue that much of the country’s current economic stagnation and political fragmentation is, at least indirectly, the result of US interventionism.
How Tangentopoli and CIA paved way for Berlusconi – and Renzi
Following the end of the Cold War, Italy’s ruling class disintegrated after a nationwide judicial investigation into political corruption in the early 1990s. The Mani Pulite (‘clean hands’) investigation resulted in the demise of the First Republic and the dissolution of many political parties, even suicides of high-profile politicians and industrialists. At one point, every second member of the Italian Parliament was under indictment. Thanks to corruption charges, more than 400 city and town councils were dissolved.
Known as Tangentopoli (“Bribesville”), the corrupt system amounted to an estimated $4 billion, mainly from bribes for large government contracts.
Investigation began to expand in early 1992 when judge Antonio Di Pietro arrested Mario Chiesa, a member of the Italian Socialist Party for a bribe from a cleaning firm. As the party began to distance itself from Chiesa, the latter started to give out information about corruption that implicated the party itself. Soon thereafter, the investigations snowballed. That, in turn, led to the fall of the center-right Christian Democracy, while frustrated Italians turned from moderate parties to far-right Lega Nord (LN). By 1992, investigations began to shake moderate mainstream parties, the government-controlled energy giant ENI and veteran national politicians, including Bettino Craxi who accused judge Di Pietro of having provoked a “false revolution” of investigating only some politicians, while ignoring the opposition parties.
In national politics, the most critical result was the fragmentation of major center-left parties. Like in Brazil today, allegations also emerged about a ‘soft coup’ orchestrated by Italian judicial investigators and the CIA. Among others, US Ambassador Reginald Bartholomew said that, behind the operation, the CIA helped Italian prosecutors to accuse politicians – especially those who did not represent US interests in Italy.
As such, this kind of intervention was not exactly new in Italy. It goes back to the 1970s and 1980s “Years of Lead”, when Italy coped with waves of terror attacks and assassinations by neo-fascist terrorists. The latter, in turn, were associated with US-led Operation Gladio; a codename for a clandestine NATO “stay-behind” operation in Italy (and many other Western European countries) during the Cold War, led by the CIA. Leaning on the “strategy of tension,” these groups used extremism to foster destabilization, which would lead to demands for “law and order.”
The destabilization resulted in the center-right, pro-US Silvio Berlusconi’s four governments between the mid-1990s and 2013; until he was convicted of tax-fraud. These two decades also led multiple left-wing and center-left politicians consolidate their combined forces into Renzi’s Democratic Party (PD), which was acceptable in Washington. While Berlusconi represented the center-right in Italy, Renzi belongs to center-left. However, neither was a Eurosceptic, both supported US-led globalization, the NATO and military interventions in the Middle East..
Today, times have changed, as Grillo now puts it.
Renzi wanted structural reforms, EU integration and US cooperation. Despite its Euro-skepticism, the M5S supports EU membership, but also national referendum on the euro. Salvini wants political power, exit from the euro and Euro-skeptic cooperation with Russia. Yet, after the Brexit threat, Brussels cannot afford Italexit.
That’s a recipe for new uncertainty and volatility from Italy to France and German – all of which will face critical elections next year.
The commentary was originally released by The European Financial Review on December 7, 2016 http://www.europeanfinancialreview.com/?p=12062