Why The Hysteria Over The Italian Referendum?

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By Bernardo Ferrero

Italian Prime Minister Matteo Renzi has announced his plans to resign in the wake of the resounding defeat suffered on Sunday as exit polls revealed a No victory with a 20% margin. Right up to election day, as he was busy traveling around the country promising new gifts to voters - the most recent of which involved an increase in state worker's salaries by 85 euros - he was oddly being described as the "pro-market" candidate! Meanwhile the media, including politicians, economists, and a broad range of commentators, have continuously depicted the vote as a vote of no return for democracy and government stability. CNBC modestly described the referendum as "the most significant European political event of 2016. Yes even bigger than Brexit." The Independent alerted its readers of the continuity between Trump's election and a possible No vote; The Financial Times spoke about a high risk of a severe Banking and Euro Crisis on Monday morning. But is it really like another Brexit or Trump? Is Italy's referendum decisive to bring about the collapse of an already collapsing banking sector?

What Did the Italians Vote On?

On Sunday, Italians voted neither for exiting the Euro nor for paving the way to pro-market reforms. The vote amounted to a judgment on Renzi's political future, as citizens were faced with the decision of whether to accept or not a reform that aimed at strengthening the executive branch.

The reform package included:

1) the abolition of the balanced bicameral system: instead of the lower and upper house having the same exact powers, the Senate would have lost - except with regards to international or constitutional matters - many of its political functions such as that of being able to vote laws against the lower house and holding a vote of confidence.

2) a reduction in the number of senators from 315 to 100 (74 of which would have been regional councelors, 21 mayors, and 5 picked by the Head of State) elected not via direct popular votes anymore but through regional councils.

3) a revision of Title Five: transferring more legislative authority from the periphery (regions) to the center in cases where national interest ought to be followed.

4) the elimination of the CNEL: an organ of the state that offers consultancy to the executive and parliament with regards to economic matters.

Had the Yes won, Renzi would have seen both his position as Prime Minister and his constitutional reforms approved, which would have meant a majority both in the lower house and in the Senate, since 17 out of 20 regional administrations are currently in his party's hands. However, the No vote prevailed, and as Renzi resigned Sunday morning, the ball has now bounced to the Head of State, who will follow the country through an electoral reform and appoint the person who will govern until the end of the current legislative session (2018).

No, This Is not like a Trump or Brexit

According to The Telegraph, this vote "could open the way to the anti-establishment Five Star Movement, which says it wants a referendum on whether Italy should abandon the euro as its currency." Such a fear has brought newspapers, like The Guardian, to connect Sunday's vote with the Trump and Brexit shocks, not least because of Renzi's declaration, a couple of days preceding the referendum, that Italy would have pursued a stronger position in the EU were the reform to pass.

The idea that the Five Star Movement - founded by Italian comedian Beppe Grillo - will rise to power as a consequence of a No vote is by no means guaranteed, however. The movement's success will depend on several new changes of the electoral law. Grillo, in order to govern (for his party has always neglected the possibility of entering alliances) will need an absolute majority, which will be extremely difficult were the country to turn to the newly proposed electoral system in the Senate. Yet even the comparison between the Five Star's anti-euro stance and the Brexit anti-EU campaign ought to be rejected. The error in equating these two movements lies in a more subtle confusion between political and monetary sovereignty. The Brexit movement aimed for political independence from the EU. The Five Star movement, on the other hand, seeks "monetary sovereignty," which is really just a more polite term of saying they want to print more money independent of any political restraint. With this in mind then, it is not surprising that when being asked, Grillo has never believed in abandoning the political union. As he told his followers during the Brexit campaign: "The Five Star movement is in Europe and has no intention of leaving it."

Will The No Vote Trigger a Banking Crisis?

This menace of future political turmoil has also been coupled with the fear of economic calamity. The Financial Times wrote that the outcome of a No vote would trigger a financial panic, with the possible failure of 8 Italian banks, as the banking system currently holds up to 360 billion euros worth of non-performing loans vis-a-vis 225 billion in equity. What these proponents argue is that this vote against Renzi will trigger a confidence crisis that will slow down the bailing out procedures the government had planned and at the same time discourage investors from underwriting the necessary re-capitalizations of these troubled banks. What they forget to mention, however, is that a crisis of confidence already exists: 36% of all citizens prefer to hold their wealth in cash at their house rather than in a bank due to the suppression of market interest rates, increased regulations and greater economic surveillance that unfolded in the past few years.

Just a question: how could confidence in markets be revived if the reward on future oriented-ness (the rate of interest) is non-existent or negative? The culprits, therefore, are not the No or the Yes voters, but those unconventional and easy monetary policies pursued by the ECB which, coupled with the accounting imbalances of Italy's government, have fueled a vicious cycle of financial leverage and debt collaterization, leading financial institutions to enter markets they would not have entered had these monetary manipulations been absent in the first place. Now let's solve this enigma: is it bad for these banks to fail after years of unsuccessful policies aimed at propping them up at the taxpayer's expense?

No! Contrary to popular belief, rewarding failing banks with bailouts is acting like a mechanic that fills fuel tanks with Coke (and not with petrol). It only results in a wasteful use of one's own resources and in a net loss for society. It props up poorly managed banks that channel funds away from productive activities and into valueless assets that will increase these redistributive effects. This does no good to the economy or for the taxpayer's pocket. Failure ought to be viewed as the best solution: only through a process of regeneration will these financial institutions return to serve their intended purposes as intermediaries between suppliers and demanders of present goods.

While hysteria has dominated this political campaign, the Italian state cannot turn fantasy into reality. With a state that manages and directs more than 50% of the total economy, the problems lie not in a Yes or a No vote on a referendum. Instead, we are only witnessing the continued postponement of a necessary free-market revolution.

Disclosure: No positions.

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