December 4th is the Italian election which means on Monday we will know the results and possibly the implications of them. Those predicting the “No” vote will win the election are calling for an increased likelihood of Italy leaving the Euro currency and possibly the European Union. The details of how we get to a point where a referendum to leave the EU comes up for a popular vote are unclear, but the sentiment trends towards it happening are obvious. If a referendum does come up at some point in the next year or two, I think there would be a higher than 50% chance it would win. As you can see below, there is now a 20% chance of Italy leaving the EU in the next 12 months.
The election Sunday is over the proposed reforms Prime Minister Matteo Renzi wants to put in place to put Italy on a path of growth, so it can finally get out of the doldrums it has been in since entering the European Union. Matteo Renzi wants to change the power structure of the Italian government, which means getting rid of the Senate and only having one lower house. This would centralize control in the Prime Minister’s hands which lets him get economic reforms through.
This change is similar to the nuclear option which was passed by Senate Democrats a few years ago. It limited the ability for an individual Senator to filibuster a presidential nomination. This centralization of power was great for Democrats in the short term, but now looks scary to them because it gives President Trump an easier pathway to nominate whoever he wants. The risk to centralizing power is when the opposition gets in charge it may abuse it.
Matteo Renzi wants to decrease the power of local governments to unify Italy and get the economy going again. It is ironic because this change would make it easier for the 5-Star Movement to put through measures for Italy to leave the Euro currency, even though Matteo Renzi opposes that. These globalist politicians have no concept of the pain the ordinary citizens are feeling and do not see the tidal wave of support their opposition is receiving. The Democrats in America didn’t see the Trump election coming and the politicians in the U.K. didn’t see the Brexit occurring. If the establishment simply understood the woes of the average person and spoke to them, they would be able to stem the tide before it completely wipes them out.
The chart below shows the latest polling support that the populist parties in Europe are getting. Italy’s 5-Star Movement has almost triple the support of UKIP. This is likely because Italy’s government is seen as more corrupt than the U.K.’s government and because being a part of the European Union has done more damage to the Italian economy. Considering the Brexit won by a few percentage points, extrapolating this poll to an Italeave would lead me to believe Italy would vote in favor of leaving the EU.
The chart below shows an older poll from the spring which has 48% of Italians approving of leaving the Eurozone. The momentum is clearly in favor of Italy leaving the EU, so I’d expect the current sentiment to be higher.
I am highly skeptical of a “Yes” vote winning, but if it does, it would make it easier for the 5-Star Movement to go through with a referendum on leaving the EU. This is because “Yes” would eliminate the upper house of the Senate which is appointed and give more power to the lower house which the 5-Star Movement is gaining control of. The 5-Star Movement would need to form a coalition government with the Euroskeptic Lega Norda party. The only way a “Yes” vote would hurt the 5-Star Movement would be if Matteo Renzi’s reforms work quickly and Italy’s economy gains steam. The weakness in the banking system and global economy makes this challenging.
The issue in determining the course of Italy over the next two years is one of political momentum vs. legislative technicalities. The legislative technicalities are whether Matteo Renzi resigns if the “No” vote wins, who replaces him, and if the 5-Star Movement will be able to form a government to get a referendum through before the next election in 2018. The political momentum is feeding off the global trend of unrest with the political elites and the weak economy for the working class. Italy is the country most ripe for this type of change because of the chart below. It shows Italy’s economic competitiveness has declined since 2011 and is the 3rd worst in the EU.
If you are objectively looking at the political risk facing the EU, it is impossible to not conclude the EU’s days are numbered. Italy is the third largest country in the EU, so if it leaves, the project is over. Germany has done well under the EU’s creation, so it always has an incentive to come to the aide of the weaker nations to prop up the system. However, the German people do not like doing this as they do not understand the game theory behind it. This populist revolt against bailouts is why the EU has put into place rules where bondholders need to take a haircut (bail-in) before the government bails out a bank. Once again, this populism in Germany does not consider the consequences of their actions because Deutsche Bank is going to need a bailout. Whether it is populism versus the elite, populism versus logic, or populism vs. legislative technicalities, I will always expect populism to win because of the discontent of European citizens. Every aspect of life is integral in this wave of political upheaval. With that statement, I am referring to the EU citizens’ discontent with the politicians’ handling of the migrant crisis.