The reason why I said the disenfranchised Italian citizens were voting against their own short term interests is because the banks will be in worse shape than they otherwise would be if the reforms had passed. The health of the banking system reflects the health of the overall economy and the economy needs a functioning banking system to grow again. Italy is the only developed country with a lower GDP per capita than in 1997 partially because of its weak banks. Normally I’d advocate for bankruptcy because I am in favor of capitalism, but this system is so foregone it’s tough to have that happen without severe consequences.
The government telling citizens to buy bank debt ensured that a bank’s collapse would wreck the entire country’s financial system. Therefore, banks cannot be allowed to fail. A zombie bank is better than a failed bank. A zombie bank is one which cannot overcome its bad debts and keeps requiring new capital infusions from government and investors. An investment in an Italian bank is an investment in Italy’s future. Since reforms were voted down, this makes selling the investment to buyers even tougher. It doesn’t cause an immediate collapse in banks, but makes fixing the issues tougher. Voters may have liked the fixes, but either they didn’t like who was orchestrating the fixes or they wanted to leave the EU entirely. The fact that Italy has had a new government almost every year for the past several decades is part of the reason why reforms haven’t been passed. Therefore, as the political winds change, we get more of the same from Italy.
The ECB bought Italian stocks and the Euro to avoid a potentially calamity, but even so Monte Dei Pasche stock fell 4% today. It is ‘small potatoes’ for the stock given the over 90% collapse it has seen in recent years. What this referendum does is make the potential upside scenario even more remote. Matteo Renzi planned to go ahead with a plan to raise 5 billion Euros for the bank after a government bailout was rejected by EU leaders. Now the man in charge of the plan is about to be gone and the environment for investing in Italy is more toxic, making that plan to raise money by the end of the year less likely. Whoever takes charge of Italy’s government prior to the next election will try to orchestrate a government bailout which will be politically difficult unless some bondholders take losses. The government will have to make sure the citizens who bought the bonds don’t take a loss because if that happened the bank would be healthy, but there would be no depositors.
These problems are largely political. Although the citizens want to see a fresh face in power, that won’t change the situation. As I said, Italy has been changing governments like people change socks. What is needed is reform. Matteo Renzi was a skilled technocrat who would have been the best suited to orchestrate the bailout of Paschi. Although Renzi was viewed as an untrustworthy, his reforms were a step in the right direction. Hopefully for Italy they can use some of his ideas when the populists gain the power in the next election. He wanted to make it easier to fire workers to spur hiring. This is the same issue we have in America. If there are too many regulations protecting workers, then it makes it too expensive to hire new ones. Another reform Renzi wanted was to speed up the court system to make it easier for banks to collect collateral on bad loans. When Italians were voting against Renzi and a corrupt system, they were also voting to support the corrupt system with this clunky court system. If banks could collect on bad loans, they’d also need less bailout money from tax payers. The enraged voters probably would support this change, but thought it was more important to express their dissatisfaction with government than make some changes.
Another issue the election was about was how Italy was treated in the European Union. It is an objective fact that Italy has had anemic growth since entering the EU. Voters like to blame Italy’s treatment for its problems. This is somewhat true because if Italy wasn’t in the EU, it could devalue its currency to help its competitiveness. The problem with this election is Matteo Renzi was the best suited to negotiate with the EU to get a better deal for Italy because of his political connections. He would have had the best chance at allowing Italy to spend more money to spur growth instead of forcing pension cuts as a form of austerity.
I think most Italians did agree with these proposals, but were afraid to vote to eliminate the Senate’s power to get them done. Maybe they also don’t like the idea of asking EU leaders in Brussels and Berlin for the ability to run their own government. It appears those in favor of a “Yes” vote want to draw the conclusion, that the election was about the reforms and not about Italy leaving the EU. However, they are also the people who would be in favor of remaining in the EU so it shows the high overlap with both stances. The tow possible reasons for voting “No” while supporting the reforms are a personal disdain for Renzi or an interest in leaving the EU. Given Matteo Renzi was in office for only two years and had great political connections with EU leaders, I don’t see how this was a direct vote against him as a politician. The only way a voter can logically vote against reforms which they like is because they want to leave the entire EU project.
Conclusion
In Italy and America, we have seen some weird voting patterns which draw stark comparisons. In America Trump was widely seen by voters to be unqualified. It is quite something to imagine someone voting for a candidate they feel is unfit to do the job. Trump had a powerful populist message which resonated with voters despite his problems as a candidate. Italian voters decided to vote against reforms they would likely support to put Italy down a path of leaving the EU. That is my conclusion when looking at the economic environment, polling, and speaking to some Italians.