James Bevan: Stakes high as Euroland faces five star disruption
0The perceived threat is that the pro-European Union party in power under Mr Renzi’s wing will be outflanked by the populist Five Star Movement (M5S), which favours exiting the euro. If that were to happen, Euroland could fall apart.
Whilst there are many who are focused on the Chancellor’s Autumn Statement, the next big event to influence markets will be on December 4th when Italians will vote on a referendum that could destabilize the Euro project, or at least contribute to the wave of global populism reflected by the Brexit and Trump votes.
Many don’t understand what the vote is on, and put simply it is about attempting to achieve a decisive process for decision taking in Italian politics. At present Italy has what is described in textbooks as a “perfect” bicameral system, with two chambers that hold the same level of power as the other, which often leads to gridlock. With the referendum in force, one of the chambers will have less power. The Senate would be reduced from 315 elected politicians and six lifetime appointees to just 100 seats. It would include 74 regional councillors, 21 majors, and five presidential nominees. Instead of a lifetime term, the latter would serve for only seven years. The changes would tip the balance of power from the Senate toward the Chamber of Deputies. When it comes to constitutional matters, the Senate still will have veto powers, but the Deputies will get final say on routine bills. The Senate will have the opportunity to review everyday bills if a third of members want to. But they won’t get final approval. These proposed changes have gone through both chambers, but the two-thirds of the vote required was not received, so the referendum has been called.
So the referendum is not directly about the EU or the Euro system at all, and an Italian ‘no’ vote need not lead to Italy leaving the EU and/or Euroland, but there’s a lot at stake, including the constitutional functioning of the Italian government. Mr Renzi promises that if he wins, that the reforms will provide for less legislative gridlock and more governmental stability, and that he will resign the leadership if the referendum is defeated, with defeat implying more ongoing political chaos and economic stagnation. But there will also be an opening for alternative parties to step into power. The perceived threat is that the pro-European Union party in power under Mr Renzi’s wing will be outflanked by the populist Five Star Movement (M5S), which favours exiting the euro. If that were to happen, Euroland could fall apart. M5S doesn’t currently have any intention to lead a charge to leave the European Union, but its views are predominately Euro-sceptic, anti-establishment, and anti-globalist – and with Italy deep in debt, and its banks distressed, any pressure on Italy’s economy could destabilize the already unstable Euro system. In terms of risk magnitude, a ‘no’ vote could be more damaging, at least in the short term, than Brexit has been so far and it could be seen as another sign of the rising populism and nationalism around the world.
That said, Mr Renzi would retain his post at the helm of the centre-left Democratic Party, the biggest party in parliament, and therefore a ‘no’ vote could have little practical influence in the short term if Mr Renzi works closely with the new figurehead PM. Mr Renzi confirmed back in August that Italy’s general election would be held in 2018 as planned no matter the outcome of the referendum.
The next Italian general election could be interesting with M5S gaining popularity. Its leader is Beppe Grillo, a comedian-turned-political-activist with a blog promoting his populist views. But he is no joke. Increasingly, Italians, especially nationalists, like him and his party. It’s been widely publicized that the M5S could lead Italy to become the next country to leave the European Union. However, Mr Grillo has said that he hasn’t even contemplated doing so, and although he apparently wants a referendum on whether to drop the euro, Article 75 of Italy’s written constitution explicitly states that Italy cannot hold a referendum on anything related to international treaties.
Taking a couple of steps back, there may be a positive outcome from a ‘no’ vote in that the euro could weaken, directly helping Italy, and any sort of change might help revive Italy, even if it hurts at first. Equally, if the vote is ‘yes’, we should recognise that there’s a decent chance that Mr Renzi could then lead the country into a new era of stability and growth.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
