The difficult Italian job for Germany

Unlike the Brexit vote in the UK or Donald Trump’s election as president of the US, the meaning of Italy’s recent failure to approve certain constitutional reforms in a referendum is not as clear and may have greater short-term effects.

With Brexit and Trump’s election, the British and American people voiced their opposition to the establishment. It was the roar of the shrinking and impoverished middle class that feels under siege by the joint assault of global delocalization and rising waves of immigration.

The Italian vote also has this element, but it was more influenced by two other components: the euro (which interested the UK and the US only indirectly or marginally) and the political balance of power in Italy (a mystery coated in cryptography for foreigners and a national pastime, like football, for Italians).

The combination of these two elements, with different degrees of importance for the world, makes the present Italian predicament a dangerous mix. Shortly after the vote, one of the leaders of the Five Star Movement (5SM, a recently established coalition without a large political platform, campaigning for “honesty in government”) said he would propose a referendum on Italy’s withdrawal from the euro. If the Brexit, even with the UK not being part of the euro, is proving technically difficult and a possible blow to the global financial order, the Italian exit from the euro could be the start of an earthquake—certainly in Europe and perhaps in the whole world.

These massive consequences would first and foremost hit Italy, with a debt-to-GDP ratio of 134%. Yet they are casually discussed by some Italian senior politicians and journalists, as if they were pondering whether a penalty kick was justified or not.

Moreover, in the wake of the vote, everybody is claiming a win, which is typical for Italian politics. Each enemy of recently resigned Premier Matteo Renzi, who pushed for the referendum and urged “yes” votes, all maintain that the 60% of “no” votes are theirs, and not motley pool of different opinions as they possibly are. Renzi conversely argues that the 40% who voted “yes,” which is slightly more than his party’s share of support, were on his side.

Everybody is shouting for a new vote, although there presently is no clear electoral law (the old one dropped with the referendum and the constitutional court has to rule on it at the end of the month). Moreover the Italian banks are on the verge of bankruptcy and new political in fight would further damage their forecasts. In all of this, Italian president Sergio Mattarella (who has no executive powers but can open wide-range consultations) is wisely reluctant to plunge into yet another political campaign of very uncertain outcomes.

Giorgio Vittadini, leader of the very influential Catholic organization Comunione e Liberazione, was the only one who, to my knowledge, correctly predicted the referendum outcome, saying “no” would win by a landslide. He also now believes that in a few months the 5SM might take power. This would bring a revolution that is not necessarily positive to Italy. The old Italian establishment is fretting over how to change laws and regulations to prevent this from happening. Some are dreaming of going back to the electoral law that allowed for almost half a century to freeze the 30-35% of the communist votes.

But this could prove difficult. Unlike with the communists, there is no international veto on the 5SM and they are now reaching out to Trump in America. Besides, the freeze of the communist in a political corner eventually wore down the whole system, and now this erosion could happen much more quickly than in the past. The reality is that the country is extremely split, and these divisions have to be addressed to avoid a massive break in Italy and Europe.

The first easy division is for or against Renzi, which doesn’t coincide with being for or against the constitutional reforms. Many who voted “yes” did so despite their distaste for Renzi; and many who voted “no” did it just to spite the young prime minister. So Renzi has proved very divisive, and the vote shows the cracks run very deep. Some 80% of the young people voted “no,” as did about 70% of southern Italy.

Therefore young southerners are desperate, and this might tear Italy apart—or more likely they could try to pull Italy out of the euro. This may happen in the medium or long term, but Italy’s tossing and turning could in the short term unravel the precarious status of Italian banks, which according to economist Francesco Giavazzi need an at least 40 billion euro injection (see https://www.ft.com/content/020460c8-bad8-11e6-8b45-b8b81dd5d080 ).

If voting is no solution because there is presently no clear law, what should be done? The 25 readers who have followed so far now are dispensed from proceeding further, because the scribbler will now engage in the real Italian national sport: distributing unrequested advice as if politics were a football match.

This is a bell tolling for Europe, not just for Italy, and Brussels and Berlin have to decide now, before the possible Italian parliament vote in March and the French presidential vote in May. The UK wants to pull out of the European Union, the US with Trump doesn’t care about the EU, Russia cheers for a weaker EU, Italy may sink further into dangerous bickering, and so Berlin, de facto capital of the continent, has to decide if it wants to give up on the union and revert to its beloved Deutsche mark.

Dragging out this decision will only worsen the state of affairs, as the past decade of mounting rifts in the Union prove. If Berlin decides it can do it on its own, it will simply hasten the existing trend. It will be easier at the beginning and rockier after, because the balance of global currencies will change. If Berlin decides to oppose this trend, it could be easier in the long term, as the euro will remain a global currency, but much more difficult in the coming weeks and months.

Here something has to happen in Germany and then in Italy. The euro must have a political capital with political responsibilities, and thus it needs to stand not just on the leg of one central bank but also on the leg of shared fiscal policies. If not every euro country can join in on the two-legged euro, then Berlin should proceed quickly on its own to stabilize at least part of the continent from the possible tsunamis coming from London, Paris, and Rome.

This means opening concretely to the possibility of a two-speed Europe. Germany and some of its best partners will need to close ranks on a super-euro, while the rest will stay on a simple-euro. This could have the extra benefit of appreciating the super-euro, and thus by reducing German trade surplus, cutting some temporary slack to the underperforming simple-euro members. Of course, this will also mean that a Kern Europa will be born, and the rest of the continent will have to deal with it, choosing between a plan to join it or drop off of the economic world map, at least for some time.

This would salvage the euro and grant some extra time to countries like Italy. There would be a lot of technicalities involved, such as how to account on old debts from the unified euro, but they are not insurmountable. A bigger problem will be electing an executive government of this Kern Europa, which can’t just be the leaders in Berlin but neither can they be the present bureaucrats in Brussels.

This leaves the rest of the euro countries with the stark choice of a purgatory in simple-euro (without political sacrifices) or the immediate paradise of super-euro, with the consequent surrender of fiscal, and political, sovereignty. In either case, for Italy it is very tough, unless it wants to slide into the hell of de facto joining up with Libya because of its growing poverty and unrestricted waves of immigrants from North Africa.

The next steps in Rome are thus very important, but so are the ones coming from Berlin. Without clear decisions from Berlin, Rome’s moves may just be scribbling in the sand.

Of course many will choose to drag their feet a little longer, wait for events to unfold even further to avoid difficult responsibilities. Yet perhaps in a few months might be too difficult to change. The ones who said “nothing happens” have been proved wrong already three times in the UK, in the US and in Italy, perhaps it is no time to wait for a fourth time.