Italy And The Future Of The European Union

Given that Trumpfreakout may guarantee relatively pro-EU politicians winning in France and Germany in the near term (France less certain than Germany), many are now looking at Italian elections next year as the next time when there may be a serious threat in a major EU nation of a leader being elected who may want to pull the nation out, following the UK example.  The most likely candidate for pulling off this feat would be Chiara Appendino, the current apparently fairly competent mayor of Turin, and the new rising star of the Fiver Star Party, with Rome's Five Star mayor having gotten bogged down in corruption scandals, and long time party leader, Beppe Grillo, more likely to stay in the background.  Why might this come about, quite aside from the fact that the Five Star Party is now dead even with the ruling Democratic Party in polls after rising?

The obvious main explanation is that the Italian economy has simply been dead flat since around 2000, in contrast to the other large EU nations: Germany, France, UK, Poland, and Spain.  The latter certainly has had some worse experiences in the last decade and a half, notably a much higher unemployment rate.  But that has been coming down in more recent years as Spain has gotten it together and finally gotten growing, despite crises and debt issues.  Italy never had it as bad as Spain, and certainly never as bad as still declining Greece.  But its stagnation has begun to really sour, and those who claimed to fix it have fallen on their faces, with the EU itself increasingly putting unpleasant pressures on Italy that are drawing forth resentment.  The Five Star Movement may be semi-incoherent and contradictory in its populism, but it seems to be rising as the ruling PD (Partita Democratia) has increasingly floundered, and it has a strongly anti-EU position.

Frankly it is not obvious why Italy has done so poorly in the last decade and a half, especially in comparison with previous years.  It may be that it is getting into the euro and losing the ability to devalue periodically, while underlying problems in the Italian economy and society remained.  But Italy was quite dynamic prior to the turn of the century, one of the growth stars of the EU in many years, with a strong position in such areas as luxury clothing and expensive sports cars, as well as several other areas.  They continue to have strength in those areas, but have increasingly faced foreign competition in them, with the Chinese playing an important role.  But then the Chinese have been competing with other EU nations. Why has Italy found it so much harder to maintain its position?

Also, most of the underlying problems in Italy were certainly there prior to 2000, notably an excessive bureaucracy, major corruption, as well as some stodgy state-owned enterprises, with some of these features dating back to the fascist era, if not earlier.  It is not obvious that they have gotten substantially worse, and there have been major anti-corruption and anti-Mafia campaigns, even if they may not have been as successful as the headlines would have it.  But somehow these problems have exacerbated a declining ability to maintain leadership in many sectors, and the economy simply has stagnated, even if not collapsed.  Some blame the fact that it has not collapsed on the inability to get the society to do anything serious about the entrenched problems, which may be true.

A particularly vexing problem has been the troubled financial sector, whose opacity and complexity is seriously daunting.  The poster boy for all this is the world's oldest bank, once Italy's largest, although now down to third, Monte dei Paschei di Siena (MPS), founded in the 1400s.  Indeed, modern banking began in Tuscany, with Siena, Florence (with the Medicis), and Pisa competing for being most innovative in developing double-balance accounting, the use of Indo-Arabic numerals, and so  forth.  The very word "bank" comes from a bench (banca) in Siena where guild leaders sat in the Middle Ages.  Its books and operations have long been complicated, with its museum even showing black books" from earlier centuries where the bank hid actual transactions from outside authorities.  To some degree, the problems of MPS are recent, with the bank getting involved in flaky investments during the runup to the last financial crisis, with these blowing up big time.  The bank has been trying to save itself ever since, with multiple bailouts and rollovers and eliminating financing the Palio horse race in Siena as well as other civic functions there.  However,  its problems have persisted, aggravated by the general stagnation of the Italian economy, and it has come down to regulatory bodies in the EU arguing that no more EU funds should be provided for helping the bank out and effectively arguing that it should simply be closed.  The EU view is that if the Italians want to save this ancient monstrosity, they should pay for it themselves with their own taxes, but economic stagnation in Italy has also led to serious fiscal problems, and the Italians have been loath to provide open-ended support for MPS.  As of now, it remains unclear what will happen, but increasingly many Italians have become resentful of the EU attitudes on this matter, with many fearing that if MPS goes down it might take down many other Italian banks, whose interconnections are murky at best.  Indeed, many in Frankfurt also worry that such a collapse could spread beyond Italy to other parts of the EU.

So, have the Italian polticians tried to respond to all this?  Yes, but not successfully.  The most important player here is Matteo Renzi, former mayor of Florence and recently reelected as PD party leader in a hotly contested three way race.  He had been serving as Prime Minister since 2013, a young man viewed as dynamic in the mold of Obama and Justin Trudeau.  He proposed a major referendum to  make major reforms in the Italian political system.  This had many parts, with the most important involving reducing the powers of the judiciary (seen as behaving arbitrarily), imposing testing in the school system, eliminating the provincial layer of government (essentially equivalent to US counties and mostly not doing much now), reducing the power of the Senate, as well as major changes in other areas.  Renzi campaigned hard for his referendum, which went up for a vote in December, 2016, declaring that if it did not pass, he would step down.  It did not pass, and he stepped down, to be replaced by Paolo Gentilone, a former far leftist, now moderate smoother-over, who might yet emerge as the PD candidate, although most think it will be Renzi running again.  One problem with the referendum appears to be that it simply had too many items in it, and while many were generally sympathetic, there were too many things that upset too many entrenched groups, with the education and judicial proposals for it to pass.  Indeed it may well be that this is where a bigger economic crisis might have helped Renzi out. Complacency won, but now many are more disillusioned.

Which brings us to more recent matters, which I am aware of because I have been living in Florence for the last three months (leaving tomorrow, which is why I am posting this now while still on top of all this) and following local language media, as well  as talking to various economists and others around the country.  The supposedly clean and dynamic Renzi, whose family are practicing Catholics even though he is of the center left, has now become personally besmudged.  The problem is not him, or at least not so far directly, but his father, Tiziano, a former local businessman and figure in the old Christian Democratic Party, who became a regional PD leader.  There has been a stream of reports linking him to corruption scandals involving public contracting over the last few years.  It has been a drip drip drip sort of thing, rarely with any really dramatic story that would make major headlines in the foreign media, although the story has had some foreign coverage, but repeated top headlines in the papers across the political spectrum.  This has undoubtedly played a role in the recent decline of the PD in polls with the Five Star movement rising, with the PD the main pro-EU party and the Five Star movement opposed.

There are many political parties in Italy, but there are two main other large ones, both of them on the political right and also to varying degrees critical of the EU.  The most anti-EU one is the hard right Lombard League, which has little chance of coming to national power as it is essentially a regional northern party that would also like to leave Italy so as to stop sending money to the poor Mezzogiorno south.  The fourth is Forza Italia, the party of longtime former leader, Silvio Berlusconi, who resembles Donald Trump in all too many ways.  The FI has been critical of the EU, but has taken a somewhat softer line than has either Five Star or the Lombard League.

This has led to my final observation, based on carefully reading the back pages of the local Italian papers, where an important matter is who is appearing in photographs and how often?   I have all along known that Matteo Renzi is a major player because he always has his photo  in the papers, even if way inside, for whatever he is doing.  People know he is important, and he continues to get lots of attention.  But in the last month or so I have noticed a very curious phenomenon, the sudden reappearance on a regular basis in photos, even in papers that do not like him, of "Il Cavalieri" ("the Knight," really), that wily old scoundrel Berlusconi, all dressed up and looking like his old self.  I am speculating that it is not out of the question that this man might yet make a reappearance as leader.  Why?  He is perceived as not as anti-EU as the leaders of either the Five Star Movement of the Lombard League, and if Renzi continues to get dragged down by the problems of his father, those who want to stay in the EU might well go for the old dog.

Nevertheless, the most likely scenario is a showdown next year between Renzi of the PD and Appendino of Five Star, with membership in the EU a central issue, and by then people more used to Trump being in office, whatever the heck he will be doing by then. 

This is important not only because Italy was one of the original six members of the European Coal and Steel Community (along with France, West Germany, and the three Benelux countries), but it was the site of the founding of the European Economic Community, the predecessor to the EU, in the Treaty of Rome, signed on March 25, 1957, whose 60th anniversary was just observed.

Ciao, you all.

Barkley Rosser