EU Parliament President Martin Schulz has resigned. Just as the EU sinks deeper into the quagmire of its own making Herr Schulz seemingly wants to run against Angela Merkel for Chancellor next year. The triumvirate of Schulz, Juncker & Tusk was supposedly inseparable but one wonders if it has become insufferable this year with the prospect of 2017 becoming even worse. Think about it – Brexit, the ditching of a free pass by the Swiss to join, the mess with Turkey over refugees, the parlous state of Greece, an Austrian presidential election that exposed the lack of respect for member state democracy by the EU, a touch and go referendum in Italy and the growing chances of a Le Pen presidency in France on top of an EU economy at stall speed with limited options.
Italy holds its referendum on Dec 4 this year. Italian politics is rarely devoid of scandal or controversy. The referendum is to do with reforming the constitution with a focus on limiting power in the Senate so laws can be passed quicker. If you believe polls, 42% don’t want change. 37% do. Referendums in 1993 and 1997 failed. PM Renzi has threatened to resign if it fails to carry. In a sense the referendum had been tracking ‘yes’ until he staked his career on it (are you listening David Cameron?) and the mood switched. Renzi thought the threat would work in his favour by alarming voters he’d throw the country into more political gridlock. The idea that Italians are “concerned by instability” is rather humorous. I am trying to work out a period when Italy had stable political leadership. Here is a list of PMs since 1976 (all 24 of them):
1. Aldo Moro – 1974-1976
2. Giulio Andreotti – 1976-1978
3. Francesco Cossiga – 1979-1980
4. Arnaldo Forlani – 1980-1981
5. Giovanni Spadolini – 1981-1982
6. Amintore Fanfani – 1982-1983
7. Bettino Craxi – 1983-1987
8. Amintore Fanfani – 1987-1987
9. Giovanni Goria – 1987-1988
10. Ciriaco De Mita – 1988-1989
11. Giulio Andreotti – 1989-1992
12. Giuliano Amato – 1992-1993
13. Carlo Azeglio Ciampi – 1993-1994
14. Silvio Berlusconi – 1994-1995
15. Lamberto Dini – 1995-1996
16. Romano Prodi – 1996-1998
17. Massimo D’Alema – 1998-2000
18. Giuiliano Amato – 2000-2001
19. Silvio Berlusconi – 2001-2006
20. Romano Prodi – 2006-2008
21. Silvio Berlusconi – 2008-2011
22. Mario Monti – 2011-2013
23. Enrico Letta – 2013-2014
24. Matteo Renzi – 2014~
The stratospheric rise of the Euro-sceptic 5-Star Movement (M5S) could benefit from the electoral rules (Italicum law) which changed in July 2016 which grants a party that wins over 40% of the vote it wins 54% (a minimum of 340 out of 630 seats) of the Camera.
The Economist wrote of the party that aims to #draintheaqueduct “the M5S chooses its electoral candidates in online ballots. Save in municipal elections, it does not accept anyone who has served more than a term as a political representative of any sort. The intention is to guarantee that its lawmakers and office-holders are free of the compromising links that are rife in Italian politics. But one effect is to ensure they are equally untainted by experience and, sometimes, ability.” M5S is polling around 28% vs Renzi’s Democratic Party at 32%.
There in lies the rub for the establishment. Around the world, they are fast learning that political experience and ability are outweighed by the promise of change and the ability to call a spade a spade. Rome’s Mayor Ms. Raggi (M5S) has bounced from one problem to another after being left a city in deep debt and political scandal. Reality is often different to the dream.
Still if Renzi loses and he resigns, Italy maybe thrown into a snap election and if the M5S wins a majority that will have implications for the bond market. A party that looks to exit the euro will potentially raise large scale bank default risk. Holders of Italian euro-denominated debt would be stuck having to receive a devalued lira on top of wholesale dumping of Italian debt proving a double whammy. Banks are not required to hold capital against government bond holdings but such losses could well create insolvency issues. At the start of October this year, Italian 10-yr government bonds traded at 1.2% yield. It is now 2.13%.
So the risk of the Italian referendum is perhaps being viewed by Schulz to take an emergency parachute to pursue a German state political career than his once Utopian ideal of the EU. It is telling. Surely he stood to gain much greater power in the long run if he truly believed in his beloved EU project. Resignation suggests he may believe the writing is on the wall and better to retreat to his homeland to keep what is left of a career alive. A true contender to Merkel? It remains to be seen but do not discount his move as a precursor to the dwindling fortunes of the EU movement.