Italy Tries to Skirt a Populist Revolt
Posted by hkarner - 31. Januar 2017
Source: The Wall Street Journal By SIMON NIXON
Country has taken steps to insulate itself, but long-term risks remain
Never underestimate Italy’s capacity to muddle through.
Following Prime Minister Matteo Renzi’s defeat in last December’s constitutional reform referendum, the country didn’t collapse into turmoil, as many had feared. There was no political crisis leading to a snap election that might have brought the anti-euro 5 Star Movement to power; nor did the fragile banking system implode.
Instead, a new prime minister was swiftly installed at the head of a largely unchanged government, which acted promptly to stabilize the banks.
Now, the Italian establishment has taken further steps to insulate itself against the risk of a future populist government: A constitutional court ruling last week struck down a proposed change to the country’s electoral law, which would have created a two-stage process for electing the lower house of parliament, with the second-round winner automatically receiving bonus seats to give it an absolute majority.The court ruled instead for a one-stage election with bonus seats only available to a party that receives more than 40% of the votes. In Italy’s fragmented political landscape, that high threshold makes coalition governments more likely.
Even so, there are risks to this muddling-through scenario.
First, the constitutional court’s intervention makes the prospect of early elections, perhaps in June, more likely. And even under a revised electoral law, a 5 Star government can’t be ruled out, whether because it achieves the 40% threshold or forms a coalition with other populist parties.
Despite relentless, critical media coverage about the performance of the mayor of Rome, Virginia Raggi, some polls put the party marginally ahead of Mr. Renzi’s Democratic Party.
Establishment critics question 5 Star’s competence, ideological coherence and governance but following what has become a familiar pattern across Western democracies, this appears to make no dent in its support. Instead, it is tapping into deep public discontent over corruption and resentment of a European Union that many believe has done little to help Italy with its twin challenges of migration and a stalled economy.
Second, the banking system still has the capacity to spring nasty surprises that could darken the political mood. True, the risk of a systemic Italian banking crisis now looks much diminished. The government’s promise of a €20 billion ($21.4 billion) fund to support the banking system halted a run on Banca Monte dei Paschi di Siena SpA, Italy’s fourth-largest bank and the primary focus of investor concern.
At the same time, shares in Italy’s largest bank by assets, UniCredit SpA, have nearly doubled since December, when chief executive Jean Pierre Mustier announced a radical turnaround plan that included a €13 billion rights issue and the sale of around €17 billion of bad debts, a landmark transaction that for the first time opens up a private market for nonperforming loans.
Yet, tricky questions about how the government will deploy its €20 billion remain. The European Commission has yet to confirm that a state rescue of Monte dei Paschi is consistent with EU rules. Brussels also needs to give its approval on the terms of any compensation offered to investors who may have been inappropriately sold junior bonds and now face having their bonds forcibly converted into shares.
The government faces a potentially even bigger headache over the fate of two smaller banks from the Veneto region of northern Italy, which were rescued last year by Atlante, a private sector industry-funded bank rescue vehicle. These now need yet another capital injection, and it isn’t clear whether Atlante has sufficient funds or whether the banks might be eligible for a state bailout under EU rules, raising the prospect of losses for senior bondholders and uninsured depositors.
But perhaps the biggest risk is that in muddling through, Italy is storing up trouble for the future. The country’s primary challenge for 20 years, since it first locked itself into the discipline of eurozone membership, is that it has struggled to adapt to the challenges of operating in an open, global economy.
The small and medium-size enterprises that make up the backbone of its economy may be brimming with technology, but they are typically too small, too reliant on bank lending and too resistant to outside capital and management to deliver the boost to growth and productivity that Italy needs to allay concerns about its high public debt burden.
How much of this is due to cultural factors and how much to longstanding structural issues such as an inefficient judicial system, inflexible labor rules and pervasive corruption is a matter of longstanding debate. But without far-reaching reform, Italy will struggle to break out of its low-growth trap, raising the risk that popular frustration against the current establishment and mainstream parties will continue to build, culminating in a populist victory.
If the price of keeping out the populists is a return to weak and unstable governments unable to deliver reforms, then the establishment’s victory may be pyrrhic. Muddling though can be both a blessing and a curse.