Sunday, 4 December 2016

Italian Referendum

It looks like the Italian Government of Matteo Renzi will lose today's referendum on constitutional reform.  It shows the problem of plebiscitary democracy, as also seen in the Brexit vote, and the election of Trump.  That is given a stark binary choice, voters may vote one way or the other for reasons completely at odds with the actual question being put to them.  In the case of Renzi, he made the mistake of threatening to quit if he lost, and so now, voters see the referendum as a means of kicking the government.

The actual basis of the referendum is to introduce constitutional reforms into Italy's Byzantine political system.  The aim is to reduce the power of Italy's second chamber, The Senate, which would give more power to the government to push through economic reforms, and to be able to provide state support for Italy's bankrupt and fast collapsing banks.

In part, Italy's experience shows the problems with the proposals of those in Britain who advocate a similar set up of elections based on proportional representation, along with an elected second chamber.  Proportional Representation tends to lead to a large number of parties in parliaments, which then have to engage in back-door deals to stitch up coalitions and alliances to form governments.  Add to that a second elected chamber, which then claims its own democratic mandate to frustrate or overturn any decisions eventually made by the first chamber, and you end up with the deadlock faced in Italy.

Its not surprising that the Italian government is then seeking these reforms to limit the power of the Senate.  That would be okay, were it not for the fact that in the Italian system, the Prime Minister has the same kind of powers that in other systems the President would have, the President in Italy being merely a figurehead, with limited powers, like the Queen in Britain.  Given that in the recent past, Italy has had technocratic Prime Ministers, imposed on it, like Mario Monti, therefore, its also clear why many Italians are also loathe to hand over too much power to the Prime Minister, given their memory of the past, and of Mussolini.

The real problem, in Italy, however, as in much of the EU, is the banks and financial system.  For thirty years, asset price bubbles have been blown up, giving the appearance of wealth, whilst all the time, they undermined the production of real wealth.  The inflated asset prices be it of bonds, shares or property, were used as the shaky foundation upon which to borrow ever more money to continue to finance consumption, whilst the same paper chase of speculation to push up those asset prices, diverted potential money-capital from real investment in productive capacity.  When 2008 globally, and 2010 more specifically in Europe, threatened to obliterate all of the paper wealth of the top 0.001%, held in these fictitious assets, central banks intervened to reflate them with massive money printing, whilst governments in Britain and across the EU, inflicted further pain via austerity measures.

That is the real problem facing Italy, just as in 2010 it faced Greece, Ireland, Portugal and Spain.  The ECB has printed money to lend to EU banks, who used it to buy the bonds of their governments, which led to the ridiculous situation whereby the yields on the bonds of countries like Spain, Italy and Portugal fell to levels even below those of the UK and US, which themselves has been manipulated lower by their own central banks printing money to buy them.  The debts have continued to grow, the inflated prices of assets have become ever more ridiculously inflated, whilst productive investment required to provide the profits to justify the payment of interest on those assets, was constrained.

Italy's banks are reported to have non-performing loans amounting to €360 billion.  If past experience is anything to go by, the real figure will be two or three times that figure.  Renzi wants the reforms so as to be able to bail out the banks in the same way that the US, Britain, Ireland and other EU countries bailed out their banks, and thereby bailed out that top 0.001% whose wealth is tied up in these paper assets.  Socialists should oppose such bail-outs.  It is a good thing for us if financial markets and the astronomical prices of these paper assets crash, so long as that is not allowed to interfere with the provision of credit and liquidity into the market, to enable the circulation of real capital and commodities to continue.  If the prices of bonds and shares tumble, it means that our pension fund contributions can buy much more of them, thereby reducing the cost of providing for our pensions; if the price of property collapses, it means we can again begin to afford to buy or rent houses at reasonable costs; if banks go bust, it means their workers can begin to take them over, and run them as co-operatives in workers interests.

The crisis in Italy, like the crisis caused by Brexit, and the potential crisis of a fascist winning the election in Austria, of Le Pen being in the running for President of France, and of a string of right-wing populists gaining support, comes down to the fact that conservative politicians across Europe have defended the paper wealth of that top 0.001%, whilst inflicting austerity and the real economy. The EU could have introduced a policy of fiscal expansion to stimulate economic growth across the EU, politicians like Hollande, came to power promising such policies, but instead they did the opposite creating the situation we have now.

The last thing the French socialists need is an equivalent of Blair, but at this late stage, even an equivalent of Corbynism sweeping the French Party might be too late to turn things around.  The EU might be forced into action, as the message seems to be getting through in global forums that monetary policy has hit the buffers, and fiscal stimulus is required.  But again, they may be too late to avert the imminent crisis.

The Italian banks look set to collapse next week if the referendum goes against Renzi, and he resigns.   Following Italy, the German banks look set to follow.  It's rather like I foretold some months ago.  In fact, the more 2016 has unfolded, the more its events have mirrored the scenario depicted in my novel 2017.


George Carty said...

Wasn't Hollande unable to adopt a policy of Keynesian stimulus in France because the Eurozone's rules would not allow it, just as Ramsay MacDonald was unable to follow such a policy in Depression-era Britain because of the Gold Standard?

Boffy said...

Technically, that's true, and illustrates the point I was making that, it comes down to EU politicians adopting an EU wide fiscal stimulus policy. Of course, Hollande has been one of those EU politicians who help formulate the overall stance, and having talked left before his election, he failed to do anything to mobilise support across the EU to change EU policy, for example to support Greece. Had Hollande, worked with Syriza and others across Europe to build a movement for change, EU policy could have been different, and would have undercut the rise of the populist right. Its up to Corbyn and others now to build such an EU wide movement.

However, in practice, Hollande could anyway have breached EU deficit rules. Both France and Germany breached the rules in the past. As I wrote at the time of Hollande's election, with sovereign bond yields so low, he had a perfect opportunity to have issued a load of long dated bonds at very low levels of interest, which could then have been used to buy back some of the existing higher yield, shorter dated bonds, as well as using the money from the sale of long bonds, to finance large scale capital spending.