Italy: The Endless Appeal of Easy Money

italy voteOn March 5, Italy looked like France without Emmanuel Macron. The national elections, held the day before, were hailed as a triumph for the so-called populists. Added together, the political parties that could be so labelled gained 58 per cent of the votes. “Moderates” of the Left and the Right, namely the Democratic Party and Silvio Berlusconi’s Forza Italia, performed badly.

This seems to be another tile falling down in a domino effect. Since Brexit (June 2016) and the election of Donald Trump to the Presidency of the United States (November 2016), observers have looked for a pattern in political shocks. Some analysts have suggested that middle- and lower-middle-class voters are protesting, all over Western democracies, against globalisation, as they feel its costs (businesses moving to emerging economies) and fail to see its benefits (lower prices, more innovation, better international division of labour). Others have pointed to a sense of frustration people are developing with international organisations, beginning with the EU, that are perceived as an attempt to shield political decision-making from democratic accountability. Almost everybody believes social media has changed the rules of the game, making “mainstream media” less and less relevant and perhaps transforming the world of news into a series of “echo chambers”, where like-minded people listen exclusively to other like-minded people.

This essay appears in May’s Quadrant.
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Some argue that Right and Left are now obsolete political categories, whereas we should be classified as either “globalists”—part of an elite that moves around and appreciates the benefits of an integrated world—or “localists”, who want to defend their “roots” no matter what. “Do you consider the nation-state an obstacle to be overcome, or a jewel to be polished, loved and nurtured?” asks the foremost theorist of contemporary populism, Steve Bannon. According to Bannon, the Italian elections were like the Trump vote and could reshape Europe.

While in politics all is possible, at least in principle, I think we should be wary of building grand explanations at the expense of facts. Intellectuals look for great narratives to explain the turning tides of history. And yet, sometimes the real answer is the simplest one.

In the United States, Donald Trump’s national vote in 2016 corresponded closely with Mitt Romney’s national vote in 2012. It is true that Trump consolidated support in some key states, but it is debatable whether he would have won had his opponent been more able to command the loyalty of Democrats.

After its elections, Italy is the only big European country where a majority of voters—close to 60 per cent—chose parties that, from the Right or from the Left, can fit into the “populist” camp. The right-wing coalition has a small lead, but within it the Northern League, an anti-immigration party, gathered more votes than the moderate Forza Italia. The Five Star Movement, a populist group established in 2009 by comedian Beppe Grillo, won 32.4 per cent of the votes: in some regions in the south of Italy, it commands over 50 per cent.

In what sense are these parties “populist”? In the very narrow sense that they have been constantly in the opposition to the national government for the last seven (the Northern League) or nine years (the Five Star Movement) and can thus credibly claim to be other than the so-called establishment. They frame the political struggle as being between a “people” that is virtuous and honest and an “establishment” that is rotten, regardless of the details and the specific actions of one or the other. The gist of their discourse lies in simple solutions to complex problems, all of which presuppose the substitution of the rotten ruling class with a populist one.

The Northern League has campaigned largely on denouncing unrestricted immigration, while the Five Star Movement has flown the flag of a minimum base income. Both somehow promised to lower the retirement age, in a country with one of the oldest populations in the world and one of the lowest fertility rates in Europe, which has declined every year since 2010 and in 2016 was 1.34 children per woman.

Both parties advanced public policy proposals that experts consider financially unviable for a state like Italy, where public debt is 132 per cent of GDP. Both seemed not to bother about the dire straits of public finance and fancied at a certain point to quit the euro, go back to the lira and inflate their way to growth—though this promise was not reiterated in the electoral campaign. Matteo Salvini of the Northern League, an admirer and friend of Marine Le Pen, clearly remembered that her bid was damaged by her vagaries on the euro, and decided to sound more adult.

While immigration and a growing sense of uncertainty have certainly played a role, lately Italy has experienced moderate economic growth: GDP grew 1.5 per cent and industrial production was up by 4.9 per cent. This was hardly sensed because the country’s economic performance has been weak for years. Twenty-five years ago Italy’s GDP per capita was 92 per cent of Germany’s and 137 per cent of Spain’s; now it is 75 and 107 per cent respectively.

That part of the Italian business world that thrives is export-oriented and rejoices at globalisation. While globalisation has been vastly maligned, it has forced the successful manufacturers in the north of the country to speed up and improve. The part of the Italian economy that is lagging behind is the one that lives off internal demand, damaged by high taxation, inefficient services, and regulations that seem conceived to strangle any new ideas.

Austerity has been more forcefully denounced than seriously practised. Public spending is 50 per cent of GDP, higher than the Eurozone average (public service provision, on the other hand, is not considered quite satisfactory). In the last parliamentary term, the country moved slightly away, both in practice and rhetoric, from fiscal consolidation, which was practised by the Mario Monti government from 2011 to 2013. Austerity was more an issue in the 2013 election than in 2018. Indeed, 2013 marked the beginning of the growth of the Five Star Movement: the “austeritarian” prime minister Monti, hardly a charmer, won 10 per cent with a party of his own making that collapsed soon after.

So before considering Italy the new promised land of populism, we should look for a more proximate cause of what happened on March 4: the failure of political leadership. Too often apparently smart talk on the demise of the elites and the wounds of the political establishment conceals the mistakes of certain political leaders, rather than “the elites”.

The foremost loser in the elections is Matteo Renzi, the young leader of the Democratic Party. In 2014, Mr Renzi, then a new face of the Italian Left, won some 40 per cent of the votes at the European elections. Renzi was hailed all over Europe, as Macron later was, as a newcomer well placed to counterbalance the populist wave. He was prime minister for 1000 days, his being the fourth-longest government in the Italian republic. In this period, he promoted at first some needed reforms, like the labour market one, but soon settled for a mix of ambitious constitutional reform and a more placid management of the status quo when it comes to the economy.

Mr Renzi’s ability to destroy his own political capital has been astonishing. The former prime minister compounded one mistake after another, and became odious to most Italians, only 19 per cent of whom voted for his Democratic Party in March.

Renzi left office as a prime minister in 2016, after the constitutional reform he promoted was rejected in a referendum. That ballot became less about the proposed constitutional changes—hardly a subject that excites the masses—than about his persona and his tenure. A vast majority of Italians didn’t like either, as a result of a long series of tactical mistakes.

An interesting feature of Renzi’s politics is that he consistently adopted an electoral rhetoric that appeared like a watered-down version of his opponents’ populism. He advocated budget deficits (smaller ones than those promised by his opponents), chastised the European Union (though with far more sober words than his opponents), and forgot all the supply-side reforms he himself had promised.

The other loser of the Italian elections was Silvio Berlusconi. The media tycoon, long maligned outside and inside Italy, seemed about to make a comeback just a few months before the vote. Although his previous conviction barred him from holding public office, his name was nonetheless on the ballot, written in large block letters in the logo of Forza Italia.

Mr Berlusconi fought his final electoral campaign with gallant enthusiasm. He ran it as a stand-alone show, with no junior partner sharing with him the burden of bearing the torch of his own party. He used all his repertoire of tax reforms and televised charm. In a mad, sometimes violent campaign, he stood out as being calm and wise, and smoothed the edges of his coalition partners’ most anti-European proposals. But for all his charisma, the 2018 vote showed his legendary ability to charm millions is gone. He was never a genuine orchestra conductor, but a virtuoso all too eager to play all the instruments by himself.

Berlusconi’s failure is not a failure of execution: it is a failure of longer-term vision. In twenty-four years in politics, Berlusconi did not foster a single potential successor. None of his former ministers and collaborators could ever play in the premier league. His candidates were only fragile ornaments of his larger-than-life persona.

Confronted with younger, telegenic opponents—such as Northern League leader Matteo Salvini or the Five Stars’ softly spoken and well-mannered Luigi Di Maio—Berlusconi, for the first time, appeared an old man. His greatest accomplishment, since 1994, was his ability to win in both the north and south of the country. That, too, is gone. This election showed a stark polarisation: the north turned to the Right, while the south voted overwhelmingly for the Five Stars.

The two political champions of “moderate” Italy have thus both fallen, albeit for very different reasons. Renzi had poor political judgment and could never correct his many tactical mistakes. Furthermore, he didn’t realise that the public had had enough of him and he refused to give ground to more palatable left-wing figures. Berlusconi, a genuine businessman, spent his entire life despising politicians and never invested in a true political heir. In his last gamble, he asked Italians to vote for an eighty-one-year-old man who could not himself enter parliament, and with no successor to showcase.

The rise of the Five Star Movement and the Northern League is not unconnected to these failures. At the ballot, people can choose from a limited supply of options. If some look attractive, it is also because some others no longer are.

Neither the Five Star Movement nor the Northern League could be at the helm of a new government on its own. The League is in a larger coalition with Berlusconi’s Forza Italia, but the coalition’s 37 per cent would require an alliance with either the Democratic Party or the Five Star Movement (which on its own gained an impressive 32 per cent) to govern the country.

At the time of writing, it is not unlikely that months will be needed to produce a working coalition. This is hardly new: it has happened before in Ireland, the Netherlands, Spain and Germany. What is hard to fathom is on what kind of platform an agreement might be reached.

Those who would go for the demise of the traditional Right and Left political geography, like Mr Bannon, would be happy to see the two Italian populist parties joining forces. This is hardly probable, as it may cost both of them votes. But let us imagine this as a possibility. What can unite their different “populist” views? In a sense, they share the same purpose: they want to replace the establishment with a newer, supposedly non-corrupt one. This means that they frame the problems of the country (and of Europe) in terms of men, not institutions. And this means they consider their men to be the good ones. This is hardly novel in politics.

The other thing they share is the determination to rely on public spending and bigger deficits to foster their aims: a flat 15 per cent rate for income tax, a universal basic income, the lowering of the retirement age, a bigger role for industrial policy—all of which is predicated on a veritable revolt against European budget rules. The irony is that, without the prop of the non-conventional monetary policy of the European Central Bank (ECB), all these proposals will look far more scary than they look now. Think that short-term Greek debt yields were their lowest in decades: the country’s two-year borrowing costs are at 1.47 per cent and thus lower than the equivalent US Treasury yield. We are talking of Greece. Reflecting uncertainty, before the election, Italy’s ten-year bond yield was at 2.09 per cent.

Still, generally speaking, the Italian government can keep issuing short-term debt up to a two-year maturity and be paid to do it. This is how the country keeps its debt under control in the short term without any significant spending cuts, since it earns money for issuing debt.

It has been pointed out that in the last years the ECB has been the only net buyer of Italian debt. Over the past thirty years, Italian households have steadily been reducing their exposure. Now 18 per cent of BTPs are held by central banks, foreign investors hold 35 per cent and 41 per cent are within Italian financial institutions.

If you need a grand explanation for the rise of “populism”, there is one that works better than the narratives of epic struggles around globalisation and austerity. Easy money has created the impression that free lunches are possible and we should go for them. The establishment’s ties with their European counterparts are the only thing that allowed them to make the most of this credit bonanza. Better go with bolder promises, particularly if the ECB will foot the bill.

To add to the irony, the new government that Germany has given itself, with a renovated Christian Democrat–Socialist coalition, may actually be friendlier to profligate expenses in the south of Europe, for the sake of increasing the speed of European integration.

Alberto Mingardi wrote on Gertrude Himmelfarb in the January-February issue.

One thought on “Italy: The Endless Appeal of Easy Money

  • Jacob Jonker says:

    It has been said that bad money always drives out good money. In some quarters, of course, there would be no difference. International high, low, or under the table finance regard all moneys the same, except for the minute amounts attracting some kind of impost or regulatory burden which, at the cost of some administrative oversight, can be avoided or apportioned further down the chain. The creation of money supply through QE, however, creates a supply of bad money insofar as productive labour and savings are concerned, as the money conjured up is not distributed according to the economic worth of those partaking in the economies in question, but to those interests whose malignant operations are already hugely taxing on the productive sector of the economy.
    The assumption that ECB QE money would be of benefit to an economy relies on the myth that the sparrows do better if the elephants are given more to eat. The unequal distribution of QE money, however, leads to further inequality in opportunit and a dilution of the reward both for productive effort and prudent money management. In the case of Italy, for the German electorate to tolerate its continued program to fund the debasement of Italy’s medium of exchange can hardly reckoned to be a good thing. If Italy’s economy is not too bad, it must be despite ECB QE, not because of it.

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