With financial markets poised to react to the pivotal Italian constitutional referendum on December 4, consensus suggests that a ‘yes’ vote to the reforms will be positive for asset prices and a ‘no’ represents a sell signal.
According to leading Italian commentators, however, a ‘yes’ vote will not fix Italy’s problems and the issues at play are not just black and white, but instead are far more complex than people seem to understand.
To illuminate the discussion and explain the factors behind it in greater detail, Real Vision TV brought together Professor Valerio Onida, the former President of Italy’s Constitutional Court and Rodolfo De Benedetti, a leading Italian entrepreneur and chairman of the CIR Group, to examine how this key vote might affect Italy’s future. The interview was conducted by former Presidential advisor Dr. Pippa Malmgren and also looked at the broader implications for Europe, amid rising political populism on both sides of the Atlantic.
When Dr. Malmgren asked Professor Onida if the financial markets were correctly interpreting the context of the vote, he said that it won’t be any disaster if the ‘no’ vote wins and the same applies to a victory for the ‘yes’ vote, while the real solution for Italy requires changes to the political system, not the Constitution.
“It’s all about approving or not a modification to some aspects of the Constitution,” Onida said. “During our history, we applied a lot of changes and 18 modifications of the Constitution have been approved in the last years. The last one was approved in 2012, to add the ‘balanced budget amendment’ to our Constitution, and an important reform was made in 2001, about the relationship between State and Regions. So, it is just misleading saying that we won’t be able to make other changes to the Constitution, should this reform not be applied. Anyway, I think that the real issues in Italy are not about the Constitution. We need to change our economical politics, and the politics in general.”
Italian Politics Have Been in a Mess for Years
Professor Onida said political problems in Italy have got worse over the years, with the old political parties disappearing in the early 90s. Historically these parties had been able to mediate between society and the government institutions. Further troubles followed that political shake up, with Silvio Berlusconi’s center right party being a personal one and ruled by him alone, while there were also splits and divisions in the left wing parties.
“Italian politics has lost any clear orientation. The voters have seen parties that sometimes even changed their main opinions in time,” Onida said. “They kept changing and struggling against one another, making the voters very confused. I think this is the main cause of the Italian political issues, while the Constitution itself is not.”
Complex Issues Forgotten in What is Now a Personal Vote for Renzi
Rodolfo De Benedetti has seen major success with his business interests in Italy, in areas as distinct as automotive parts, publishing and care homes. From his perspective the importance being placed on the referendum as the date approaches is an indication of how badly Italy needs reform, because the country has seriously underperformed its European trading partners over the past 20 years. In his view, the debate, however, has come down to a personal view of whether people are for or against Prime Minister Matteo Renzi.
“I think when the current prime minister took office about 2 and 1/2 years ago, this was taken as a promise of change and reform. And I think it was probably the first time in many years that a lot of hopes, a lot of expectations were built on a politician and on a government since many, many years,” De Benedetti said. “The fact that the world sees this Italian referendum today as one of those important watershed dates in Europe over the next few months is because it is seen, rightly or wrongly, as a symbol of: Is this country reformable or not? … And so I think unfortunately, as it happens often times with referendums, votes take their own dynamic and people start to side on one side or the other, and they forget about the issue. They forget about what it is that they’re voting on. And basically, it becomes a personal endorsement or not for an individual or for a government, which is exactly what is happening in Italy.”
De Benedetti said that particularly outside of Italy, there is a huge expectation that if it ends up with a ‘no’ vote it would be the end. “I think this is much too exaggerated,” he said. “The referendum is an opportunity for change.”
Barricading Borders – Change for Italy or Change for Europe
Clearly part of the reason a domestic Italian referendum has garnered such worldwide attention is the political fallout from the UK’s Brexit and the rising tide of populism in politics across Europe and in the US, highlighting strains in the European Union and raising suggestions that Italians are voting on whether they want to remain in the EU.
“Italians have always been Europeanists,” commented Professor Onida. “Now, we see new political parties that are not Europeanist, and, on the contrary, they argue against the European institutions. There is a revival of nationalism. And not just in Italy, because Germany and France too have this kind of political subjects. But we now lack our traditional parties, that once made the European Union and now do not exist anymore. So, the risk is a growth of this kind of estrangement, if not even repulsion against Europe.”
Onida said this is a dangerous situation because the continued strengthening of integration and unity are vital for Italy’s future, as well as its European partners. “Nationalism is a great danger for Europe, for all the European countries. In the history of Europe, nationalism has always meant wars, and the last great war started right in the heart of Europe… The real breakthrough, made at the end of World War II is leaving behind nationalisms and national egotisms, to try and reach a greater continental and global unity. This also happened thanks to the foundation of the United Nations and the Universal Declaration of Human Rights. In this, Americans were the first starters. I remember the role of Eleanor Roosevelt in creating the Universal Declaration of Human Rights. Now we risk losing this goal, this vision that identifies the future with international co-operation and European integration. We are barricading ourselves in our national borders. This is really dangerous.”
Troubled Economy Seeks Relevance in Europe
The discussion in some circles has widened to suggest that it would be better for Italy, as well as the other countries questioning their role in Europe, to drop out of the euro in order to devalue and restore competitiveness in an effort to resolve domestic economic problems.
“I don’t buy it,” De Benedetti said. “I know that there are a lot of people pretending this. I think for countries in Europe to stay relevant in a global world as the one we’re living in and increasingly, we will live in, it’s just a non-starter. I think if you’re Europe, you have to struggle to stay relevant globally. If you’re Italy, Germany, or France, or the UK individually, it’s a non-starter. You’re irrelevant. And if you want your voice to be heard and if you want to stay relevant, I think you have to be part of a broader economic system. And I don’t think that the solution is turning back on Europe or on the single currency, which doesn’t mean that there shouldn’t be a debate in Europe about how Europe should be more effective, should be more liked.”
The real issue, as far as De Benedetti is concerned and what European officials should be asking themselves, is why is Europe so unpopular and why are politicians all over Europe riding the wave of anti-European sentiment?
“As we know, politicians, they tend not to lead. They tend to follow public opinions. And so if more and more people are riding this wave, it is because there is a wave. And this is probably something that, at a European level, one should think about how to change that and whether certain rules that have been perceived as excessively rigid are motivated by today’s situation,” he said.
Structural Reforms are Badly Needed
While Professor Onida made it clear in the interview with Real Vision TV that faults in the political system were hampering Italy’s progress, for De Benedetti, the route to economic improvement lies in structural reforms.
“The regulations around the labour market are very bureaucratic and very rigid in this country,” he said. “And this is one of the reasons why companies hesitate before hiring in this country because it’s not a very flexible system. Because of the high public debt and because of the pressure on the deficits, tax rates, both for individuals and for corporations, have consistently been pretty high compared to international standards, which is clearly not helping foreign investment. Italy is one of the lowest recipients of foreign direct investment in Europe and has been for a very long time. And when you think about our high debt load, it’s easy to understand that we would badly need foreign direct investment to substitute, particularly on the infrastructure side, what the government cannot do with private capital.”
Privatization of state industry is another issue where there has been plenty of talk but little action. De Benedetti said privatization does not mean just selling a few shares in a state owned enterprise, but should change the governance of a company, transforming a publicly dominated culture into one that responds to markets.
“It’s not just a question of money and shareholdings, but it’s really a question of mindset and mentality. And those are profound changes. I think the high pressure, high tax rate in Italy is something that you can cure only to the extent that you’re able to reduce drastically the cost of running the government, so a massive rationalization of government cost that can be turned into a lower tax rate for corporations and for individuals.”
Another issue he would like addressed is to fix the legal system because settling a dispute between two individuals or companies takes two or three times as long as in the rest of Europe, which puts off international investors.
Unseen Implications of a Win for Renzi
In spite of any potential political ramifications for Prime Minister Renzi over the prospect of a ‘no’ vote on December 4th, Real Vision TV’s guests were not of the view that it would be the disaster for Italy that media reports would have you believe. Looking at the other side of the equation, Dr. Malmgren posed the question whether a ‘yes’ vote would also be a vote — or at least a signal to the rest of the world — for austerity. For Professor Onida, once again the answer lies within Italy’s political system and he doesn’t believe a victory for Renzi would produce the political solution required, at least while the landscape remains so divided.
“If the ‘yes’ wins and the reform is applied, there won’t be any immediate change in Italian politics,” Onida said. “The question is: will Italian politics have more or less means to face the issues we have? For example, I think that we need a stronger national cohesion, and a greater capability to agree and arrange. Politics can not be just deadly fighting, with parties in total opposition, never finding any common point. This is not correct politics, even more so in the Italian situation, where we have more than two parties. We never had only two parties in Italy.
“Italy is much more politically divided, so one can not think that elections and politics could be fine if one party wins and all the others don’t, when the winner is not supported by the majority of voters. If we had just two parties, one would gain majority and the other would not. But we have three or more large groups, so none of them can stand for the majority of Italians. Thus, we should be more inclined to understand the others, unite and join forces. On the contrary, our politics tends to reduce everything to a fight with just one winner. One winner.”
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