David Fuller's view -
Italy's Matteo Renzi thought the "silent majority" would save him, if only he could chivvy enough of them to polls. The prime minister misjudged disastrously.
The voters certainly turned out. They smashed through the 60pc threshold that Mr Renzi thought would secure him victory in the constitutional referendum, but only to register their silent anger - with him, with his government, with Brussels, and with an Italo-European establishment that has run the Italian economy into the ground.
"I didn't realise they hated me so much," he confessed before his resignation, the wunderkind of European politics no more.
Markets have reacted with insouciance to the epic scale of Mr Renzi's defeat, betting that the Italian political class will somehow put together a new caretaker government and that business will carry on as usual. "It's not a psycho-drama," said the EU economics commissioner, Pierre Moscovici.
The reflex of traders after Brexit and the Trump shock is to "buy the dip" on political upsets, but it is far from clear whether the tumultuous events unfolding in Italy have anything in common with Anglo-Saxon episodes, or indeed with any other episode in modern Italian history.
The European Central Bank has bought calm for now by intervening in the bond markets, holding down yields on 10-Italian debt to 2pc. This in turn has steadied the currency markets. The euro has risen slightly against the dollar.
But the ECB is effectively "front-loading" purchases of Italian bonds on a short-term basis, which means it will have to buy less early next year since it cannot alter the total volume under its €80bn programme of quantitative easing each month.
"I am worried about what is going to happen in February when the Italian treasury has to redeem €49bn of bonds. The ECB may not be able to remain aggressively in the markets that long," said Professor Erik Jones, director of European studies at Johns Hopkins University in Bologna.
The ECB cannot legally step in as a lender-of-last resort for Italian bonds unless Rome requests a formal bail-out under the European Stability Mechanism (ESM), and this requires votes in the German and Dutch parliaments, among others.
The terms would be draconian. Italy would lose even more control over its budget. It would amount to a Troika-style take-over of the economy, or a "commissariato" in the horror parlance of Italian politics. "If Europe humiliates Italy and puts the government under a tight rein, then you really will see a popular insurrection," said Professor Jones.
Belying the apparent calm, the Italian authorities are scrambling to prevent the collapse of their intricate rescue plan for banks, knowing that failure would set off a dangerous chain-reaction.
Mario Draghi calmed the markets by purchasing more Italian Government bonds with his £80bn a month programme. However, troubles lie ahead, from Italy’s need to redeem €49bn of bonds in February to a possible request from Rome for a formal bail-out, as AEP points out above.
Matteo Renzi would still be in office, for better or worse, had he not made a tactical error in thinking a referendum was similar to a general election. In the referendum, he was on his own and lost with approximately 40% of the vote. As one of several candidates in a general election, he would have won with the same 40%. His age is only 41 and he has some charisma, so we may see him run again at some stage. However, unless Brussels and Germany tread softly in dealing with Italy’s financial problems, which they may not, Beppe Grillo’s Five-Star Movement could succeed with an anti-Euro campaign.
A PDF of AEP’s article is posted in the Subscriber’s Area.
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