Fra Commerzbank:
If new elections were to be held in Italy now the polls suggest that the Five Star Movement (M5S) could form a government. But what do Beppe Grillo and his cohorts want? Besides a rather vague party programme, we have analysed interviews and Grillo’s famous blog to find out.
The message is that the M5S would rely less on reform and more on expansionary fiscal policy to revive the economy. Moreover, the party is critical of the EU, the euro and NATO, although an Italexit does not appear to be on the agenda for now. New elections soon …
The attention of the markets has turned to Italy again, primarily because of the Italian banking crisis.1 But the political situation has also become more uncertain in past weeks. The Italian electorate is to vote in the autumn on the reform of the Senate, driven by Prime Minister Renzi (see box on page 3).
Renzi has announced his resignation in the event that the relinquishment of Senate powers, which he has made the centrepiece of his reform policy, are not validated by a majority vote. Renzi now appears to be distancing himself from this announcement somewhat and there are rumours that the referendum could be postponed to next year.
However, a “no” to the reform – which is quite possible according to opinion polls, where supporters and opponents of reform are roughly neck-and-neck (chart 1) – would put him under strong pressure and elections could then be held well before the scheduled end of the current legislative period in spring 2018. … with an absolute majority for Beppe Grillo‘s 5 Stars?
The latest polls indicate that Renzi’s PK and M5S would gain about the same percentage of votes (chart 2). In the second ballot between the two strongest parties, which is now required under the new electoral system (see box on page 4), the M5S would actually be slightly ahead at present, giving them an absolute majority in the Chamber of Deputies and presumably enabling them to form the government.
A typical “young” party But what direction would Italy – the third largest country of the European Monetary Union –take under a M5S government? Would there be hope of reform or would Italy be the next candidate for an exit from the EU, an “Italexit”? There is little mention of this in the movement’s objectives at least in the non-Italian newspapers where Beppe Grillo is still only being described as a comedian, populist or euro-sceptic.
The aims of the M5S in terms of economic policy are not easy to fathom as the party programme of 2013 – the latest official programme available – focuses on the fight against corruption, a more efficient administration and issues which from the market’s perspective are secondary (such as the promotion of renewable energies and data transmission). We have therefore also taken a closer look at recent statements in interviews and Beppo Grillo’s famous blog for a better understanding of the M5S’s objectives.
New electoral law and Senate reform: end of blockade? Italy has so far had a so-called “perfect bicameral system”. The two chambers of parliament – the Chamber of Deputies and the Senate – have more or less the same rights. Both are elected directly, most laws have to be passed by both chambers and – the key point – both chambers have to express their confidence in a government.
As there are often different majorities in the two chambers because of the different voting systems, this frequently leads to a mutual blockade and far-reaching reforms have often proved impossible. This should change with the reform passed by both chambers in April. The Senate is to be greatly reduced in size and loses many of its powers. For example, a majority in the Chamber of Deputies will be enough for a government in future.
The forming of a government is to be made easier by the new electoral system, which came into effect in July of this year. Accordingly, the strongest party with over 40% of votes now obtains at least 340 (or 54%) of the 630 seats. Should no party achieve 40% in the first ballot, a second ballot is held between the two strongest parties.
The winner of this second round gains 340 seats; the remainder are shared out between the parties according to the shares in the first ballot. From a German perspective, this is reminiscent of the beginnings of the Greens, the Pirate Party or other “young” parties, which want to be different to the “established” parties and take on board the concerns of large sections of the population and their criticisms of the current situation in their country.
They are against the establishment, want to break up encrusted structures and decisions should be made on the basis of grassroots democracy. In this spirit, M5S regularly asks its followers via internet what draft legislation should be put forward, and with what priority. Economic reform is probably not on the agenda …
From the sources available, it is possible to identify some basic approaches: • Fight against “professional politicians”, corruption and inefficient administration: At the core of the programme and many blog entries is a far-reaching reform of the inefficient public administration, the fight against corruption and the abolition of “professional politicians”. To abolish the latter, political offices are to be limited to two terms.
• No reforms but a kick-start to domestic demand: The central project in economic policy is a basic state income of 780 euros per month.2 In addition to the fight against corruption, Luigi Di Maio, a possible candidate for the office of Prime Minister, described this as the most pressing measure of an M5S government.
This should be financed through various popular tax increases – such as a solidarity levy on “golden” pensions – and expenditure cuts, such as a reduction of the allowances of parliament members. In all other respects, only vague statements have been made on the basic course of economic policy. Stronger domestic demand is frequently mentioned as the key to solving Italy’s current economic problems.
This not only applies to high unemployment but also to the banks suffering from bad loans, as a stronger economy would generate profits for companies, create employment and, hence, put more debtors in the position to service their debts. Banking crisis solved! This is the rosy perception of M5S.
But remember that the Italian banks have around 330 bn euros of bad loans on their books, and propping up the economy would never be sufficient to resolve this problem. M5S is probably not opting for structural reform; at most, the call for the abolition of the local production tax (IRAP) could be seen as an improvement of supply conditions. Instead, the basic income should be a strong stimulant for domestic demand.
The repeated strong criticism of austerity policies in Greece and other countries in the blog indicates that M5S is relying on expansionary fiscal policy to stimulate Italy’s economy, while the central bank should also play a dominant role here.
• Euro-sceptic but no Italexit (yet): M5S’s highly critical stance towards the EU is clear from the fact that its EU parliamentary members belong to the same faction as the British UKIP, whose main programme item is Brexit. The main point of criticism appears to be the restrictions on national fiscal policy by EU rules.
Beppe Grillo recently stated in an interview 2 Unlike the unconditional basic income, which is being discussed in many countries and has just been rejected in a referendum in Switzerland, this should only be paid out if the recipient is undergoing further training or education or is participating in a state-run social activity. for example that “public debt in the eurozone should be distributed according to the subsidiarity and solidarity principle“3 , which presumably means a mutualisation of debt.
Grillo has made different statements lately on the subject of Italy possibly leaving the Monetary Union. While he said in the same interview two days before the UK referendum that “the people should decide about the introduction of a double currency with its own bank”, he said on the day of the referendum in his blog that he is in favour of Italy remaining in the EU: “Italy does not intend to leave the EU”.
That said, he emphasised that the EU has fundamental problems and there are many areas in the EU that are not functioning. However, for him, “the only way to change this ‘Union’ is from within”.4 Consequently, an M5S government should not head for an Italexit for the time being, especially as this would have huge economic implications for Italy and other peripheral countries.5 • Russia as a friend and partner: The very pro-Russian and rather US-critical stance could lead to conflicts within the EU and also NATO.
In various blog entries, a close partnership with Russia and an end to sanctions is called for, not least because these are also seriously harming the Italian economy. Italy’s exports to Russia – although only amounting to around 2% of Italy’s total exports – have plummeted in the past two years (chart 3). Italy’s NATO membership is also called into question. … but a higher deficit and even more debt In the event that new elections were held in the next twelve months and Beppe Grillo’s movement did achieve an absolute majority in the Chamber of Deputies,
M5S would still not be able to “govern absolutely” as there would probably only be new elections in the case of a “no” from the Italian people on the issue of Senate reform. Moreover, a Senate with a different composition would then remain a counterweight to the majority in the Chamber of Deputies. A government led by M5S would then still need the vote of confidence from this chamber. Extreme measures such as an exit from Monetary Union or from NATO would be very unlikely.
That said, an M5S government would strengthen the tendency of the current government to loosen financial policy further, with higher deficits and further rising debts (chart 4) and hence give further tailwind to those in the EU who wish to further loosen the stability pact. Moreover, the limited hope of more reforms, which would exist if Renzi continued to govern and the Senate’s powers were reduced, would then be dead and buried.
