Download Geopolitical Briefing: Italy and Austria: next on the

November 30, 2016
Italy and Austria: next on the anti-establishment hit list?
So far, 2016 has been marked by two electoral bombshells: Britain voted to leave the EU and the United States elected
Donald Trump president. But there may be more to come, as both Italy and Austria will be casting ballots on
December 4.
Italy is holding a referendum on whether to approve constitutional reforms. A likely no vote could cost Prime Minster
Matteo Renzi his job and trigger an election. As for Austria, it is holding a presidential election. Polls currently have the
far-right candidate slightly ahead. While the presidency has limited powers, a victory by the far right would be hugely
symbolic for Austria and Europe.
A no vote in the Italian referendum combined with the election of a far-right president in Austria would be seen as further
proof of a growing backlash against the traditional governing elite and the EU. This would make it even harder for the EU
to agree on a strategy to overcome the many challenges it faces, including sluggish economic growth, high debt levels,
Brexit negotiations and growing disillusionment with the EU.
Italy’s make-or-break referendum
Italy is holding a referendum on proposals aimed at ending chronic government instability. Under the plan, the size and
power of the upper house (Senate) would be reduced. This would leave the lower house with sole authority to approve
most bills. Supporters argue this would make it easier to pass crucial legislation and increase political stability. Italy has
gone through more than 60 governments since 1945.
When the referendum was first announced eight months ago, a yes vote was a foregone conclusion for most pundits. This
is no longer the case. Recent polls show Italians are leaning towards voting no. However, the high share of undecided
voters (25% in some polls) adds an element of uncertainty. The government is hoping that the polls will be proven wrong,
as they were in the case of Brexit and Trump.
“Final Polls Show Renzi’s Referendum Heading for Defeat in Italy,” Bloomberg, November 18, 2016
GEOPOLITICAL BRIEFING
Why do so many Italians plan to vote no?
The referendum has shifted from being a vote on the merits of the proposed reforms to increasingly being a vote on the
PM, the EU and the ruling class in general. Below are some of the driving forces behind the no vote.
1- The economy is in dire straits. Italy is struggling with weak economic growth, a very high level of public debt, a
banking system burdened with non-performing loans, high unemployment and a rapidly ageing population. Since
the formation of the Eurozone in 1999, the Italian economy has barely grown at all. Its total cumulative
(not annual) increase in GDP has been a measly 5.7%. This pales in comparison to 26.4% for France and
40.7% for the U.S.1 Prior to joining the Eurozone, Italy resorted to periodic currency devaluations in order to
compete with economic powerhouses like Germany.
2- The migrant crisis. Following the closure of the Balkan route via Turkey and Greece, Italy has become the main
gateway into Europe for migrants. Over 160,000 have arrived so far this year. This influx is straining Italy’s
resources (which have already been depleted by many years of little growth) and risks creating a major political
backlash. This situation has been worsened by the fact that Italy’s northern neighbours have taken steps to close
their borders to these migrants. Italians widely feel the EU has abandoned them when it comes to the
migrant crisis.
3- The constitutional reforms would grant too much power. Many Italians find it worrisome that these reforms
would, if approved, grant government nearly unlimited power. This fear is heightened by the possibility of seeing
the far-left Five Star Movement, an anti-establishment party, one day win an election under this system.
4- Broad-based political opposition to these reforms. Opposition to these reforms ranges from the far-left Five
Star Movement to the far-right Northern League and includes former Prime Ministers Mario Monti and Silvio
Berlusconi. It is also rumoured that many left-leaning members of Renzi’s own Democratic Party are opposed to
the reforms.
5- Renzi’s criticism of the EU is a sign of growing desperation. The fact that both the PM’s popularity and support for the
proposed constitutional reforms have been slipping has caused Renzi to become increasingly critical of the EU in an effort
to stop the bleeding. Recently, he removed the EU flag from the backdrop of his press conferences and stated: "We are
sick of doing what Brussels demands of us. The time of the diktat has come to an end."2
The consequences of a no vote
A no vote would likely mean Renzi’s resignation, which in turn could trigger early elections. Lorenzo Guerini, Deputy
Secretary of Renzi’s Democratic Party, recently said that in the event of a no vote, the party would seek to move up the
elections slated for May 2018 to the summer of 2017.3
Currently, the governing Democratic Party is polling at about 32%, compared with 28% for the Five Star Movement.
The two main right-leaning parties, the Northern League and Forza Italia, are each polling at about 13%.4 If no party gets
more than 40% of the vote, a run-off election between the two leading parties would be held. If this occurs, the Five Star
Movement would have a good chance of coming out ahead against the Democratic Party since many opposition parties
would likely side with it against the current government. This is what happened in the June mayoral elections when the
Five Star Movement won 19 of the 20 run-offs it contested. The Northern League and the Five Star Movement are in
favour of holding a referendum whether to leave the Eurozone. A third opposition party, Forza Italia, is also very
critical of the Eurozone and could choose to back a referendum as well.
A no vote would also raise doubts about Italy’s ability to enact meaningful reforms and finally end its long period of
economic stagnation. It could also delay the much needed recapitalization of Italy’s beleaguered banking sector. The
financial sector is staggering under the weight of 360 billion euros in bad loans, which amount to nearly 20% of all loans.
1
Reuters, DataStream
“Trump Spells End of Normality for Europe,” Spiegel, November 11, 2016
“Renzi’s Party Wants Early Election in Italy If Referendum Lost,” Bloomberg November 22, 2016
4
“A Referendum Puts Italy’s Government to the Test,” Stratfor, November 28, 2016
2
3
2 GEOPOLITICAL BRIEFING
Don’t forget about Austria
While the financial markets are much more focused on the outcome of the Italian referendum, it is also important to pay
attention to the presidential election being held in Austria on the very same day. The election pits Norbert Hofer of the farright Freedom Party against Alexander Van der Bellen, a candidate supported by the Green Party. This vote was
prompted by ballot-counting irregularities in May, when the Green candidate beat his adversary by a razor-thin margin of
50.3% to 49.7%. In April, the first-round of the presidential election saw the candidates from the mainstream Social
Democratic Party and the People’s Party eliminated. This marks the first time Austrian voters rejected candidates
from these traditional parties in the post-WWII era.
The polls currently give Norbert Hofer of the far-right Freedom Party a slight lead. If he wins, it would be the first time
since WWII that voters in a European democracy elected a far-right head of state.
Despite limited powers, the president does have the authority to: refuse to swear in government ministers,
dissolve parliament under certain circumstances and call referendums. Hofer supports holding referendums on
banning burkas and approving free-trade deals negotiated by the EU. While the Freedom Party is Eurosceptic, its
presidential candidate has promised not to hold a referendum on EU membership unless the EU attempts to strip more
power away from the states and/or further enlarge membership. Even more importantly, this victory could give further momentum to the far-right Freedom Party in the next round of
parliamentary elections scheduled for 2018. The Freedom Party is currently leading in the polls at 34%, versus 27%
for the centre-left Social Democratic Party.5 While this would not be enough to win the election outright, it would be
more than sufficient for the party to become a senior member of a coalition government.
Conclusion
A no vote in Italy and a victory for the far right in Austria could further embolden support for anti-establishment
political forces across Europe. The Netherlands (March), France (April/May) and Germany (October) all have elections
coming up next year. Moreover, Catalonia is planning to hold a referendum on independence on September 2017, though
the federal government has already vowed not to recognize its outcome.
It would also make it even harder for the EU to agree on a strategy to overcome the many challenges it faces, including
sluggish economic growth, high debt levels, Brexit negotiations and growing disillusionment with the EU.
While Europe's many anti-establishment parties have different agendas, they share a strong disapproval of the
EU/Eurozone and traditional mainstream parties. Many of them also want to severely restrict immigration. The growing
popularity of these anti-establishment parties is already forcing mainstream parties to take much tougher positions
towards the EU in an effort not lose further public support.
Increasing political instability is also one of the main reasons Europe’s major stock indices should continue to
lag far behind their U.S. counterparts in the foreseeable future. 5
“How Trump's Victory Will Galvanize Kindred Spirits in Europe,” November 13, 2016
3 GEOPOLITICAL BRIEFING
World: S&P 500 vs. Eurostoxx 50
Comparison between both major stock market indices indexed to 2007
160
Index 2007m1=100
150
140
130
S&P 500
120
110
100
90
80
70
Eurostoxx 50
60
50
40
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
NBF Economics and Strategy (data via Datastream)
How President-elect Trump differs from European anti-establishment
political parties
Europe’s anti-establishment political parties are overjoyed at Donald Trump’s surprise victory. But it is important to note
that while there are similarities between Trump and Europe’s anti-establishment forces in terms of their positions on
protectionism and immigration controls, they widely differ on many other matters. Trump supports lower corporate taxes,
fewer regulations and large-scale infrastructure spending—all measures that could benefit the economy in the short term.
On the contrary, many of Europe’s parties situated on both the far right and left of the political spectrum do not support
lower corporate taxes and fewer regulations. Also, the Eurozone’s fiscal rules leave much less latitude for significant
changes to fiscal policy than is case for the United States. Ironically, one of the most significant international
consequences of Trump’s victory could be the strengthening of anti-establishment political parties in Europe
with a much weaker pro-growth agenda than his. This could make it even harder for EU countries to implement
much needed economic reforms. Or, as Trump might say: “my election, your problem.”
Angelo Katsoras
4 GEOPOLITICAL BRIEFING
ECONOMICS AND STRATEGY
Montreal Office
514-879-2529
Toronto Office
416-869-8598
Stéfane Marion
Marc Pinsonneault
Warren Lovely
Chief Economist & Strategist
[email protected]
Senior Economist
[email protected]
MD, Public Sector Research and Strategy
[email protected]
Paul-André Pinsonnault
Matthieu Arseneau
Senior Fixed Income Economist
[email protected]
Senior Economist
[email protected]
Krishen Rangasamy
Angelo Katsoras
Senior Economist
[email protected]
Geopolitical Analyst
[email protected]
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