Italy’s Crisis: Democracy And The Euro

The critiques

Many commentators have argued that President Sergio Mattarella’s decisions of May 28 wounded Italy’s democracy and were damaging or counterproductive (e.g., most interestingly Jan Zielonka, on this site, and, more radically, Yanis Varoufakis; and, on Twitter, in alphabetic order, Paul Krugman, Branko Milanovic, Ann Pettifor, Helen Thompson). I disagree with the first argument and partly also with the second.

Before I turn to the substance, I would like to remove one set of issues from the table. The commentators I chose to cite, among many possible ones, are all far removed from the political allies of the League, who cried ‘coup d’état!’ (Marine Le Pen). Their democratic credentials are impeccable, to my eyes, and their motives unimpeachable. Besides the democratic principle they invoked also arguments I share, moreover, well outlined in Robert Hancké’s milder critique and in Simon Wren-Lewis’s review of Ashoka Mody’s book, such as opposition to pro-cyclical fiscal austerity and free-market orthodoxy, or the need to rethink Western capitalism and the approach to European integration. And I readily grant that the veto did objectively look very bad. But it was not.

Their critiques, often moved jointly, can be grouped into three categories. One claims that the veto was illegitimate, because it breached the democratic principle (it denied the voters’ choices; it interfered with the political agenda of a parliamentary majority; it imposed on voters and their elected representatives the president’s and the establishment’s agenda – or, in other variants, the markets’, the EU’s, or even Germany’s). Another claims that the veto was unwise, because it was certain to increase political distrust, strengthen anti-euro, anti-EU, or anti-establishment sentiment, and boost the League’s and the Five Star Movement’s support. A third claims that the appointment of a technocrat as prime minister designate was equally unwise, for the same reasons.

The events

On 28 May, the president exercised the veto, and, for the first time since 1948, when the constitution was adopted, the coalition refused to form a government. It was a legitimate choice, of course, but it was their choice. This is enough to dismiss critiques that conflate the two steps, to argue that the president breached the democratic principle because he ‘prevented’ the coalition from forming a government. This is not what happened.

The president cited two reasons for the veto, both predicated on two assumptions. The first was the risk that Paolo Savona’s appointment as finance minister – by reason of opinions he had expressed, papers he had written, plans he had prefigured, as well as by reason of the symbolic and signalling value of his appointment, after a long stand-off due precisely to these reasons – would trigger a sequence leading (potentially unstoppably, after a tipping point) to Italy exiting the euro. And it is well known that, on account of the size of the country’s economy and public debt, her uncoordinated exit would seriously endanger the survival of both the monetary union and the Union itself.

The second assumption is that, unlike most other policy changes, euro exit cannot be undone: its consequences, good or bad, are de facto irremediable. On this double basis, the first of the president’s arguments was that there had been neither popular endorsement nor proper public debate on the choice of leaving the euro, as neither party had run on such a proposal (which indeed was not part of the coalition ‘contract’ they agreed and published). The other argument was protecting citizens’ savings. The coalition’s argument was that the veto was illegitimate and Savona crucial for implementing its programme.

The veto: legitimacy

The assumptions supporting the president’s arguments seem plausible enough: Savona’s appointment could raise the chances of an exit to more than a negligible degree, and exit would be de facto irremediable. So, his first argument is most probably valid.

One might retort that as the only way to exit the euro without catastrophic damage is arguably through a surprise move, this reasoning would imply that Italy can never exit. I would accept this implication, and note that it is consistent with Dani Rodrik’s convincing ‘trilemma’ argument (e.g. here). But I would deny that it amounts to confutation by reductio ad absurdum. First, the same is true of going to war counting on the surprise effect. Second, it would imply that before acting one must test popular sentiment in other ways. Third, in the present case the democracy argument works against the critics, for polls tell us that a clear majority of Italians still support the euro.

The second argument – to the extent it can be seen as separate from the first – seems less valid, as reasonable people may disagree on how best to protect savings. But one valid argument is enough.

The coalition’s argument seems weak, conversely, and is certainly weaker than the president’s. Savona can hardly have been crucial for implementing the coalition’s programme, because he is neither a parliamentarian nor a member or adviser of their parties, he was absent from the electoral campaign, and, by the Five Star Movement and the League’s own admission, his name was chosen only after they wrote up the coalition programme. So, until fairly recently they were ready to go ahead without him.

The argument of his irreplaceability began to crumble when, already on 29 May, the League and the Five Star Movement resumed talks on forming a government based on the same programme but without Savona as finance minister. The government was sworn in on Friday 1 June, and Savona is a second-tier minister.

So, the president neither prevented the formation of a government (it was the coalition’s decision) nor wounded democracy (the veto was a defensible use of an ordinary power).

The veto: wisdom

Turning to the wisdom of the veto, on one pan of the balance lay the risk of exit and the weakening of the veto, on the other were the risks highlighted by the critics (increasing political distrust and anti-euro and anti-establishment sentiment, strengthening the League and the Five Star Movement). Not an easy choice, naturally. Including, paradoxically, because part of the second set of arguments sat uneasily with the neutrality principle: could the president accept increasing the risk of exit to avoid a possible surge in support for the League and the Five Star Movement? Hardly, in pure principle. And yet some critics attacked both the legitimacy of the veto and its wisdom, arguing at once for and against democratic neutrality.

I think the veto was wise, because the risk of exit would have risen more than negligibly. Exit would probably have remained an unlikely event, but as it is potentially destructive – for both Italy and the continent, as the country’s exit would endanger the survival of the Eurozone and the EU itself – the risk dwarfs the side effects.

Of course, I say this because I see the euro as a step for greater political integration – which I view as both vital in itself and the superior response to Rodrik’s trilemma – and I am ready to accept further sacrifices to keep that perspective alive, including those imposed by mistaken European policies. I do not (yet) think that the costs of the flawed architecture of both the Eurozone and the EU justify abandoning either. I may well be wrong, naturally, but clearly this trade-off must be discussed publicly and comprehensively – in some way that is compatible with the constraint I mentioned earlier, for which some institutional ingenuity is probably required – before any step is taken than could precipitate exit.

A fairly roundabout way of forming another underwhelming cabinet

The outcome of the week’s crisis is a semi-technocratic coalition cabinet, with limited experience and modest credibility, both internally and externally, which is supported by political competitors that visibly do not trust each other. In this, it does not radically differ from several previous governments (except, that is, in its programme, part of which is gravely irresponsible, radically unjust, or both: fiscal and migration policy, chiefly). It might restore a degree of stability, therefore, compared at least to the previous few days. Italy needs it, to address the real roots of the crisis, namely low growth, rising inequality, and political distrust.

As I argue in a recent book on the country’s decline, however, these phenomena have very deep causes, the remedying of which will require a long, choral effort of Italian society. But the country seems now squeezed between two political alternatives, the establishment and its ‘populist’ challengers, neither of which seem fully aware of those problems, let alone able or even willing to tackle them (or to contribute constructively to equally necessary Eurozone and EU reform). So, Italy needs also time, to discuss what kind of society it wants to become and organise its moral and intellectual energies into a better set of political alternatives.

Italy’s malaise and delicate balance

The country finds itself in a predicament similar to that of the early 1990s, with two differences. First, she is locked into an inflexible monetary union, which constrains macroeconomic management and is impossible to exit without the potentially catastrophic consequences I mentioned earlier. Second, tainted by its own de facto pro-cyclical fiscal rule and the inadequacy and cowardice of Italy’s political establishment, European integration is no longer the safe anchor and motivating aspiration it once was.

Hence the crisis we just witnessed, of which the events of 27–28 May were just the accidental trigger. Hence also the fiscal policy utterances of the coalition that has just taken office, which suggest a strategy of responding to stagnating productivity and real average incomes with debt-financed fiscal expansion and competitive currency devaluation.

In essence, this was Italy’s macroeconomic equilibrium between the 1970s and the September 1992 currency crisis. The country signed up for the Maastricht criteria and the euro because its then elite realised that this equilibrium was unsustainable in the long term, coupled with the belief that its roots were so deep and entrenched as to require an exogenous constraint – the so-called vincolo esterno –for society to summon the resolve to change itself. Maastricht was a commitment device, in other words, like the rope that tied the young and easily distracted Vittorio Alfieri—a XVIII century poet—to his writing table.

So, to state the obvious conclusion, the main roots of Italy’s malaise are domestic. The country may have met the Maastricht criteria for joining the euro but it failed to shift onto a fairer and more efficient equilibrium. Hence her need to see political alternatives better than the present ones arise.

These observations invite one last remark on those confident critiques, rapidly relayed across the web. Italy’s stability hangs on the delicate balance of powerful opposing forces. It can be compared to a china shop with too few customers, whose bankruptcy could ruin the whole neighbourhood. The elephants that entered it last Monday might, upon reflection, have spoken more advisedly.

This is an edited/abridged version of a piece originally published by LSE Europp blog and combined with extracts from a piece for Il Mulino