Go Beppe! Italian Elections and the Next Austerity

“They can’t hold us back any longer” – Giuseppe Piero “Beppe” Grillo

For those of you not watching the internet yesterday, Italian comedian turned politician shocked the political world today by launching his “Five Star Movement” to the forefront of Italian politics. It is a 100% grass-roots movement, rising up outside of the mainstream political classes and even refusing to use television as a media outlet (at least for campaigning). Grillo and his followers campaign in person and make extensive use of social media (Italy is small enough that the “in person” bit can work out).

Once considered a long shot and a joke (no pun intended) Grillo’s movement has become the largest single party in Italian politics (by popular vote anyway). In the race for the Chamber of Deputies (effectively their House of Representatives) Grillo’s party took 25.5% of the vote, edging out Pier Bersani’s 25.4%. Now, Bersani’s group ran with a coalition and has secured the largest plurality, giving them control of the Chamber.

The whole election has basically led to a split government. Bersani will control the Chamber but not the Senate, where former Prime Minister Silvio Berlusconi has the largest number of seats (but not a majority), and Grillo (who ain’t dealin’) holds enough to keep Bersani from forming a majority coalition with the rest. General conclusions are that we’ll see another election in a few months.

I’m not here to endorse Grillo – the guy has some whacky policies (like a 20 hour work week). But the fact that he did it outside the mainstream of politics is awesome. We take heart that when the system becomes utterly corrupt and unmanageable, an outsider can step in and shake it all up.

Even if you didn’t follow the Italian elections today (and why would you?) chances are you have felt or will feel the effects. The markets have certainly responded, mostly by taking a nosedive. It was generally held by the mainstream that a Bersani government would be much like the outgoing Mario Monti government, holding the line on Eurozone-demanded austerity and reforms. (And, when I say “Eurozone-demanded” I mean “German-demanded”.) This is preferred by the banking-class because it makes sure all pain and risk lie with the masses, while the proceeds go to the elites. The rise of Grillo, and the resurgence of Berlusconi, threaten the status quo, as both seem inclined to push against the demands of the Eurozone. (Actually, Berlusconi seems “inclined” … Grillo out-and-out supports leaving the Eurozone.)

Austerity appears to have been the big issue in the election, as one might imagine. We face the same issue over here, just not to the same degree yet. When people are used to getting something extra from the government (whether a direct payout or some other form of largesse) they are loathe to relinquish it. A skilled politician (like Berlusconi) or even a charismatic comedian (Grillo) can take advantage of massive public opposition to reforms and take down an election.

The result appears to be, in some sense, the Italians calling the bluff of the Germans. For years the southern European states (the PIIGS: Portugal, Italy, Ireland, Greece, and Spain) have lived on borrowed money and borrowed time. They fund political corruption (Greece, Spain, and Italy anyway – I don’t want to impune Ireland and Portugal) through borrowed funds and a banking system propped up by lower-than-reasonable lending, all based on the strength of the northern economies (Germany) and the monetary union of the Eurozone. Sooner or later the bill comes due. Either the PIIGS default on the money owed to the north, or they knuckle under and pay it back.

Until now the north has effectively said “implement austerity and we’ll loan you enough to keep you going a little while longer.” The Italian election may be the first step in the south responding “you’ll loan us more to keep us going, or we’ll just default on the rest.” As the saying goes, if you owe a man $50 it’s your problem, but if you owe him $50,000,000 it’s his problem.

To be sure, it is a game of brinksmanship, and probably better played by skilled politicians than comedians (sorry Beppe). A default would render Italy unable to borrow money, and enforce immediate austerity. While I think that’s probably a good thing in the long run, it would not feel great for the average anti-austerity citizen in the short run.

Will the election have an impact over here? Boy I hope so. Any time a “throw the bums out” mentality flourishes it gets the attention of politicians everywhere.

Then there’s the slim chance that this is the new “Lehman moment” (or, more generally, a Black Swan moment) – where a seemingly mild disruption on the financial scene leads to unraveling chaos. I doubt that will happen just now, but the threat of the Eurozone breakup has a lot of folks worried (and a lot of folks planning ahead … ahem). Further, I can only imagine the Washington insiders are taking a look at every angle of this election before making decisions/compromise on the impending “sequestration” cuts in America. Economic difficulties may be coming regardless of sequestration, but if the two happen simultaneously the blame-game will be intense.

As the saying goes, politicians cannot abide scorn. OK, that’s not really the saying, but it’s close.

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