Financial Markets Between The Italian Referendum and its Banks: The Apocalypse is Near… or Maybe Not

Markets are “nervous” ahead of the referendum in Italy in December the 4^th. The Italian stock index FTSEMIB is underperforming compared to the main European indices, weighed down by the heavy performance of the banking sector. Banks, led by Monte dei Paschi di Siena, are really under tremendous pressure and the markets are massively punishing their stocks.

The spread with German ten-year bond, the “main concern” since the great financial crisis, began to rise again after a long period of extremely low values, which came as a result of the offices of ECB Governor Mario Draghi, with its QE and massive purchases of government bonds.

Just as in 2010, a race to apocalyptic predictions by politics and media has unleashed, with the surprising, though shy, exception by the Economist last week, fearing catastrophic scenarios for Italy if the referendum will reject the proposed constitutional reform by the current government.

The Financial Times anticipates the possible failure of eight banks in Italy if the NO to the reform were to prevail. What impact might directly have this constitutional reform on the state of the accounts of these banks is hard to understand. However, it is quite clear that there is a hardly disguised intention to suggest the possibility of a softer attitude, especially of the European institutions, in trying to support these troubled banks.

But only if the reform is passed. A few days ago, the co-director of the Financial Times Wolfgang Munchau, specifically focused its analysis on the possibility that on December 5, following a negative vote on the constitutional reform in Italy, Europe might face the concrete possibility of its disintegration. What really seems to interest the current establishment the most is not the supposed greater efficiency and governance of the Italian system, but the openings towards a system that makes questioning the current political and institutional framework within the EU way more difficult, openings that are concealed in the folds of this reform, which is considered by many, even very authoritative, analysts and jurists, cumbersome and dangerous for the stability of the country. The contrary is claimed, just as authoritatively, by supporters of the constitutional reform.

If we take a closer look at the fears and markets reactions, we can easily spot the same reasoning which lead the enormous pressure directly and indirectly exerted on Italy immediately after the financial crisis that struck the entire world’s economy. Has the consequent “cure” imposed to Italy in any way addressed the real problems of the Italian system? What benefits has it brought? After all, from 2010 onwards, when in a similar climate Italy bowed to the dictates of the European and world financial institutions to the point of disrupting its political setup, things have not gone so well.

We have witnessed constant announcements of reversal of the negative trend and cheerful growth forecasts, which were first announced with great fanfare every quarter and then promptly rejected or revised downwards. More than six years have passed since the GFC and Italy’s macroeconomic measures have remained very weak, as confirmed a few days ago:

Italian Industrial Orders (Sep) M/M -6.8% (Prev. 10.2%, Rev. 10.7%)

Italian Industrial Orders (Sep) Y/Y 2.6 (Prev. 15.9, Rev. 16.5)

Italian Industrial Sales (Sep) Y/Y -0.30% (Prev. 6.80%, Rev. 7.10%)

Italian Retail Sales (Sep) M/M -0.6% vs. Exp. 0.0% (Prev. -0.1%, Rev. -0.2%)

Italian Retail Sales (Sep) Y/Y -1.4% vs. Exp. 0.0% (Prev. -0.2%, Rev. -0.5%)

On the other hand, what happened to those countries that refused the “cure” and retained the right to decide for themselves the path to follow and maintain the right to choose their government and leaders?

Look at Spain. Its spread with the German Bund was even higher than the Italian one. A country which certainly was not without its own serious problems, struggling with a huge real estate bubble (which Italy did not have), whose bureaucracy is certainly not leaner than the Italian one. Yet, despite refusing the virtuous “tips” of the supranational entities and refusing hetero-imposed governments, Spain has managed to pull itself out of trouble. They were so successful that some analysts are talking about the “Spanish miracle”.

Therefore:

If we consider all that has happened since 2010 (and before then, as I shall indicate later): was it a result of issues and circumstances that can magically, even only in the medium or long term, be finally addressed by the provisions in the constitutional reform?

Can the entity of the planned expenditure savings (laughable actually) or abolition of CNEL really influence in a meaningful way the course of Italian public spending?

I believe that the answer is certainly negative. In a nutshell, the (let me say it clearly) disastrous trend, both in relative and absolute terms, of the Italian economy is indeed a result of a reckless fiscal policy, a government spending out of control, an ever-rising debt, all impacting heavily on the level of domestic consumption and GDP in general. But not even this is enough to explain Italian awful numbers.

We should then ask ourselves: how come the European institutions and international media are engaging in such a heartfelt support of this constitutional reform?

For me the answers are essentially two:

1. As mentioned earlier, this reform hides in its twisted folds a far more congenial legal and political environment to those who want to defend the current European Union framework and the single European currency.
2. The reform shifts the balance of power in favour of the government, as opposed to the parliament. In the current situation, where there is undoubtedly a government basically in favour of European integration policies, a positive outcome of the consultation is functional to those who see in a greater transfer of sovereignty to supranational institutions the only way forward.

To be intellectually honest, it is in my opinion that the negative developments in macroeconomic variables are due, with regard to Italy, to the disastrous impact on the competitiveness of its economy that followed the introduction of the single currency: the eternal uncompleted work of the European Union, triumphantly accepted at the time of its introduction with a meaningless parity with the Italian Lira, defining which as unfair is a charitable understatement. I used the metaphor of connected vessels to propose a simplified model of the impact of the single currency on economies such as the Italian one, comparing the introduction on the EURO with the characteristics that it holds since its inception to the interruption of the link between the vessels, which prevents the liquid to level out within them. Greatly simplified as a model, but it gives the idea of the reason why some economies suddenly steered from a trade surplus to a trade deficit and vice versa.

Following this historic event (and disastrous for the economy) Italy has undergone a process of fierce de-industrialization, virtually irreversible if not in the long run and only if the factors that caused it are eliminated. Even the typical Italian economic environment made up of small and medium-sized companies, a flagship of the Italian economy and element of excellence, stability and innovation was badly hit by the EURO tsunami. An economic environment as harshly criticized as joyfully transferred in those that now are the leading economies in the EU.

This is fact and is beginning to be realized by many.

It is exactly in the situation described above that we can discover, in my opinion, the explanation of everything that is being said, written and done in favour of the positive outcome of Italian referendum, inside and outside of our beloved peninsula.

I personally have my idea of how to assess the situation and act accordingly, but that is not what I want to discuss here.

What I would say, and I take full responsibility of it, is that I find despicable and unfair to fear catastrophes and threaten dire consequences depending on what comes out of the ballot box of what is still, thank goodness, a sovereign country despite all the distortions of recent years, last but not least the lack of legitimacy of the current government, unequivocally sanctioned by the Italian Constitutional Court.

I find unacceptable leveraging the legitimate fears of an impoverished country, deeply tested by years of crisis, also using the greed of those who parasitically live exploiting the system.

I think the only thing that reasonably I would hope is that Italians will focus on the merits of the consultation, its controversial aspects, positive and negative, focusing on facts and data, and choosing what they consider to be the best for their own country, regardless of what might frighten them.

I hope that it will not be fear to choose for them, that they will have courage in the choices, that they’ll look beyond the short term, assuming their responsibilities, agreeing to pay the price of their mistakes, looking at their own future with confidence.

Roberto d’Ambrosio

CEO Alpari Research & Analysis