Inside Renzi’s Referendum: What’s at Stake In Italy?

Matteo Renzi press conference, Rome
Matteo Renzi (pictured), the current centre-left Prime Minister of Italy, has gambled his political viability on a landmark referendum designed to reform and streamline the country’s political process.

On 4 December 2016, Italian voters will be asked the following question:

Do you approve a constitutional law that concerns abolishing the bicameral system (of parliament), reducing the number of MPs, containing the operating costs of public institutions, abolishing the National Council on Economy and Labor (CNEL), and amending Title V of the Constitution, Part II?

While this question seems rather technical and perhaps a bit insignificant, the political ramifications are drastic. Matteo Renzi, the centre-left Prime Minister of Italy, has stated that the referendum is so important that he would resign if the voters did not answer “yes”. That pledge has led many to in the country to view the question as a referendum on Renzi’s governance. At this moment, the polls signify a toss-up, with both “Yes” and “No” garnering 50% of the projected vote.

The referendum aims to bring stability to a rather tumultuous democracy that has had 63 premierships in the last seven decades. Both the Chamber of Deputies and the Senate, the two houses in Italy’s bicameral legislature, have an equal amount of power in government. This often to leads to a deleterious amount of gridlock, as both chambers must approve each bill in an identical form.

The proposed referendum would reduce the number of Senate members from 315 to 100 and give the institution far less power than the Chamber of Deputies. It also seeks to eliminate Italy’s 110 provinces—regions that typically have overlapping duties and whose governments serve as yet another layer of bureaucracy. The National Council for Economics and Labour, a group of 64 councillors who advise the government, would also be abolished under the proposal.

These reforms would greatly streamline the Italian political process and most citizens would be foolish to oppose them ceteris paribus. They are slated to save the Italian government €500 million. With Renzi’s injudicious decision to personalise the referendum, however, many view it as a conduit to oppose the current government that has failed to deliver economic growth. The country’s national debt has reached 132.7% of GDP and the entire banking sector is facing heightened risk due to debt accumulated during anaemic economic growth.

Renzi is now even facing dissent within his own party; Ignazio Marino, the former mayor of Rome, and Gianni Cupelo, the President of the Democratic Party, are now campaigning against the referendum. In another section of the political spectrum, Beppe Grillo’s syncretic populist Five Star Movement seeks to mount a significant political victory if the referendum fails, and is has now reached parity with the Democrats in the polls.

If “the referendum is about the future of the country, not about mine,” as Renzi told Radiotelevisione italiana last Friday, then he should seek to make the referendum focus on ameliorating the pressing issues in the Italian political system, not his electoral viability.

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Kuroda’s Monetary Policy Bazookas and the Failure of Abenomics

ADB's Kuroda Says Additional BOJ Easing Can Be Justified for '13
Haruhiko Kuroda, Governor of the Bank of Japan, speaks during an interview in Tokyo, Japan, on 11 February 2016. His stimulus programmes as BoJ head have sparked international controversy and discourse but have unfortunately ended in a resounding failure.

Since Haruhiko Kuroda became Governor of the Bank of Japan in 2013, he has implemented a labyrinth of monetary expansion initiatives, including the famous quantitative easing programme of ¥‎80 trillion per year and the negative interest rate policy. As a major tenet of the Abenomics reform package, this was intended to stimulate Japan’s ailing economy.

The most pressing issue for both Kuroda and Prime Minister Shinzo Abe is that these reforms did not—even remotely—achieve their desired goals. Inflation is nowhere near the 2% annual target and GDP growth is lacklustre. Since the dawn of the 2008 financial crisis, the Japanese economy has endured five recessions and GDP growth that is stagnant at best.

Abe’s reform package relies heavily on a weaker Yen to increase exports, raise corporate profits, and fight deflation, but this is not materialising either. Since January 2016, the Bank of Japan has improvised a -0.1% interest rate on many reserves and yet the currency has still increased 18% vis-á-vis the US dollar since the new target rate. The asset purchasing programme, which has now been implemented at the ECB as well, has resulted in the Bank of Japan holding 38% of Japanese government bonds. This astonishing figure is more than double the 14% of US government bonds held by the Federal Reserve after its quantitative easing scheme under Bernanke and Yellen.

In a desperate attempt to finally revitalise Japan’s economy, many observers are pointing to helicopter money as a means to increase aggregate demand and hopefully economic output. While this has not been implemented at the central bank level, Abe’s cabinet did approve a 13.5 trillion stimulus programme in August that focuses on public works spending. The recent appointment of Toshihiro Nikai, a long advocate of this variety of spending, as Secretary-General of the Liberal Democratic Party signifies Abe’s commitment to this new plan.

There is one significant problem with this new plan—it isn’t new at all. Following the burst of the Japanese property bubble in the early 1990s, several administrations, notably that of SPJ PM Tomiichi Murayama, initiated massive stimulus programmes in civil projects to jumpstart the economy. In fact, the massive demise of this policy was even used in the United States to argue against the Obama administration’s American Reinvestment and Recovery Act. Like many Western nations, the plight of the Japanese economy is the result of structural forces that are regulatory, tax-related, and demographic.

In their reckless aim to artificially boost the economy, Abe and Kuroda both fail to realise this. While the BoJ Governor said in late 2015 that negative rates were not an option, he proceeded to implement them in January the following year. Any denial of prospective helicopter money directly from the BoJ should likewise be viewed as a tentative hope for the future, not as an actual policy position. After the pledge of a “comprehensive review”, the BoJ has now decided to begin a new yield-curve monitoring programme during the late September meeting.

A glimmer of hope once existed for the Japanese economy: the Trans-Pacific Partnership. Unfortunately, due to populist forces fuelled by demagogues such as Bernie Sanders in the Western world and the Renho-led Democratic Party’s opposition to the deal, this lifeline is unlikely to come to fruition.

As Japan’s international competitiveness continues to decline, leaders in both the BoJ and National Diet will attempt to employ any method possible to save future generations from malaise…

…except the ones that actually work.