Italian Referenda Today are the Warmups for 2018

Today Italians in the regions of Lombardy and Veneto are voting on non-binding referenda to empower the local governments to push for more autonomous control going forward.

According to a good article over at Zerohedge on this:

At its core, today’s vote is about whether taxes collected in the two wealthy regions should be used far more for the benefit of the two regions, or diluted among Italy’s other, poorer regions, especially in the south. Lombardy sends €54 billion more in taxes to Rome than it gets back in public spending. Veneto’s net contribution is 15.5 billion. The two regions would like to roughly halve those contributions – a concession the cash-strapped state, laboring under a mountain of debt, can ill afford.

The two regions are both run by the once openly secessionist Lega Nord, or Northern League party, which hopes that the result will give it a mandate to negotiate better financial deals from Rome. The Northern League was established in the 1990s to campaign for an independent state of “Padania”, stretching across Italy’s north, from around Lombardy in the west to Venice in the east. It no longer campaigns for secession but argues that taxes the north sends to Rome are wasted by inefficient national bureaucracy.

What is lurking in the background here is that Italy’s banking system is effectively toast. And the richer regions rightly understand that when the situation blows up they will be on the hook for the bailouts/bail-ins.

Referenda on the ECB

The implosions of two Veneto-based smaller banks, Popolare di Vicenza and Veneto Banca, in June underscores this point (for a good run-down on that story see this article at Seeking Alpha). The European Central Bank could have ‘bailed-in’ the depositors and senior bondholders in but chose not to knowing that it would have been political suicide to do so.

The Italian central bank and the ECB were intimately involved in managing these two banks which eventually had to be sold for a symbolic €1. And in the process blinked when it came to not socializing the costs of this.

The important take-away here is that more of this will occur as long as Italy remains within the euro. With the rally in the euro this year to $1.21, it’s put an even-bigger burden on Italian banks in serious need of recapitalization.

These referenda are simply warm-ups for negotiations with Rome for the general parliamentary elections coming up in May 2018. Between the Northern League and the Five-Star Movement the possibility exists for a coalition government that is openly hostile to EU austerity plans and, if necessary, would pull Italy out of the euro-zone.

In fact, if Italy wants to survive as a country, it will have to do this by devaluing its debt, bailing out its banks and beginning the rebalancing process. If Italy does not, or is not allowed to, leave the euro then the ECB will be on the hook for the mountain of bad debt and the bailouts which will ensue.

And this is why ECB President Mario Draghi cannot stop buying sovereign debt issued by these bankrupt countries. These two bank failures tell us that the ECB will pay the bills. It will just make a show of not doing so.

So, instead of bailing-in the senior bond-holders and the depositors, which would have wiped out even more people locally, the ECB pawned off the costs to the Italian government, who will then issue new debt that the ECB will buy.

Why the Vote Now?

Because with more bank failures on the way the richer regions of Italy can maintain tighter control over the money sent to Rome and therefore deal more directly with their own emergent financial problems while protecting themselves from the bigger problems down south.

That’s what a big part of this is about. And the challenge the Bank of Italy’s chief, Ignazio Visco, a Draghi-ally (nee stooge), is another potential pitfall for the EU to maintain control over the Italian political situation.

The Democrats are trying to gain political points by attacking the Bank of Italy’s handling of the bailouts. They are locked in a fight with Five-Star Movement in the polls. Moreover, there are potentially more of these referenda in the pipeline depending on today’s results.

Positioning for the May elections is important as it will be the first real opportunity for Five-Star Movement to gain control of the Italian parliament and stick a major thorn in the EU’s eye.

Because lurking in the background is Germany who believes in maintaining a euro that is under-valued relative to Germany’s productive capacity and over-valued versus the rest of Europe.

And the great sucking sound you hear is the wealth of Europe being rolled into the maw of Germany’s control over the EU. Leaders of Five-Star in Italy and Front Nationale in France understand this much more so than the Euroskeptic parties in Spain and Greece do. And that’s why they try to play the game of negotiating with Germany for debt relief rather than truly threaten to leave the euro.

Italians in general have a much less respectful attitude towards 1) its own government and 2) any foreign rulers/occupiers. And for that reason Italy is the real test of EU leadership and why the measures to keep it placated (bailouts) and subdued (appointing leadership) have been so heavy-handed.

Removing Berlucsconi back in 2011 was one thing. It won’t be cottoned a second time if Five-Star and his Forza Italia! win in May. And even if they don’t, at that point the Northern League will be in a prime position to play king-maker and get whatever they want.

At that point, the EU will have a real problem on its hands.