Today’s column should really start with a review of the rather good looking numbers that Friday’s US payroll report threw up but, not that it should come as a surprise, they have been swamped by a wave of political news.
Starting with the least obvious one, the unexpected resignation of New Zealand Prime Minister John Key. It is unusual to see a popular politician step down, declaring that the tank is empty and that he doesn’t believe he has any more to give his country. On the whole, New Zealand is chugging along quite happily, a status for which Key can take much of the credit. 4.9% unemployment is not a bad. The Kiwi dollar dipped slightly on the news but compared to what Europe might be in for today, that’s all very peaceful.
The second of the big news items is the clear defeat for Norbert Hofer, the Freedom Party candidate, at the hands of Alexander van der Bellen in the rerun of the Austrian presidential elections. This is a rare piece of good news for EU integrationists although I am a little surprised by the way the mainstream lauds van der Bellen, formerly a Green Party activist. The Greens originally grew in Germany out of what was then known as an “APO”, extra parliamentary opposition. In other words the Greens were a populist, anti-establishment movement which in the mid-1970s shook the political elite to the core and which scared the living daylights out of the ruling nomenclature. How short memories are.
In electoral terms, 53% to 47% is a pretty clear result - that’s pretty much spot on the same as the Brexit count in England - but the establishment must finally begin to seriously ask itself what has gone wrong and what motivates 47% of Austrians to cast their ballot in favour of a right-wing nationalist. Van der Bellen’s victory is not a roaring triumph which deserves demonstrative breast-beating and it should be treated as a very lucky escape.
Pollo Italiano
And so to Italy. I flew into Milan yesterday where there was no sign of a developing revolution. That the referendum result was going to go against Prime Minister Matteo Renzi has in truth never really been in doubt although, given the poor record of pollsters in the recent past, anything would have been possible.
Markets were generally braced for the outcome and so far the reaction to the thumping defeat - give or take 60% to 40% - has been muted. The euro fell by a tight 1% against the dollar to a 20-month low at US$1.0560 but apart from that, so far at least, there are no moves that could not have happened and without special reason on any given Monday. Maybe St Mario’s inference that the ECB would do “whatever it takes” has been enough…
Whether the relative calm is because markets really are sanguine or because they haven’t worked out how to price something of which they don’t know what the next step might be is, to be honest, slightly unclear. Asian markets are softer this morning and bonds have caught a bit of a bid but this could be just as much on the back of political developments in New Zealand or Korea as they are response to the Italian referendum.
There is the old maxim that if you don’t want to know the answer, don’t ask the question. The outcome of the referendum is a clear expression of discontent within the voting population although, despite having spoken, we don’t know quite what they are telling us. The fact is that Italy is and has been for as long as even I can remember - and that’s quite a long time - ungovernable. Parliamentary reform has been long overdue. Much is always made of Germany and the much vaunted collective fear of inflation - which is rubbish because there is barely anybody left alive who can remember the 1920s - but only rarely does anybody refer to Italy’s caution when it comes to vesting too much political power in one individual. The dictator Benito Mussolini did, after all, rise to power well before Adolf Hitler. The latter admired the former for having achieved that feat and it was his aim to replicate Il Duce’s success in seeking total control of his country.
Diminishing the relevance of the Senate - both houses are equal in the Italian legislative process - was seen by many Italians as exposing the country to the risk of offering the leader of the majority party near dictatorial power. That a frustrated electorate saw a recalcitrant senate as the sole guarantor that the country would not be run entirely to Brussels’ rules is beyond the point.
Not unlike Greece, Italy has massive economic problems that are hard to resolve without the ability to devalue. Caught in a zero growth trap and with a zombie banking system, the austerity corset that Brussels is trying to impose sits deeply uncomfortably with a people that has spent 30 years enjoying the solutions provided by the EU without ever asking itself any of the concomitant questions. It is a country of staggering potential, which sadly missed the inflection point and which has now traveled too far down a fiscal cul-de-sac to be able to reverse and revise its itinerary.
Despite the huge victory for the ‘No’ campaign, it is still highly unlikely that a referendum to leave the EU would meet with success, in which case the problem is not with Italy but with the rest of the union’s members. Greece has so far cost around €220 billion; Italy, as we all know, is both too big to fail and too big to rescue. Even Bepo Grillo knows that.
Markets are wobbling today but they will, in all probability, not go into meltdown. Not because they don’t want to but because thinking the unthinkable is best not thought.
Hang on to your hats and have a good week.