It seems apposite that Matteo Renzi’s term as Italian Prime minister should end in this way. This referendum was a surreal distraction. Italy does not need faster political decision-making. Good decisions always trump the overrated trait of ‘decisiveness’. Nor does Italy need fewer checks and balances, with the populist 5 Star movement polling at close to 30%. It is not even clear that Italy’s priority should be ‘structural reform’ – which has become shorthand for wishful thinking. Let’s not forget that Italy has higher life expectancy than the United States – does it really need US-style product and labour markets?

Italy has two interconnected problems. It is cyclically extremely weak, having been needless devastated by the Euro-crisis, and it needs banking sector consolidation. In the days when Italian governments, not the EBA or the European Commission, made the important macroeconomic decisions, Italy would have devalued, and the government would have printed money and bought up the non-performing loans. State aid is the basis of all of all banking resolutions (what is the FDIC after all?), precisely because banking crises are hugely dysfunctional private sector failures. This economic law will be confirmed if Deutsche Bank hits a wall.

If Italy had not been subject to inept and disastrous Eurozone policy-making, Italian output would be 5-10% higher.

The reality of the Eurozone is that there are no effective, urgent counter-cyclical policies in place, nor is there a coherent way to deal with a banking crisis. Renzi is a reminder that nations are not really sovereign if they cannot print money. This has gradually dawned on the Italian political elite. If European institutions functioned effectively, this would be a price worth paying. If they remain destructive, and more concerned with establishing power than exercising it well, Europe’s political future remains treacherous – domestic political elites are incentivised to rebel.

It should not be surprising that ambitious, young, national politicians get distracted by bizarre referenda – which serve only to make the population feel briefly empowered, while leaving everything unchanged.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

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