The Five Star Movement and the Potential for Real Change

                    

In Italy the populist Five-Star movement (M5S) may potentially win the next election and form a government. Pundits and markets are alarmed at the potential victory of M5S because its leadership has promised a referendum on the euro, the common currency which many Italians regret and might very well vote to leave if given the option. According to the professional doomsayers, Italy’s leaving the common currency would lead to uncontrolled and cascading financial crises and would represent an existential threat to the European Union.

However, the dynamics are much more nuanced than pundits assume, and this should council skepticism towards their apocalyptic predictions on the potential consequences of a populist victory in Italy.

First, any referendum on the euro would be consultative, not abrogative, because the Italian constitution forbids the abrogation of international agreements via referendums.

Second, M5S are not opposed to the euro per se, rather they object to the current set-up which ensures the continuation of austerity policies which have socially devastated Italy and other periphery Eurozone countries. In addition, the M5S recognizes that the common currency needs a political union to be sustainable. Hence they are demanding changes to the currency to make it work, changes that accord with the suggestions of the IMF, the European Central Bank, and numerous reputable think-tanks.

The purpose of a referendum on the euro, then, would be to send a signal to the country’s representatives and Italy’s European partners about how the majority feels about the currency, and this would occur after attempts to finally fix it. If the efforts to resolve the euro’s problems succeed, a majority of Italians would likely vote in favour of preserving the common currency.

This is actually an excellent strategy because Eurozone leaders have been complacent about fixing the structural flaws of the euro. After the debacle with Greece in the summer of 2015, French and German leaders presented proposals to create a banking union and centralized political institutions to underwrite the euro and to help correct the imbalances that led to the crisis. These proposals were soon forgotten, however, and hence the euro remains vulnerable and continues to disadvantage periphery countries like Italy. The threat of a referendum, even a consultative one, might just be what French and German officials need to spur them to action.

Of course, this raises the question of what might occur if this strategy of pressuring Europe’s core fails and, when a referendum on the euro proceeds, the majority of Italians vote to leave. In this scenario, given that the referendum would not be abrogative, the elected representatives of the country would have the final say on whether to officially leave the currency. If they did, a financial crisis and the end of the EU would not be inevitable. That would depend on the way the process is managed. Policies to mitigate the harmful effects of the transition would include temporary capital controls, a commitment to stay in the EU while leaving the euro, and a reserve fund to pay for essential imports.

A victory for the Five Star Movement in the next election could set in motion one of the scenarios sketched above. Either way, they would be doing Italy and Europe a favour. The threat of a referendum on the euro might spur Europe’s leaders to take action and finally fix the flaws of the currency, helping to put Europe on a more secure financial footing. If this threat fails, the referendum proceeds and a majority of Italians vote to leave the euro, they will be expressing their democratic right to leave a system that has caused them much financial, social, and political difficulty.