Rumors of Europe's imminent demise—or right-wing nationalist takeover—have been greatly exaggerated, it turns out.
Voters in Austria and Italy went to the polls this weekend. Austrians chose the establishment candidate Alexander van der Bellen as their next president—a largely ceremonial role—while Italians emphatically rejected Prime Minister Matteo Renzi's plan to reform the Italian constitution, driving him to resign. Neither of the two elections, however, was an embrace of populism, even though in Italy the weakest banks there now face an uncertain future.
In Austria, van der Bellen received 53.3 percent of ballots from the 74.1 percent of the electorate who voted against 46.7 percent for his far-right opponent Norbert Hofer. This is a far clearer result than the initial election in May 2016, where van der Bellen won with only 50.3 percent of the 72.7 of voters who participated; the election was later annulled by the Austrian courts for sloppy voting procedures. A majority of Austrians hence rejected a far-right and until late in the campaign outright euroskeptic candidate in what will be viewed as an important political win for traditional pro-EU parties. It cannot be ruled out that at least part of the reason for the increased voter participation in the second election and the clearer victory for the establishment candidate is related to the increased political uncertainty following the June 2016 Brexit vote and the election of Donald Trump as US president. When faced with a real choice, Austrian voters hence chose stability and establishment over protest.
The surprisingly large scale of the defeat suggests many voters abandoned Renzi's constitutional change at the last minute out of fear that it would empower the prime minister too much at a time when rightwing forces are ascending.
In Italy, Renzi suffered a crushing defeat of nearly 60 percent to 40 percent against the referendum to change the Italian constitution. As a result, he has announced his resignation. Such a large defeat shows Renzi failed not only to convince center-right voters but also large parts of his own leftist supporters, and did not manage to mobilize young voters behind his call for change. While populists in both the Northern League and the Five Star Movement will undoubtedly claim the election as a massive anti-establishment result, this is far from obvious. Rather, the surprisingly large scale of the defeat—the last polls indicated a much narrower "no" win of only 5 to 7 percentage points—suggests that many centrist and leftist voters abandoned Renzi's constitutional change1 at the last minute out of fear that it would empower the office of the prime minister too much at a time when rightwing forces are ascending. Ironically, the scale of the victory likely reflects an anti-populist vote in favor of checks and balances and the status quo. For many Italians perhaps still smarting from their experiences during the Berlusconi years, if unconstrained populism is a risk, continued political gridlock seems preferable.
Moreover, given the margin of the "no" victory, President Sergio Mattarella is unlikely to call for early elections and is far more likely to try to establish a caretaker coalition government to see out as much of the remainder of the current election period as possible. Given how other parties like Silvio Berlusconi's Forza Italia are also currently doing poorly in the polls, it should not be so difficult for the Italian president to find a majority in parliament for a temporary caretaker government. He will probably task it with overseeing a change (demanded by the Constitutional Court) to the current Italian electoral law, which will almost certainly make it more likely that only coalition governments can take power, as well as possibly align the different electoral rules for the two chambers of Parliament to increase the likelihood that the same coalition will have a majority in both houses. Such a law would obviously weaken the prospects of either the Northern League or the Five Star Movement ever taking power, as these two populist parties are both strongly opposed to each other and unlikely to get more than 50 percent of parliamentary seats on their own. Italy, in other words, is not on the cusp of a populist takeover as a result of the referendum.
It is clear, however, that another reformist center-left leader in Europe has been politically hobbled, only a week after French president François Hollande chose not to seek reelection in 2017. This shows the difficulties for Europe's center-left to remaining in power during a period when anti-immigration sentiment in Europe is high and the economic situation for many voters remains tough. The Austrian election highlights, however, that outright populism is not necessarily the inevitable next step, as voter majorities there remain hesitant to embrace such alternatives.
As the large no vote in Italy stems primarily from anti-populist sentiment, a large sell-off in Italy and Europe seems highly unlikely. Still, for Italy's crisis-stricken banks, the result is clearly bad news. It now seems improbable that Monti dei Paschi Siena (MPS) Bank, Italy's third largest, can raise the €5 billion in new private equity capital in the coming weeks as required by the European Central Bank. Instead, MPS is likely to be restructured, and equity and at least junior bondholder bail-ins (creditor losses) appear to be a near certainty, while the main uncertainty is whether more senior bondholders and previous retail depositors are spared and whether the Italian government will contribute any capital. The same fate may befall some of Italy's smaller banks—such as Popolare di Vicenza, Veneto Banca, or Carige—that also need more capital quickly. Tough negotiations between the Italian government and European authorities await. Yet, restructuring parts of Italy's excessively large and poorly managed banking system is necessary, if politically painful, if the country is to return to higher sustainable growth rates. More short-term pain for Italy's banks is not necessarily a bad thing, nor if handled properly likely to start a crisis of confidence in the Italian financial system.
Given that the long overdue restructuring of at least parts of Italy's banking system now seems to be on its way and is likely to be handled by a caretaker and perhaps technocratic government, the longer-term political fallout has become more uncertain. Certainly, Italian politicians will try to avoid getting blamed for any bail-ins of retail depositors sold bank bonds under false pretexts of safety by handing the political responsibility temporarily over to technocrats and tasking them with the dirty work. And perhaps even Renzi can escape any blame, as he will no longer be prime minister and can credibly say to any aggrieved bank investors "I told you this would happen if the vote was a 'no.'"
Who ends up paying the political price for the economic fallout of Italy's referendum result? That remains to be seen. And while Italy will likely avoid a populist takeover in the short term, there is no guarantee that a much needed reformist government will be elected in the future.
1.The late surge for "no" is likely to have come from establishment voters, as there was no large uptick in poll support for the Five Star Movement or the Northern League during the referendum campaign.