The People vs. Democracy?
Are voters really so irrational and ill-informed that they make terrible choices, as the election result in Italy, the UK's Brexit vote and the election of Donald Trump in the US seem to suggest? If they are, as many liberals have come to believe, the obvious next step is to take even more decision-making power away from them.
PRINCETON – The election result in Italy, where populists and far-right parties topped the polls, following the twin disasters of Brexit in the United Kingdom and Donald Trump’s election in the United States, seems certain to harden a common liberal belief: the people brought these calamities on themselves. “Ordinary citizens,” according to this view, are so irrational and ill-informed that they make terrible choices. Some go a step further and attribute to them coherent preferences for anti-democratic leaders. Indeed, a new book asserts that the problem is one of The People vs. Democracy.
Such diagnoses are deeply mistaken. By focusing on individual citizens’ beliefs, they miss the structural reasons for today’s threats to democracy. As a result, they are also bound to yield the wrong practical lessons. If one really believes voters are incompetent or illiberal, the obvious next step is to take even more decision-making power away from them. But, rather than retreating to technocracy, we should tackle the specific structural problems that have aided the triumph of populist politicians.
There is plenty of evidence that citizens are not as well informed as democratic theory would like them to be. Especially in the US, political scientists have repeatedly shown that a realistic view of the people diverges drastically from civics textbook wisdom. But elections are neither citizenship tests nor exams in master’s programs in public administration. Voters do not need detailed knowledge and preferences on every policy question; broad orientations and the capacity to take cues from trusted authorities – politicians, journalists, or, God forbid, experts – can be enough.
The problem starts when citizens view every issue purely as a matter of partisan identity, so that the credibility of climate science, for example, depends on whether one is a Republican or a Democrat. It gets worse when partisan identity becomes so strong that no arguments from or about the legitimacy of the other side ever get through.
Trump was not elected as the candidate of a grassroots movement of globalization’s angry white losers, but as the leader of an establishment party. Long before Trump, that party – and its cheerleaders in the right-wing media – had started to demonize its opponents and effectively told its followers that they could never opt for “European-style socialists” and other un-American abominations under any circumstances. Thus, Republicans who readily admitted that Trump was not qualified to be president voted for him anyway.
In the US, polarization is not an objective reflection of given cultural differences; it has at least partly been a conscious elite project to divide the country for political advantage and sometimes even personal profit. After all, polarization is also big business, as a quick look at the earnings of major figures on Fox News and talk radio can confirm.
Observers who claim that Europe is now split between a liberal-democratic West and an East where deeply illiberal electorates have brought populists to power make the same mistake of explaining all political outcomes in terms of culture. They, too, attribute authoritarian outcomes to what voters allegedly “really wanted.”
But recall the crucial elections in Hungary in 2010 and Poland in 2015: as my colleague Kim Lane Scheppele has pointed out, voters then did exactly what democratic theory told them they should do in a two-party system. In Hungary, a dismal economic record and corruption discredited the major left party, so it was time to vote for the other side. In Poland, the center-right Civic Platform had an excellent economic record but was widely perceived as having become complacent after many years in power.
In 2010, Viktor Orbán did not campaign on a promise to draft a new constitution, weaken checks and balances, and radically reduce media pluralism. Instead, he presented himself as a competent mainstream Christian Democrat. In Poland, the Law and Justice (PiS) party went out of its way to stress its character as a reasonable conservative party which simply wanted to provide more benefits to families with children.
Many people remembered the dismal, polarizing performance of PiS leader Jarosław Kaczyński as prime minister from 2006 to 2007. But Kaczyński kept out of the limelight, and let someone else lead the government. Even today, he is nominally a simple member of the Sejm (parliament) – even if he controls the administration from behind the scenes.
Once in power, populists like Orbán have engaged in all-out cultural warfare. In the name of “unifying the nation,” they have divided their societies, betting that, after getting most media under their control, they can manipulate public opinion to remain in power.
As in the US, the imperative is not to lament people’s authoritarian tendencies, but to tackle the structural problems that have enabled populists to do well. For example, not everything populists say about those “left behind” is wrong; nor is it always a mistake to suspect that parts of the state have been captured by special interests. But these ground-level grievances always need to be articulated and represented with the help of media and political parties. It is media and party systems that are visibly failing in many countries and require systematic re-building.
To be sure, more and better civic education also would help. Such education has been declining for decades, because it does not easily fit curricula that rely heavily on standardized testing. If done properly, it is also very time-consuming and thus detracts from subjects that appear more useful in the short run, in the sense that they are supposed to contribute more directly to economic success. Civic education can be crucial in helping young people to manage disagreements and recognize other citizens as legitimate opponents in democratic conflicts. Cultural differences will not and should not disappear, but if the people themselves have learned to live with them, populists will not succeed in using them as political weapons.
Will More Italians Vote With Their Feet?
Roughly 5.5 million Italians – 8% of the country's population – currently reside abroad, with 1.5 million having left since 2007. The results of the recent election are likely to convince even more of Italy's best and brightest that they would be better off leaving.
MILAN – Italy’s inconclusive general election, with its clear populist drift, will likely lead to a prolonged period of political stalemate, freezing the adoption of much-needed structural reforms. But the deadlock, and the related perception that the country is unwilling to change, might have another chilling effect. It will push more of Italy’s top talent abroad, exacerbating a trend that has plagued the country for more than a decade.
Since 2007, almost 1.5 million Italians have left the country, joining four million other expats. To put the number in perspective, roughly 8% of the Italian population currently resides abroad. But the actual figure could be higher. Italian expats refrain from declaring to national authorities their true residential status to preserve their access to benefits like free health care.
Around one-third of these émigrés hold university degrees. Many are highly qualified professionals working in finance, consulting, academia, architecture, or law. And stories about Italian entrepreneurs who found successful companies in the world’s Silicon Valleys are legion.
France, Germany, the United Kingdom, and the United States are the main magnets. London, is said to be Italy’s fifth-largest city – after Rome, Milan, Naples, and Turin – with roughly 250,000 Italians. Not even Brexit has halted immigration from Italy, contrary to the prevailing trends in Western Europe. This is a clear symptom of the dissatisfying conditions back home, where a rigid labor market, inadequate funding for academic research and start-ups, and a socioeconomic system biased toward the old prevent individuals from expressing their full potential.
But Italy is not just losing skilled, ambitious, and visionary workers. Its intellectual elite is pouring out of the country, too. OECD data for the years 1996-2011 show that, among the largest European countries, Italy is a net contributor of scientists to the rest of the world. Making matters worse, it trades researchers with a track record of highly significant publications for mediocre ones.
In economics, seven of the eight recipients of the Carlo Alberto Medal, which is awarded biennially to an outstanding Italian economist under the age of 40, were teaching in elite foreign universities. And when one looks at the very top of the talent distribution, the situation is even more disheartening. With few exceptions, Italian recipients of Nobel prizes, the Fields Medal in mathematics, the Pritzker Prize in architecture, or the Breakthrough Prize in life sciences have spent their careers abroad.
The loss for the country is twofold. First, those who leave are usually educated in Italy at government expense: around $600,000 for the full school career of each college graduate. It is as if the country had lost 4-5 percentage points of GDP each year since 2007. Second, because expats are usually the least satisfied with the status quo, Italy loses the most likely agents of change – those who would disrupt a stagnant economy and push the technology frontier outward.
If Italy’s president, Sergio Mattarella, succeeds in pushing for a government of national unity, he should put the brain drain problem at the top of the political agenda, along with the labor market, the financial sector, and the pension system. Being an issue of national concern, no political force would obstruct it. And to prove the government’s commitment to the issue, the next prime minister should expand the government team by appointing a diaspora minister.
Ideally, Italy should reverse the brain drain by adopting the necessary reforms to retain and re-attract its own talent. But, even if the current parliamentary constellation were more reform-minded, the effects of such measures would materialize only in the long term. The diaspora ministry should focus instead on short-term fixes, like engagement policies and leveraging expats’ emotional attachment to their homeland. Even from afar, they can contribute to Italy’s renewal by increasing the flow of knowledge, money, and innovation back home, promoting the national interest internationally, connecting local businesses with the global market, and helping build partnerships with research centers or private companies abroad. And one day, if true change happens, they might even decide to return home.
The new ministry should map the diaspora and compile detailed profiles of the skills and expertise possessed by Italy’s top minds abroad. Thus, it would be possible to assess the severity of the brain drain, build a bridge with potential employers at home, and involve the most successful émigrés in philanthropic and mentorship projects. In addition, the government should organize on a regular basis formal events with expats and exploit their ideas and experience to promote innovation, entrepreneurship, and the growth of key industries.
Ireland represents the best source of inspiration for such a program. Since 2009, Ireland has maintained a program called “Global Irish” to promote engagement with the country’s massive diaspora through the establishment of an ad-hoc ministry and the adoption of targeted measures like the Global Irish Economic Forum. Ireland’s impressive recovery from the financial crisis a decade ago would have not been possible without the support, recommendations, and engagement of its diaspora.
For too long, Italy has ignored its brain drain. Paradoxically, the current stalemate provides an excellent opportunity to address it.
The Electoral Fate of Italy’s Banks
To fix Italy's banking system, the government that emerges from the general election in March will need a solid majority, a comprehensive strategy to boost economic growth, and a willingness to confront vested interests. But none of the parties has shown any indication that it can meet any of these criteria, much less all three.
LONDON – As Italy approaches what promises to be one of its most contentious general elections since 1945, banks are the elephant in the room. Too big and cumbersome to be ignored, they are a constant source of embarrassment for the parties that have been in government since the global financial crisis of 2008, especially for former Prime Minister Matteo Renzi, who hopes to rekindle his political career in March. They are also an inviting anti-establishment target for the populists of the Five Star Movement.
Indeed, Italy’s banks epitomize all the problems that the financial crisis brought to the country, and on which the populists are capitalizing: a double-dip recession followed by sluggish GDP growth, high unemployment, especially among the young, and a collapse of domestic demand. Banks also embody the tangle of vested interests, malpractice, and even corruption that, together with la dolce vita, have come to be associated with Italy.
Despite the bail-in of four local banks, the bailout of Monte dei Paschi (one of Italy’s systemically important banks), the liquidation of two regional banks, and the market-led rescue of the mid-size banking group Carige – all within two years – the banking system has yet to be stabilized. Will the underlying economic recovery – this year and next, the Italian economy should grow in real terms by 1% – assist Italy’s banking sector by keeping a lid on a stock of non-performing loans (NPLs) totaling nearly €180 billion ($220.9 billion)? Or should the recovery be used to clean up wobbly banks’ balance sheets, by bundling their NPLs and selling them at a discount?
Before the global financial crisis, Italy was described as a country of solid banks that were rooted in the local economy and never played with exotic financial instruments such as derivatives. It was also said to be a country of prudent savers, who buttressed the profligate public sector and its expanding debt.
In the aftermath of the collapse of Lehman Brothers in September 2008, Italy’s then-finance minister Giulio Tremonti famously endorsed the health of the country’s banking system. As a result, a major recapitalization of Italian banks and the creation of a “bad bank” to absorb NPLs were deemed unnecessary.
Ten years later, Italy is no longer that imagined land of prosperous banks and happy savers. The prolonged recession and economic malaise have dented the individual savings rate, while banks no longer have the resources to provide peace of mind to many retail investors, whose trust has been severely eroded.
The implicit pact between banks and savers was broken in late 2015, when four troubled local banks were bailed in and the shareholders took the hit. For years, this pact had underpinned Italian-style financial repression, whereby risk-adverse savers traded safety, implicitly assuming that banks could not fail, and accepted relatively low real returns. The political backlash that ensued from the bail-in triggered a blame game between the government and the opposition parties, and even between politicians and regulators, with all blaming the European Union and its banking regulations.
The government that emerges on March 4 will have to make the banking sector a high priority. In order to restore confidence among savers and investors, it will have to find a solution to clear banks’ balance sheets of NPLs, which are undermining credit, making capital more expensive, and thus acting as a drag on the economy.
The solution must be market-led, as the volume of NPLs is far too big, and the recovery far too slow, for this debt to be gradually absorbed. The new government thus may need to identify cases where NPLs hinder banks’ normal functioning, sell this debt, and prop up the capital of the affected banks. At the same time, civil bankruptcy procedures will need to be reformed, to ensure the reasonably fast action on defaulted borrowers’ assets.
If confidence and credibility are to be restored, sound governance has to be put at the core of the next government’s plans for banks. Over the years, regulatory lapses, lack of board independence, and a good dose of financial repression turned many banks into channels to fund family members, friends, and political associates.
Monte dei Paschi, for example, was long associated with the center-left Democratic Party, which has been in government since 2013. This political association may have prolonged the bank’s saga for several years, until it had become so battered by inconsistent piecemeal interventions that a market solution became impossible. Following last year’s bailout, Italy’s Treasury owns about 70% of the bank.
Restoring market credibility also means clarifying banks’ role in the economy. If they provide a public good – that is, credit to the real economy – should they be part of a broad-based long-term economic policy strategy for the country? And, in an economy with approximately 600 small independent banks and too many branches, should consolidation be encouraged and supported?
Any effort to put Italy’s banking sector on a sounder footing will require a stable majority government, consistent determination to put economic growth at the center of the political agenda, and willingness to confront Italy’s many vested interests. Unfortunately, none of the parties has so far come out with a comprehensive, credible economic agenda. And none so far seems capable of winning or delivering a parliamentary majority.
The most likely scenario, then, is that Italy’s zombified banks will continue to feed the populist electoral narrative. And if that narrative fuels a populist victory in March, reform of the banking sector will again be postponed, raising the eventual cost still further.