Could a new financial crisis, brought on by the Covid-19 pandemic, lead to Italy’s exit from the eurozone? Lucio Baccaro, Björn Bremer and Erik Neimanns present evidence from a new survey experiment on Italian attitudes toward a European bailout and exit from the euro. They find that a majority of voters would opt to stay ... Continue

Baccaro, Lucio

Bremer, Björn

Neimanns, Erik

English

LSE Research Online

Opposition	to	austerity	outweighs	support	for	theeuro	in	ItalyCould	a	new	financial	crisis,	brought	on	by	the	Covid-19	pandemic,	lead	to	Italy’s	exit	from	the	eurozone?	LucioBaccaro,	Björn	Bremer	and	Erik	Neimanns	present	evidence	from	a	new	survey	experiment	on	Italian	attitudestoward	a	European	bailout	and	exit	from	the	euro.	They	find	that	a	majority	of	voters	would	opt	to	stay	in	the	euro	ifa	bailout	did	not	involve	conditionality,	but	that	there	would	be	a	majority	for	leaving	if	a	bailout	were	contingent	onausterity	policies.Covid-19	has	increased	the	risk	of	a	new	financial	crisis	in	the	eurozone.	This	time	the	epicentre	would	most	likelybe	Italy,	where	public	debt,	already	very	high	before	the	pandemic,	nearly	reached	160%	of	GDP	in	2020,	andgrowth	has	stagnated	for	the	past	25	years.	If	financial	markets	started	to	have	doubts	about	the	sustainability	ofItalian	debt,	they	would	push	the	interest	rate	spread	up,	and	force	the	Italian	government	to	either	ask	for	aEuropean	bailout	or	exit	from	the	euro.According	to	the	rules	introduced	in	the	first	stage	of	the	euro	crisis,	a	country	applying	for	a	European	StabilityMechanism	(ESM)	loan	has	to	sign	a	Memorandum	of	Understanding	committing	to	austerity	and	structuralreforms.	An	ESM	programme	is	a	prerequisite	for	Outright	Monetary	Transactions	(OMT)	by	the	European	CentralBank	(ECB),	that	is,	potentially	unlimited	purchases	of	government	bonds	by	the	central	bank.One	of	the	problems	with	this	crisis	resolution	strategy	is	that	the	austerity	measures	imposed	on	crisis	countriesare	highly	unpopular	and	lead	to	electoral	volatility,	public	protests,	and	the	emergence	of	anti-system	forces.	Still,existing	research	shows	that	voters	in	most	crisis-ridden	countries	are	unwilling	to	leave	the	euro	despite	the	highsocial	costs	of	austerity.	In	July	2015,	Greek	voters	rejected	the	European	Union	bailout	package	in	a	popularreferendum,	but	research	shows	they	still	wanted	to	remain	in	the	common	currency.	This	unwillingness	to	leave,despite	the	costs	of	austerity,	strengthened	the	hand	of	‘creditor’	countries	and	allowed	them	to	shift	the	burden	ofadjustment	on	‘debtor’	countries	during	the	euro	crisis.A	financial	crisis	in	Italy,	the	third	largest	economy	of	the	eurozone,	would	have	profound	consequences	for	theeuro.	Many	commentators	believe	that	the	euro	stands	or	falls	with	Italy,	and	the	possibility	of	exit	is	far	from	purelyacademic.	In	the	wake	of	the	euro	crisis,	the	Five	Star	Movement	(M5S)	included	the	promise	of	a	referendum	onthe	euro	in	its	electoral	manifesto	of	2014,	while	the	Lega	proposed	a	negotiated	exit	from	the	eurozone	in	its	2018and	2019	manifestos.	Moreover,	support	for	the	euro	before	and	after	the	Covid-19	outbreak	was	significantly	lowerin	Italy	than	in	almost	any	other	country.	Still,	we	know	little	about	how	Italians	would	weigh	the	costs	and	benefitsof	staying	in	the	euro	in	case	of	a	financial	crisis,	and	how	they	would	react	if	a	financial	bailout	was	contingent	onausterity	and	structural	reforms.A	survey	experimentIn	a	recent	study,	we	presented	a	large	sample	of	Italians	(n	=	4,200)	with	a	hypothetical	scenario	of	a	Greek-stylefinancial	crisis.	We	ran	our	survey	experiment	in	October	2019,	in	the	wake	of	a	standoff	between	the	Italiangovernment	and	the	European	Commission	over	the	country’s	government	deficit.	We	used	sample	quotas	toensure	a	representative	sample	based	on	age,	gender,	and	economic	sector,	and	survey	weights	to	further	correctfor	deviations	in	our	sample	from	the	true	population	on	other	dimensions.	However,	our	results	are	robust	to	theuse	of	different	types	of	weights,	or	no	weights.All	respondents	read	a	scenario	in	which	Italy	was	in	the	midst	of	a	financial	crisis,	involving	freezing	of	liquidityprovisions	by	the	ECB,	a	run	on	banks	and	capital	flight,	a	rapid	increase	of	risk	premia	on	government	bonds,	andthe	inability	of	the	government	to	meet	its	financial	obligations.	Respondents	were	then	told	that	before	accepting	aEuropean	bailout	package,	the	government	wanted	to	consult	its	citizens	through	a	referendum,	asking	whetherthey	wanted	to	stay	in	the	euro	and	thus	accepted	the	bailout	package,	or	rejected	the	bailout	package	andtherefore	wanted	to	exit	the	euro.	Finally,	survey	participants	were	asked	how	they	would	vote	in	this	hypotheticalreferendum.LSE European Politics and Policy (EUROPP) Blog: Opposition to austerity outweighs support for the euro in Italy Page 1 of 3		Date originally posted: 2021-04-26Permalink: https://blogs.lse.ac.uk/europpblog/2021/04/26/opposition-to-austerity-outweighs-support-for-the-euro-in-italy/Blog homepage: https://blogs.lse.ac.uk/europpblog/We	combined	the	basic	scenario	with	additional	information	about	the	costs	of	remaining	in	the	euro	andresponsibility	for	the	crisis.	Some	randomly-selected	citizens	were	told	that	the	European	bailout	implied	austerityand	structural	reforms	(easier	rules	for	layoffs,	expenditure	cuts,	privatisation,	etc.);	other	citizens	did	not	receivethis	information.	Furthermore,	some	randomly	selected	respondents	received	information	attributing	responsibilityfor	the	crisis	to	an	excessive	deficit	procedure	launched	by	the	EU	against	Italy;	other	respondents	receivedinformation	attributing	responsibility	to	the	Italian	government’s	decision	to	ignore	the	European	fiscal	rules;	otherrespondents	received	no	information	about	who	bore	responsibility	for	the	crisis.ResultsOur	results	suggest	that	Italian	public	opinion	is	strongly	sensitive	to	the	costs	of	remaining	in	the	euro.	If	voters	areinformed	that	eurozone	membership	comes	at	the	cost	of	austerity,	support	for	exit	increases	by	15%	and	supportfor	remaining	decreases	by	almost	20%.	In	contrast,	we	do	not	find	any	significant	effect	of	attributing	blame	for	thecrisis	to	either	the	Italian	government	or	foreign	actors	(Figure	1).	Apparently,	Italian	voters	do	not	care	much	aboutwhose	fault	the	crisis	is,	but	they	strongly	oppose	further	austerity.Figure	1:	Average	treatment	effects	of	austerity	and	blame	attribution	on	vote	choice	in	hypothetical‘Italexit’	referendumNote:	Marginal	effects	and	95%	confidence	intervals	of	austerity	and	blame	attribution	are	calculated	based	on	multinomial	probit	models.Importantly,	when	respondents	do	not	receive	information	about	the	conditionality	associated	with	a	Europeanbailout,	a	majority	wants	to	remain	in	the	euro.	However,	informing	participants	about	conditionality	produces	arelative	majority	favouring	‘Italexit’	(Figure	2).	Overall,	our	results	suggest	that	opposition	to	austerity	trumpssupport	for	the	euro	in	Italy.	This	implies	that	the	approach	to	crisis	resolution	followed	by	the	European	authoritiesso	far,	based	on	fiscal	consolidation	and	structural	reforms	in	exchange	for	financial	support,	may	lead	to	greaterresistance	in	Italy	than	it	did	in	Greece	and	other	countries	and	even	to	a	break-up	of	the	eurozone.Figure	2:	Predicted	voting	probabilities	in	hypothetical	‘Italexit’	referendum	by	treatmentLSE European Politics and Policy (EUROPP) Blog: Opposition to austerity outweighs support for the euro in Italy Page 2 of 3		Date originally posted: 2021-04-26Permalink: https://blogs.lse.ac.uk/europpblog/2021/04/26/opposition-to-austerity-outweighs-support-for-the-euro-in-italy/Blog homepage: https://blogs.lse.ac.uk/europpblog/Note:	Predicted	probabilities	of	voting	in	a	hypothetical	referendum	and	95%	confidence	intervals	based	on	multinomial	probit	models.In	our	study	we	did	not	present	respondents	with	information	highlighting	the	costs	of	exiting	the	euro,	and	thisnarrows	our	findings.	It	is	possible	that	preferences	for	remaining	would	increase	significantly	if	the	costs	of	exitwere	to	be	emphasised	and	they	could	counterbalance	the	decline	due	to	the	emphasis	on	the	costs	of	remaining(austerity).	At	the	same	time,	the	case	of	Brexit	suggests	that	citizens	tend	to	discount	the	costs	of	exit.	We	plan	toanalyse	how	citizens	evaluate	the	costs	of	remaining	vs.	exiting	the	euro	in	future	research.For	more	information,	see	the	authors’	accompanying	article	in	European	Union	PoliticsNote:	This	article	gives	the	views	of	the	authors,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	theLondon	School	of	Economics.	Featured	image	credit:	European	Central	Bank	(CC	BY-NC-ND	2.0)LSE European Politics and Policy (EUROPP) Blog: Opposition to austerity outweighs support for the euro in Italy Page 3 of 3		Date originally posted: 2021-04-26Permalink: https://blogs.lse.ac.uk/europpblog/2021/04/26/opposition-to-austerity-outweighs-support-for-the-euro-in-italy/Blog homepage: https://blogs.lse.ac.uk/europpblog/

Opposition to austerity outweighs support for the euro in Italy

Could a new financial crisis, brought on by the Covid-19 pandemic, lead to Italy’s exit from the eurozone? Lucio Baccaro, Björn Bremer and Erik Neimanns present evidence from a new survey experiment on Italian attitudes toward a European bailout and exit from the euro. They find that a majority of voters would opt to stay in the euro if a bailout did not involve conditionality, but that there would be a majority for leaving if a bailout were contingent on austerity policies

Baccaro, L.

Bremer, B.

Neimanns, E.

MPG.PuRe

Lucio Baccaro, Björn Bremer, Erik Neimanns – Opposition to austerity outweighs support for the euro in Italy April 26, 2021  Austerity, Economics, EU politics, Finance, National Politics, Neo-Liberalism in the EU   Could a new financial crisis, brought on by the Covid-19 pandemic, lead to Italy’s exit from the eurozone? Lucio Baccaro, Björn Bremer and Erik Neimanns present evidence from a new survey experiment on Italian attitudes toward a European bailout and exit from the euro. They find that a majority of voters would opt to stay in the euro if a bailout did not involve conditionality, but that there would be a majority for leaving if a bailout were contingent on austerity policies. Lucio Baccaro is Director at the Max Planck Institute for the Study of Societies in Cologne, Germany. Björn Bremer is Senior Researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany. His current research focuses on the politics of macroeconomic policies. Erik Neimanns is Postdoctoral Researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany. His current research focuses on the politics of education and macroeconomic policies. Cross-posted from LSE EUROPP  Covid-19 has increased the risk of a new financial crisis in the eurozone. This time the epicentre would most likely be Italy, where public debt, already very high before the pandemic, nearly reached 160% of GDP in 2020, and growth has stagnated for the past 25 years. If financial markets started to have doubts about the sustainability of Italian debt, they would push the interest rate spread up, and force the Italian government to either ask for a European bailout or exit from the euro. According to the rules introduced in the first stage of the euro crisis, a country applying for a European Stability Mechanism (ESM) loan has to sign a Memorandum of Understanding committing to austerity and structural reforms. An ESM programme is a prerequisite for Outright Monetary Transactions (OMT) by the European Central Bank (ECB), that is, potentially unlimited purchases of government bonds by the central bank. One of the problems with this crisis resolution strategy is that the austerity measures imposed on crisis countries are highly unpopular and lead to electoral volatility, public protests, and the emergence of anti-system forces. Still, existing research shows that voters in most crisis-ridden countries are unwilling to leave the euro despite the high social costs of austerity. In July 2015, Greek voters rejected the European Union bailout package in a popular referendum, but research shows they still wanted to remain in the common currency. This unwillingness to leave, despite the costs of austerity, strengthened the hand of ‘creditor’ countries and allowed them to shift the burden of adjustment on ‘debtor’ countries during the euro crisis. A financial crisis in Italy, the third largest economy of the eurozone, would have profound consequences for the euro. Many commentators believe that the euro stands or falls with Italy, and the possibility of exit is far from purely academic. In the wake of the euro crisis, the Five Star Movement (M5S) included the promise of a referendum on the euro in its electoral manifesto of 2014, while the Lega proposed a negotiated exit from the eurozone in its 2018 and 2019 manifestos. Moreover, support for the euro before and after the Covid-19 outbreak was significantly lower in Italy than in almost any other country. Still, we know little about how Italians would weigh the costs and benefits of staying in the euro in case of a financial crisis, and how they would react if a financial bailout was contingent on austerity and structural reforms. A survey experiment In a recent study, we presented a large sample of Italians (n = 4,200) with a hypothetical scenario of a Greek-style financial crisis. We ran our survey experiment in October 2019, in the wake of a standoff between the Italian government and the European Commission over the country’s government deficit. We used sample quotas to ensure a representative sample based on age, gender, and economic sector, and survey weights to further correct for deviations in our sample from the true population on other dimensions. However, our results are robust to the use of different types of weights, or no weights. All respondents read a scenario in which Italy was in the midst of a financial crisis, involving freezing of liquidity provisions by the ECB, a run on banks and capital flight, a rapid increase of risk premia on government bonds, and the inability of the government to meet its financial obligations. Respondents were then told that before accepting a European bailout package, the government wanted to consult its citizens through a referendum, asking whether they wanted to stay in the euro and thus accepted the bailout package, or rejected the bailout package and therefore wanted to exit the euro. Finally, survey participants were asked how they would vote in this hypothetical referendum. We combined the basic scenario with additional information about the costs of remaining in the euro and responsibility for the crisis. Some randomly-selected citizens were told that the European bailout implied austerity and structural reforms (easier rules for layoffs, expenditure cuts, privatisation, etc.); other citizens did not receive this information. Furthermore, some randomly selected respondents received information attributing responsibility for the crisis to an excessive deficit procedure launched by the EU against Italy; other respondents received information attributing responsibility to the Italian government’s decision to ignore the European fiscal rules; other respondents received no information about who bore responsibility for the crisis. Results Our results suggest that Italian public opinion is strongly sensitive to the costs of remaining in the euro. If voters are informed that eurozone membership comes at the cost of austerity, support for exit increases by 15% and support for remaining decreases by almost 20%. In contrast, we do not find any significant effect of attributing blame for the crisis to either the Italian government or foreign actors (Figure 1). Apparently, Italian voters do not care much about whose fault the crisis is, but they strongly oppose further austerity. Figure 1: Average treatment effects of austerity and blame attribution on vote choice in hypothetical ‘Italexit’ referendum  Note: Marginal effects and 95% confidence intervals of austerity and blame attribution are calculated based on multinomial probit models. Importantly, when respondents do not receive information about the conditionality associated with a European bailout, a majority wants to remain in the euro. However, informing participants about conditionality produces a relative majority favouring ‘Italexit’ (Figure 2). Overall, our results suggest that opposition to austerity trumps support for the euro in Italy. This implies that the approach to crisis resolution followed by the European authorities so far, based on fiscal consolidation and structural reforms in exchange for financial support, may lead to greater resistance in Italy than it did in Greece and other countries and even to a break-up of the eurozone.           Figure 2: Predicted voting probabilities in hypothetical ‘Italexit’ referendum by treatment  Note: Predicted probabilities of voting in a hypothetical referendum and 95% confidence intervals based on multinomial probit models. In our study we did not present respondents with information highlighting the costs of exiting the euro, and this narrows our findings. It is possible that preferences for remaining would increase significantly if the costs of exit were to be emphasised and they could counterbalance the decline due to the emphasis on the costs of remaining (austerity). At the same time, the case of Brexit suggests that citizens tend to discount the costs of exit. We plan to analyse how citizens evaluate the costs of remaining vs. exiting the euro in future research. For more information, see the authors’ accompanying article in European Union Politics  

Opposition to Austerity Outweighs Support for the Euro in Italy

Lucio Baccaro Björn Bremer Erik Neimanns April 26th, 2021Opposition to austerity outweighs support for the euro in ItalyEstimated reading time: 10 minutesCould a new financial crisis, brought on by the Covid-19 pandemic, lead to Italy’s exit from the eurozone? Lucio Baccaro, Björn Bremer and Erik Neimanns present evidence from a new survey experiment on Italian attitudes toward a European bailout and exit from the euro. They find that a majority of voters would opt to stay in the euro if a bailout did not involve conditionality, but that there would be a majority for leaving if a bailout were contingent on austerity policies.Covid-19 has increased the risk of a new financial crisis in the eurozone. This time the epicentre would most likely be Italy, where public debt, already very high before the pandemic, nearly reached 160% of GDP in 2020, and growth has stagnated for the past 25 years. If financial markets started to have doubts about the sustainability of Italian debt, they would push the interest rate spread up, and force the Italian government to either ask for a European bailout or exit from the euro.According to the rules introduced in the first stage of the euro crisis, a country applying for a European Stability Mechanism (ESM) loan has to sign a Memorandum of Understanding committing to austerity and structural reforms. An ESM programme is a prerequisite for Outright Monetary Transactions (OMT) by the European Central Bank (ECB), that is, potentially unlimited purchases of government bonds by the central bank.One of the problems with this crisis resolution strategy is that the austerity measures imposed on crisis countries are highly unpopular and lead to electoral volatility, public Opposition to austerity outweighs support for the euro in Italy | EUROPPprotests, and the emergence of anti-system forces. Still, existing research shows that voters in most crisis-ridden countries are unwilling to leave the euro despite the high social costs of austerity. In July 2015, Greek voters rejected the European Union bailout package in a popular referendum, but research shows they still wanted to remain in the common currency. This unwillingness to leave, despite the costs of austerity, strengthened the hand of ‘creditor’ countries and allowed them to shift the burden of adjustment on ‘debtor’ countries during the euro crisis.A financial crisis in Italy, the third largest economy of the eurozone, would have profound consequences for the euro. Many commentators believe that the euro stands or falls with Italy, and the possibility of exit is far from purely academic. In the wake of the euro crisis, the Five Star Movement (M5S) included the promise of a referendum on the euro in its electoral manifesto of 2014, while the Lega proposed a negotiated exit from the eurozone in its 2018 and 2019 manifestos. Moreover, support for the euro before and after the Covid-19 outbreak was significantly lower in Italy than in almost any other country. Still, we know little about how Italians would weigh the costs and benefits of staying in the euro in case of a financial crisis, and how they would react if a financial bailout was contingent on austerity and structural reforms.A survey experimentIn a recent study, we presented a large sample of Italians (n = 4,200) with a hypothetical scenario of a Greek-style financial crisis. We ran our survey experiment in October 2019, in the wake of a standoff between the Italian government and the European Commission over the country’s government deficit. We used sample quotas to ensure a representative sample based on age, gender, and economic sector, and survey weights to further correct for deviations in our sample from the true population on other dimensions. However, our results are robust to the use of different types of weights, or no weights.All respondents read a scenario in which Italy was in the midst of a financial crisis, involving freezing of liquidity provisions by the ECB, a run on banks and capital flight, a rapid increase of risk premia on government bonds, and the inability of the government to meet its financial obligations. Respondents were then told that before accepting a European bailout package, the government wanted to consult its citizens through a referendum, asking whether they wanted to stay in the euro and thus accepted the bailout package, or rejected the bailout package and therefore wanted to exit the euro. Finally, survey participants were asked how they would vote in this hypothetical referendum.We combined the basic scenario with additional information about the costs of remaining in the euro and responsibility for the crisis. Some randomly-selected citizens were told that the European bailout implied austerity and structural reforms (easier rules for layoffs, expenditure cuts, privatisation, etc.); other citizens did not receive this information. Furthermore, some randomly selected respondents received information attributing responsibility for the crisis to an excessive deficit procedure launched by the EU against Opposition to austerity outweighs support for the euro in Italy | EUROPPItaly; other respondents received information attributing responsibility to the Italian government’s decision to ignore the European fiscal rules; other respondents received no information about who bore responsibility for the crisis.ResultsOur results suggest that Italian public opinion is strongly sensitive to the costs of remaining in the euro. If voters are informed that eurozone membership comes at the cost of austerity, support for exit increases by 15% and support for remaining decreases by almost 20%. In contrast, we do not find any significant effect of attributing blame for the crisis to either the Italian government or foreign actors (Figure 1). Apparently, Italian voters do not care much about whose fault the crisis is, but they strongly oppose further austerity.Figure 1: Average treatment effects of austerity and blame attribution on vote choice in hypothetical ‘Italexit’ referendumNote: Marginal effects and 95% confidence intervals of austerity and blame attribution are calculated based on multinomial probit models.Importantly, when respondents do not receive information about the conditionality associated with a European bailout, a majority wants to remain in the euro. However, informing participants about conditionality produces a relative majority favouring ‘Italexit’ (Figure 2). Overall, our results suggest that opposition to austerity trumps support for the euro in Italy. This implies that the approach to crisis resolution followed by the European authorities so far, based on fiscal consolidation and structural reforms in exchange for financial support, may lead to greater resistance in Italy than it did in Greece and other countries and even to a break-up of the eurozone.Figure 2: Predicted voting probabilities in hypothetical ‘Italexit’ referendum by treatmentOpposition to austerity outweighs support for the euro in Italy | EUROPPNote: Predicted probabilities of voting in a hypothetical referendum and 95% confidence intervals based on multinomial probit models.In our study we did not present respondents with information highlighting the costs of exiting the euro, and this narrows our findings. It is possible that preferences for remaining would increase significantly if the costs of exit were to be emphasised and they could counterbalance the decline due to the emphasis on the costs of remaining (austerity). At the same time, the case of Brexit suggests that citizens tend to discount the costs of exit. We plan to analyse how citizens evaluate the costs of remaining vs. exiting the euro in future research.For more information, see the authors’ accompanying article in European Union PoliticsNote: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Central Bank (CC BY-NC-ND 2.0)About the authorLucio Baccaro is Director at the Max Planck Institute for the Study of Societies in Cologne, Germany.Lucio BaccaroOpposition to austerity outweighs support for the euro in Italy | EUROPPPosted In: EU Politics | Politics | Uncategorized Björn Bremer is Senior Researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany. His current research focuses on the politics of macroeconomic policies.Erik Neimanns is Postdoctoral Researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany. His current research focuses on the politics of education and macroeconomic policies.Erik NeimannsOpposition to austerity outweighs support for the euro in Italy | EUROPP

http://hdl.handle.net/21.11116/0000-0008-709D-9

Opposition to austerity outweighs support for the euro in Italy

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