Renzi defeat won't break the euro, but a Le Pen victory most certainly will

The eurozone crisis is never asleep for long, and if this weekend’s referendum in Italy goes against Prime Minister Matteo Renzi, it threatens to awaken anew. In itself, the result is unimportant. The proposed constitutional reforms are neither here nor there for an economy as deep in the mire as Italy’s. They won’t be enough to jolt the country out of its economic paralysis.

Rather the significance lies in the referendum’s ability to deliver another anti-establishment shock to Europe’s presiding political order. Following the Brexit vote in the UK, and the Trump victory in the US, the chances seem high. Throw in the possible election of a fascist president in Austria this weekend, and we may well be looking at rounds three and four in the unfolding story of populist upheaval across Western economies.

Again, it won’t much matter in itself if Renzi goes through with his threat to resign. Italian governments come and go with the regularity of a No 16 bus. Renzi would merely be honouring the tradition.

But besides opening the door to the possible ascent of Beppe Grillo’s Five Star Movement, which promises a separate and potentially much more seismic referendum on membership of the euro, Renzi’s resignation might also exacerbate Italy’s banking crisis.

Italian Prime Minister Matteo Renzi has threatened to resign Credit: EPA

This has been chugging along unresolved for more than a decade; non-performing loans are reckoned to have reached a staggering €360bn, far in excess of core capital. In the circumstances, it is amazing there hasn’t been a bigger run on Italian banks than so far seen.

The foreigners have largely got their money out already, but the consequences for Italian pensioners and retail investors – encouraged by the government to become big holders of bank bonds – are potentially catastrophic if the EU continues to insist on bailing in creditors to bank recapitalisations.

We should, however, never underestimate the capacity both of Italy and the European Union for muddling through. Spreads have widened significantly, with the yield on 10-year government bonds having doubled over the past several months. Yet so far the damage is quite limited compared with the height of the eurozone crisis in 2011/12. And this time around, Italy can rely on the European Central Bank to keep the lid on yields.

Furthermore, there is something to be said for bringing the Italian banking crisis to a head. Short term, there will be plenty of turbulence, but if ultimately it leads to the necessary recapitalisation, then things will settle and the Italian economy may even begin to grow again.

The euro has survived thus far because of the political will to keep it going. Populist rebellion among those who think they have nothing further to lose threatens to shatter that determination. But my hunch is that Renzi’s defeat won’t be that moment. For the final coup de grace, we may have to wait for a Le Pen victory in next year’s French presidential election. That would certainly do it.

BT office building — BT has been told to open its infrastructure to competitors

Let’s give BT a break

British Telecom has always had a big problem with customer service. Pre-privatisation, it was getting a telephone installed at all; there was a queue, and it would often take weeks. Immediately afterwards, it was to do with faulty or vandalised phone boxes, a failing which led BT to be branded “the most hated institution in the land”.

Today, it’s about broadband. The complaint is not just legitimate; it is also a vitally important one, for access to superfast broadband is key to maintaining the economy’s competitiveness in the digital age.

But I’m still not convinced that forcing BT to break itself up, and either spin off or legally separate its Openreach subsiary, which owns and operates BT’s backbone infrastructure of pipes and cables, would much further the aim of significantly better broadband.

What’s more, there are significant risks in such an approach. Would a standalone Openreach have the critical mass, or capital raising power, to deliver the £6bn broadband investment already promised by BT over the next three years, let alone something more? And with the whole thereby weakened, who would be responsible for supporting the company’s pension fund, which is already massively in deficit? There would have to be renewed doubts about the company’s ability to stand behind these liabilities in the event of legal separation.

If forced to do the extreme form of functional separation Ofcom’s Sharon White proposes, BT may as well go the whole hog and demerge the company entirely. There would be no point in keeping the two under one roof.

Would this be in the national interest? I’m not so sure. Government and regulators need to beware the siren calls of alternative service providers such as Sky, TalkTalk and Vodafone.

All of them are big customers of Openreach, but they are also fierce competitors of BT with a strong interest in weakening the company. This is particularly the case with Sky, which once had the pay TV market largely to itself but is now forced to compete with a resurgent and ambitious BT for football rights and other subscription-driving content. Is this debate really about the national interest, or is it just a grubby commercial alley fight?

None of this is to argue that BT is beyond reproach. Any incumbent needs constantly to be outperforming what the regulator demands, and in terms of keeping up with customer expectations for broadband service, BT has singularly failed in this regard. In a sense, it has brought the idea of break-up on itself. If there wasn’t a problem, there would be no appetite for action.

Theresa May unveiled a crackdown on executive pay this week Credit: Rex

Pay ratio nonsense

I suppose we should be thankful that the Government’s proposed corporate governance reforms were so substantially watered down by the time they were published last week.

However, one or two silly ideas have survived the mangle of big business lobbying, including “pay ratio disclosure” – the requirement to report the multiple of the company’s average pay earned by the CEO. The proposal sounds fair in principle, but it is likely to have some pretty negative unintended consequences.

Most obviously, these would involve companies outsourcing their low-paid work so as to make the ratio look lower, and therefore better from a public relations perspective, than otherwise. Since the ratio will be applied only to UK employees, it also further encourages companies to offshore key, low-paid functions. These effects may be quite marginal in practice, but they will be there. You don’t need ratios to know when the chief executive is being paid too much.