Italian Prime Minister Matteo Renzi is staking his political future on a referendum to be held next Sunday that would change the Italian constitution by weakening the upper house of parliament and strengthening the central government.
Foolishly, Renzi said he would resign if he lost the vote. This galvanized opposition parties to make the referendum a vote on Renzi’s tenure as prime minister.
Now it appears that the anti-establishment forces who successfully pushed through a British exit from the EU and elected Donald Trump president of the U.S. are ready to deal a crippling blow to Renzi’s center-left coalition by defeating the constitutional changes.
And waiting in the wings if Renzi follows through with his promise are two anti-establishment newcomers who are both committed to blowing up the EU.
A defeat for Renzi will be read as a victory for Italy’s two major populist parties: the Lega Nord and the larger Five Star Movement, led by the comedian Beppe Grillo. The two parties are not allied, but both are nurtured by anti-establishment sentiment and favor “national solutions” to Italy’s problems – beginning with a return to the Italian lira.
If Renzi is defeated, Lega Nord and the Five Star Movement could join forces to support a new government and hold a new referendum – this time on the euro. If Italy – one of the world’s largest public debtors – decided to go it alone, the entire European project could be dealt a mortal blow. In the age of Donald Trump and Brexit, that outcome is far from unthinkable.
The issue at stake in the referendum is not inconsequential, but it should not decide the fate of Europe. Italians will vote on whether to strip the Senate (the parliament’s upper house) of two-thirds of its members and much of its legislative authority, making it merely a talking shop akin to the second chamber of Germany’s Bundesrat, and return some of the regions’ powers to the central government.
Changes like these have been discussed for 30 years. The lack of movement could benefit Renzi, if voters conclude that they should not waste such a rare opportunity to do something to reform their sclerotic system. President Sergio Mattarella is impartial, but he would prefer that the reforms go forward. His predecessor, Giorgio Napolitano, is also strongly in favor of the reforms, which he sayswould be “great news for Italy.”
But the reforms have also faced stiff opposition. Some state institutions dislike the idea of delivering more powers to the executive branch; magistrates, for example, fear a loss of judges’ extensive and unchecked powers. Then there are the new populists, several PD old-timers, and plenty of other establishment figures, including several former members of the constitutional court, who generally fear change. Former Prime Minister Silvio Berlusconi, ever the opportunist, is also opposing the reforms.
The opposition, as usual, benefits considerably from its simple message. To vote “no” is to vote against the “system” and all of its corruption. Who is not against corruption? Add to that rising Euroskepticism, and the result is an intoxicating political brew. Opinion polls now indicate a 5-6-point majority for No, with 20% of voters still undecided.
The elevation of professional clown Grillo to the leadership of the country has investors near panic. Already under capitalized and on shaky ground, the possibility of leaving the single currency could result in a banking crisis that would shake the European financial sector to its core and hurl Italy into a severe recession.
Investors worry that that if Italian voters reject the constitutional reforms, the country will be doomed to a new period of political instability, especially if Renzi follows through on his promise to resign.
Even if he is persuaded to lead a technocratic government, markets are likely to interpret the defeat as a sign that Rome is incapable of reform. And this could cause investors to question whether Italy will ever be able to generate the economic growth it needs to support its crippling debt burden, which stands at around 130 per cent of GDP.
Concerns about looming political uncertainty are also likely to exacerbate concerns about the precarious health of the Italian banking system. Italian banks are saddled with €360 billion ($510 billion) in problem loans, roughly 20 per cent of their loan books.
In the short-term, a no vote is likely to disrupt the proposed €5 billion emergency recapitalisation of Banca Monte dei Paschi di Siena, the world’s oldest bank.
But analysts warn that Renzi’s departure is likely to result in efforts to clean up the country’s troubled banking system being postponed indefinitely, which will inflict further damage on the fragile Italian economy.
In a country like Italy, which has seen 63 governments since 1948, political stability is more than a campaign slogan. But it appears a real possibility that Grillo’s Five Star Party and their allies in Lega Nord may be on the cusp of once again overturning the establishment and making history.
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