Can Italy Finally Reform?

Erik Jones
Professor, Johns Hopkins School of Advanced International Studies

Italians head to the polls on Sunday, December 4, to approve or reject a series of constitutional reforms, which will redirect policy competence from the regions to the state, transform the Senate into a council of regions, and concentrate power in the Chamber of Deputies and the national government. Italian Prime Minister Matteo Renzi argues that these reforms are necessary to equip Italy with the flexibility needed to compete in the 21st Century global economy. His opponents counter that changing the constitution this way will eliminate critical checks and balances and make the country vulnerable to authoritarianism, if not dictatorship.

The division between those supporting the reform package and those opposing it runs deep and cuts across traditional party lines. Renzi and his supporters in the governing Democratic Party are strongly in favour of the package. They admit that the language for the new constitutional provisions is not always elegant, but they insist that this compromise is the best chance Italy has seen to bring an end to its moribund constitutional arrangement since efforts to change the constitution began in earnest in 1992 (when Renzi was just 17 years old). Opponents of the reform – including at least four former Prime Ministers from the left (Massimo D’Alema), center (Ciriaco De Mita, Mario Monti), and right (Silvio Berlusconi) – admit that some change is necessary but argue that this package should be rejected as badly written and self-serving for Renzi as current prime minister.

The populist Five Star Movement headed by Beppe Grillo, a comedian and satirist turned political activist, is also opposed to the reform package. The reason has as much to do with the Movement’s long-standing opposition to the country’s political class as to the specifics of the proposed constitutional amendments. The Five Star Movement wants to see a sweeping change of the people involved in politics prior to any transformation of the country’s political institutions. This is ironic insofar as the Five Star Movement is more likely to come to power if the reforms pass than if they fail. So long as Italy’s many checks and balances remain in place, it will be easier for Italy’s political elites to form a cross-party coalition to hold the Five Star Movement out of national office. The Movement’s position is nevertheless consistent with both its founding principles and the desires of its followers; if anything, support for the Five Star Movement has increased during the referendum campaign.

The Renzi government is probably right that some change in the constitutional arrangement is necessary to facilitate economic reforms. The greatest long-term challenge the country faces is the slow pace of productivity growth, together with the mass of long-term unemployed. Those problems can only be tackled by reforming product and labor markets to make the economy more competitive and more flexible. Some streamlining of the bureaucracy companies face would also help. So would a rationalization of the tax code. These are the hardy perennials of Italian public policy that have only been addressed in piecemeal fashion and require more sweeping attention. That is why Renzi’s constitutional reform agenda has attracted support from political leaders elsewhere, including President Barack Obama in the United States and Finance Minister Wolfgang Schäuble in Germany.

The reform package is only tangentially related to Italy’s more pressing (and immediate) concerns.  Whether Renzi wins the reform matters insofar as it strengthens his government or, if he loses, it also matters because he has threatened to resign. Hence the issue is whether Renzi is able and available to tackle a host of hot-button issues. Those issues include the recapitalization of the Italian banking sector so that key institutions can shed their exposure to toxic assets and non-performing loans. They also include the country’s burgeoning public debt: the ratio of debt to gross domestic product is 132 percent, which means that the government has to refinance roughly €380 billion per year. By implication, there is a lot of potential in Italian government debt markets for political uncertainty to create turmoil. Italy is also experiencing a surge of migration across the Mediterranean. Just over 170,000 have already entered the country in 2016, compared to 153,000 for the whole of last year.

If the “no” vote wins in the referendum and Renzi steps down from office, any new government will have to focus its attention on completing the national budget and changing the country’s electoral laws.  Such measures are necessary for Italy to go to early elections so that the country’s President, Sergio Mattarella, can seek a new (and hopefully more stable and effective) parliament.  The danger is that market speculators will take advantage of any intervening period of political uncertainty and distraction to place large bets against the stability of Italy’s sovereign debt market. The European Central Bank has already warned speculators that it will push back against them. The open question is whether that central bank action will be enough, particularly if Italy’s banks continue to struggle.

The potential impact of a “no” vote on Europe is considerable. Where all sides in this referendum campaign agree, however, is that the arguments either way should not be overly dramatic. Italy will manage to hold itself and its economy together whether or not the referendum passes. Europe will hold itself together as well. This referendum is a culmination of a reform agenda that has been 25 years in the making. Italy might have prospered if these reforms had taken place earlier; it would be better if some reform of the constitution could be implemented sooner rather than later. Whatever happens on Sunday, most Italians agree, it will not be the end of the world. Italy’s choices might be painful, but Italians are confident they will be able to handle the consequences.

The Author is Erik Jones

Erik Jones (@Erik_Jones_SAIS) is Professor of European Studies and International Political Economy at the Johns Hopkins School of Advanced International Studies (SAIS) and Senior Research Fellow at Nuffield College, Oxford.

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