On Sunday, Italians definitively voted “No” to a constitutional referendum supported by the country’s Prime Minister, Matteo Renzi. After the vote, in which nearly 60 percent of 33 million voters rejected the bill, Prime Minister Renzi said that he would fulfill the promise he made earlier this year to resign if the referendum failed. The package of constitutional changes would have revamped Italy’s bicameral system in order to give the ruling party enough power to pass key economic and political reforms. Now that this effort has failed, the country will need to form a transitional government and rework the Italicum electoral law – specifically designed to function under the referendum’s constitutional vision – before new elections in 2018.
Italy’s President, Sergio Mattarella, has asked Renzi to stay until the budget passes, but that could be finished by this Friday, so the formation of the new government will take center stage. According to professor of European Studies at Johns Hopkins SAIS, Marco Zambotti, this could mean some form of technocratic caretaker government led by a prominent figure like the Speaker of the Senate. However, “Renzi remains the most prominent figure in Italian politics and, almost by default, he will be in a strong position to pick his successor and influence the next government.”
Perhaps the biggest question now is how Italy’s banks and international markets will react to the No vote. The Euro has largely recovered after falling to a 21-month low just after the referendum, but Italian bank shares are down. Italy’s most fragile lender, Monte dei Paschi, is scheduled to raise the four billion Euro necessary to save the bank held later this month. Now that the country has voted No, analysts like Jacob Funk Kierkegaard at the Peterson Institute believe it will be difficult, if not impossible for the bank to find investors, which would plunge the country’s third largest bank into liquidation.
Below is The Cipher Brief report about the importance of the referendum prior to the vote.
This is a year of monumental political change. From the United Kingdom’s vote to leave the European Union in a referendum held this June, to Donald Trump’s shocking victory over Hillary Clinton in November, a new brand of anti-establishment populism is ascendant on both sides of the Atlantic. This Sunday, Europe may receive another shock to the system. On December 4, Italians will go to the polls to vote on a constitutional referendum, which Prime Minister Matteo Renzi promises will relieve the country’s famous legislative gridlock, allowing him to enact vital political and economic reforms in a country plagued by low growth and stagnant productivity.
However, critics contend that rewriting the constitution in this way is both unnecessary and dangerous, ceding far too much power to the Prime Minister and undermining vital checks and balances. At the same time, Renzi’s promise to resign if the bill does not pass has turned the referendum into a plebiscite on the Prime Minister, uniting a constellation of political opposition parties against its passing. While this political battle rages, one of the country’s largest banks, Monte dei Paschi (MPS), is teetering on the brink of default, which could trigger a larger banking crisis in a system riddled with bad debt – Italy holds nearly one third of all non-performing loans in the EU.
As political, and possibly financial, crisis looms in the EU’s fourth largest economy, what might the outcome of this referendum mean for Italy and the rest of Europe?
Taken on its own merits, the referendum is a transformative choice. If Italians vote “Yes,” the proposed constitutional reforms would revamp the way that Italy’s bicameral Parliament is structured. In essence, the bill replaces the existing Senate with appointees from local and regional authorities and subordinates it to the lower house (Chamber of Deputies), which would then be the only elected body in Parliament. According to former Director General of EU Enlargement at the European Commission and Cipher Brief expert, Sir Michael Leigh, “this would eliminate the existing equality between the two houses of parliament” and “change the balance of power between national and regional authorities, tilting it toward Rome.”
For Renzi and his supporters, this change would finally streamline Italy’s sclerotic government and allow him and his Democratic Party (PD) to push through the reforms that Italy’s creaking economy desperately needs. It would also return some much-needed stability to a country that has seen 65 different governments since World War II. Italy’s most famous chef, Massimo Bottura, has even threatened to take his restaurant Osteria Francescana and leave the country if Italian’s vote No on Sunday. However, in Leigh’s view, “the basic problem with the reform is its relationship to the new electoral law (known as Italicum), which guarantees a majority in the lower house for the winning party by awarding bonus seats.”
This combination between parliamentary restructuring and the new Italicum electoral law grants any future Italian Prime Minister a five-year term, leading a legislative body controlled by his or her own party. Renzi’s opponents worry that the bill is a self-serving attempt to bolster his own powers, but in reality, a Yes vote could actually empower Renzi’s enemies.
Ironically, says Erik Jones, professor of European Studies at Johns Hopkins SAIS, the populist, anti-establishment, and euro-skeptic Five Star Movement (5SM) led by former comedian Beppe Grillo “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.” But without those checks and balances, 5SM or another opposition party like former Prime Minister Silvio Berlusconi’s Forza Party, could not only win national office, it would also enjoy an unprecedented ability to enact legislative change.
These concerns have driven many supporters of the reformist Renzi to doubt the wisdom of a Yes vote. However, in April, Renzi added a twist to that choice by staking his position as Prime Minister on the results of the referendum. This has exacerbated the consequences of a “No” vote from simple maintenance of the status quo to potential destabilization of the Italian government for an indefinite period of time. The Italicum electoral law, which is designed specifically to fit into the constitutional reform passage, would have to be reshaped before early elections can take place, and the transitional government would also need to tackle the government’s budget.
These problems are not politically insurmountable, but as Jacob Funk Kierkegaard, Senior Fellow at the Peterson Institute for International Economics, notes, “the real danger lies in the banking sector. It is difficult to believe that Monte dei Paschi (MPS), which is Italy’s third-largest bank, will find investors for its five billion Euro rescue plan in the event of a No vote, and this could lead to MPS’ liquidation or restructuring.” Although larger banks like Unicredit might be able to survive MPS’s collapse and a speculative attack on the Italian banking system following a No vote, Kierkegaard believes that smaller local and regional banks will not be so lucky. Still, even in this more limited scenario of a banking crisis, EU regulations prevent national governments from spending state funds to bail out the investors of struggling banks. Instead, they promote a “bail-in,” which means that investors take the full loss on bad debt. Unfortunately, this will include many everyday depositors who could be forced to take a significant loss on their savings.
Still, says Jones, “Italy will manage to hold itself together whether or not the referendum passes. Europe will hold itself together as well.” Breathless predictions that the outcome of this referendum will allow a populist euro-sceptic party like 5SM to rise to power or precipitate a nation-wide – or even Euro-wide – banking crisis are probably overblown. But Italians face a perverse choice on December 4. On the one hand, a No vote threatens short-term political uncertainty and the possibility of a financial crisis. On the other, a Yes vote might win stability and necessary economic reform at the cost of future autocracy. Either way, the country will look very different on Monday.
Fritz Lodge is an international producer at The Cipher Brief. Follow him on Twitter @FritzLodge.
