November 30, 2016    5 minute read

The Italian Referendum Explained

Populism Round III    November 30, 2016    5 minute read

The Italian Referendum Explained

Democracy has delivered some surprising results on the doorsteps of the world’s leading financial and political experts in the past year. What was marginally possible is now fact and liberals have learned that they must review their assumptions on how votes are cast. The extent of dissatisfaction with the establishment is dawning upon the world, and politicians are having a hard time coming to grips with their disconnection from popular reality – the veil of ignorance has an evil twin.

It looks like Italy’s referendum this week will fall in line with Brexit and Trump’s election. On December 4th, the country will be voting on constitutional reforms put forth by Matteo Renzi, the young Prime Minister.

The Problem

There are many things wrong with Italy at the moment. Youth unemployment has soared over 40% since 2013. GDP expansion has been mostly negative since 2008. Worse still, GDP per capita has stagnated since the 1990s. Government debt stands at 133% of GDP, the second biggest in the Eurozone area, and private debt at 117%. The banks are saturated with non-performing loans. If Italy follows Greece to the brink of default, it will be too big to be bailed out.

The IMF predicts Italy’s GDP will lag behind its European counterparts again this year with a 1.1% increase. Reform inertia has perpetuated the longevity of these issues and the root of inertia is institutional, the government claims. They are not wrong.

The Referendum

Unlike most EU countries, the Italian Constitution prescribes “perfect bicameralism,” meaning that the Senate and the Chamber have equal power. In the words of The Economist, this is a “recipe for gridlock.” Unable to perform and always challenged, Italian governments have numbered 65 since 1945.

Mr Renzi’s proposal, one he staked his job on, will shrink the Senate’s numbers and powers and strengthen the Chamber, freeing their hands to carry necessary reforms. The upper house will no longer be able to overthrow the executive through a vote of no confidence.

65 governments have ruled
Italy since 1945

It is the fine print that differentiates the plan from other European systems. Senators will be appointed, not elected, from the culprit of Italian corruption – regional and local assemblies. Renzi has also passed an electoral law that guarantees the majority party a 54% majority in the lower house.

A Yes vote does not enable the Chamber, but the government. If executive power were the solution to legislation sluggishness, France would be thriving. It is not.

The Belligerents

When Renzi’s constitutional package was passed through the lower and upper houses in April, his achievement was celebrated as historical. The young Prime Minister, it was thought then, would breathe new life in the archaic method of governance. Things have changed.

The Five Star Movement is his primary opponent. It started as a web-based movement led by comedian Beppe Grillo in 2009. As its origins hint, it is a popular and populist party. Its combination of Euroscepticism and progressive environmental policy gave it the reigns of city halls in Rome and Turin.

Mr Grillo’s party polls at 30% of the popular vote, threatening Renzi’s hold on power and is expected to win the referendum by a small margin. “This is mad stuff,” Grillo blogged, “it’s an apocalypse for the big papers, the intellectuals, the journalists.”

The Reaction

Rejecting the government’s proposal will have everyone dancing to a familiar tune: a win for populism, a loss for the establishment, mass panic for the markets.

The rejection of Renzi’s proposal and stepping down as he vowed, will bring political turmoil. It is not realistic for yet another election to be carried out. A new government will have to be formed. More than that, Renzi has convinced the EU and the US that the reform will allow Italy’s economy to perform to EU standards. The expectations are so high that if the proposal fails Italy’s credibility internationally might come crashing down.

Investor confidence will plummet, destabilising the Italian banking sector and reducing growth prospects. In truth, this is a certainty in the immediate aftermath of a No vote. The question is for how long and to what extent.

The Consequences

Italy’s financial sector is treading on treacherous grounds as it is. Asset managers, insurers and banks set up a €5bn fund to bail out weak lenders. The political instability might limit their willingness to be involved in the Italian economy. The Financial Times asked officials and senior bankers what the backlash might be. Their answer was that up to eight big banks might be in trouble.

15.3% Italians want to leave the Eurozone

The possibility of an Italexit, on the other hand, is an exaggeration. Only 15.3% of Italians want to leave the Eurozone, a poll conducted by newspaper La Stampa concluded. But the Five Star Movement has blunted the edge of that sword lately.

The extent of the financial crisis, however, risks contagion to the rest of Europe.

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