December 3, 2016    4 minute read

Italy: The Referendum And The Need For Stability

Paradoxical Outcomes    December 3, 2016    4 minute read

Italy: The Referendum And The Need For Stability

On December 4th, a confirmatory referendum on a constitutional reform is taking place in Italy.

This electoral appointment is being watched with some concern and keen interest not only by international political observers but also by financial analysts and markets. It represents a key point in a globally desired reform process in regards to Italian institutions, particularly supported by major financial operators and investment banks, by the European Union and the ECB.

Mounting Problems

The Italian economy does not seem to show solid macroeconomic data – Italy is a key hub for mass migration and the recent catastrophic earthquake that hit the centre of the country caused unprecedented devastation and damages over €7bn.

Moreover, if one considers the apparently inexorable growth in consensus of populist forces all over the world, from the United Kingdom until the recent Donald Trump’s election as President of the United States, one can notice that a similar election event requires the same attention, due to the possible political scenarios in Italy, in Europe and the world.

The Italian political landscape is fundamentally tripartite: government forces who support Prime Minister Renzi see opponents that are gaining ground in polls. Populist and anti-European forces, such as the Five-Star Movement (Movimento Cinque Stelle) and the Northern League (Lega Nord), are gaining consensus among those disappointed by politics. And these uncertain voters have been gaining ground in the wake of the success of Brexit and Trump.

The International Issues

The discontent stems from a collective political uncertainty regarding international events: recent terrorist attacks, seemingly unstoppable migration, economic stagnation and extremely high tax rates have provided fuel to this fire.

The referendum is therefore increasingly acquiring the characteristics of a referendum on the government itself rather than on its constitutional reform. But all of this noise may distract from the merit of the constitutional reform.

The Constitution of the Italian Republic was born after the tragedy of World War II, as a result of a drafting process in an assembly elected for this purpose (Assemblea costituente) and attended by the superior politicians of the postwar Italian scene. This drafting process provided a perfect bicameral system, in which every “Camera” (House/branch of parliament) has similar functions. The legislative process has the effect that a law becomes effective only after the approval of the two Houses.

What The Reform Aims To Do

What may appear as an old and slow political system has a particular function: to make the rise of a totalitarian regime impossible, providing the central power with a strong check and balances system.

This reform aims to overcome perfect Italian bicameralism, creating a more streamlined legislative power, differentiating the roles of the two houses and reducing the number of parliamentarians. Supposedly, it could create a system that facilitates the necessary reforms to revive the country and its economy.

Political consequences of a “yes” victory appear to be a strong reinforcement of Renzi’s government: it has not yet had the opportunity to get a direct popular mandate so that it could ride the wave of this success. On the other hand, a “no” victory could open the way for the advancing populist parties and would cause a de-legitimisation of the government that could force Renzi to resign.

Potential Outcomes Of The Vote

In this scenario, the country’s President, Sergio Mattarella, would become part of the game. First of all, he would consider the possibility of forming a new government under Renzi’s leadership. Secondly, he would attempt to create a national unity government with the explicit purpose of approving a new electoral law (the current one does not guarantee governability and has been declared unconstitutional by the Constitutional Court) and specific emergency economic reforms.

Paradoxically, a “yes” victory could push Renzi to the idea of capitalising as quickly as possible on such electoral success, prompting him to resign and call for immediate elections.


So if it is essential to ensure certainty for financial markets, it might be preferable to have a government of national unity as a result of a “no” victory, rather than seeking elections after a “yes” vote, with an electoral system that does not guarantee governability and with populist forces that are on the rise.

In conclusion, a “no” win might not be as tragic as it might appear, especially from a financial point of view.

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