Why Italy’s referendum carries risks for the entire EU

Why Italy’s referendum carries risks for the entire EU
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After shock results in Britain and America, attention is turning to Italy’s constitutional referendum, where Renzi has said he will resign if he loses the vote. Many fear that the prevailing anti-establishment mood will defeat the government.

Italians go to the polls on 4 December to vote on a proposed constitutional change – called by centre-left Prime Minister Matteo Renzi – to reduce the power of the upper house and ease the executive’s ability to pass laws. The referendum has now come under international scrutiny, following Britain’s vote to leave the EU and the election of Donald Trump in America, and as opinion polls have shifted increasingly towards rejecting the proposal.

The media coverage, particularly outside Italy, portrays a No outcome as another populist domino in the democratic world, which is heading towards the possibility of more right-wing populist election victories next year of – amongst others – Marine Le Pen in France and Geert Wilders in the Netherlands. In this narrative, the result of Italy’s referendum could be a catalyst for the break-up of the EU itself. Although the political risks of an Italian No are real, the context and likely consequences are – compared to the other examples mentioned – quite different.

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Figure 1: Italy’s persistently high unemployment

Another misjudged referendum?

Since coming to power in 2014, the energetic Matteo Renzi, of the centre-left Partito Democratico (PD), has sought to pursue a broadly pro-business reform agenda, which has been likened to a social democratic ‘Third Way’ model. An obstacle that Renzi has faced has been Italy’s sclerotic political system, whereby laws cannot pass the congested bicameral parliament. The Prime Minister is seeking to make government more effective by reducing the clout of the senate. On December 4, Italian voters will be asked if they approve of the measure.

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The Yes rationale

There are strong reasons why Italians may seek to vote Yes. Italy’s economy has been languishing in the cycle of low growth and high unemployment that has troubled much of the countries in the south of the Eurozone. Potent vested interests, in particular, have made economic liberalisation and reform difficult. Italy was ranked 50th in the 2016 Ease of Doing Business rankings, while the Heritage Foundation’s 2016 Index of Economic Freedom deems the country ‘moderately free’, below Romania, Bulgaria, Turkey and Serbia.

Unsurprisingly, Italian business leaders, the General Federation of Italian industry, as well as employer organisations strongly support a Yes vote. Although a more powerful executive will not be able to fix all of Italy’s structural difficulties, observers claim that it would give a government, particularly one led by a politician such as Renzi, more leverage to kick-start the economy.

The Insurgent status quo

Initially, opinion polls pointed to an endorsement of the constitutional change. Renzi, however, has made a number of errors. His call for economic liberalisation comes at a time when there is widespread backlash against globalisation. He has personalised the issue by stating he will resign if the result is No. As his popularity has decreased, therefore, so has support for the measure. Italians may have reticence in granting a government too much power; a checks and balances argument has been consistently cited by No campaigners. These include the insurgent, populist, Five Star Movement (M5S) party, founded by comedian Beppe Grillo.

Here is where the comparisons with Brexit and Trump, have been invoked. The possibility of an M5S-inspired No vote feeds into the narrative that there is a wave of anti-establishment sentiment across Europe and the United States. M5S, however, has had electoral success in recent years and is already having to come face to face with the cold reality of governance. Virginia Raggi, the M5S mayor of Rome, is already weighed down by difficulties only months into her tenure.

In addition, there is one key difference, between Brexit and Donald Trump’s election, and that is the anti-establishment vote in Italy would preserve the status quo. It is the signal that a defeat for Renzi would send, rather than an immediate governing meltdown, which is leading to media hyperbole.

The impact of a No vote

If the recent opinion polls match the outcome (it should be noted that Italian electoral law prohibits opinion polling up to three weeks before voting day), and keeping in mind pollsters have been consistently wrong in 2016, what would a No vote mean for Italy and the EU?

There are a number of political risks. Renzi has indicated he would resign but this cannot be taken as a given. Still, any new Prime Minister would be in a precarious position. The uncertainty may have a number of negative implications, including a downgrading of Italy’s credit rating, higher bond yields and a worsening of its already fragile banking system. This would then feed back into even lower growth and higher unemployment. The most acute issue may be the potential collapse of Italy’s most exposed bank: Monte dei Paschi di Siena.

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Brussels and Berlin await

If Italy votes No on 4 December it is by no means certain that political and economic chaos will follow. Nonetheless, if the economic situation deteriorates we can expect other EU leaders – anxious to prevent contagion – to act. This may come in several guises. Most urgently a deal would be patched together to rescue Monte dei Paschi, despite the problems this will cause for the EU’s new ‘bail-in’ rules.

Then there is Italy’s sluggish economy. President of the European Commission, Jean-Claude Juncker, has already made overtures to enact EU-wide fiscal policy. The austerity favoured by Germany will surely not be pursued if the very integrity of the EU is put at risk by events in Italy. Belatedly, an easing of monetary policy, and fiscal expansion, may occur, that sits somewhere between the anxiety of German savers and the long-suffering, but debt-laden, southern European countries. Ultimately the baton for reform within the EU will be handed back to Berlin, which might have to swallow a dose of Keynesianism.

Brexit has been a wake-up call for EU policy-makers that should have been heeded with the electoral gains in recent years of Syriza, Podemos, the Dutch PVV and M5S (to name but a few). With populist threats lurking now in most EU countries, one can expect a strong response in Brussels and Berlin, should Italy vote No on 4 December.

Categories: Europe, Politics

About Author

Robert Ledger

Robert Ledger is an analyst on European affairs, with a particular focus on the Balkan and Caucasus regions. He has an MA in International Relations from Brunel University and a PhD in political science from Queen Mary University London.