By Lisa Femia, NIAF Manager of Public Policy
On Monday evening, December 5th, Italian Prime Minister Matteo Renzi looked solemnly in the face of political defeat and submitted his resignation to Italian President Sergio Mattarella. Italian voters had decisively rejected his proposed constitutional reform plan in a referendum vote just the night before. So tied was the resolution to the Prime Minister, that The Economist began referring to it as the “Renzi-ferendum.” Renzi had made it a top goal of his tenure in parliament, and promised to resign should it fail. Now, the moment had come. As he announced his resignation, he knew, as did the people of Italy, that this vote had been a rejection of him as much as his proposal.
Italians voted against the constitutional referendum by a surprisingly large margin. About 60% of Italian voters said “no” to a plan that would have reformed the size and scope of the national government and altered the nation’s 68-year old Constitution. U.S. analysts are labeling it another victory for international populist, nationalist political movements, though in truth, it is far more complex than that. Renzi faced opposition from multiple ends of the political spectrum. Establishment politicians, such as former Prime Minister Mario Monti, also argued against the referendum. In fact, it is not clear if the vote was a rejection of the referendum itself, Renzi, centralized government, or some combination of the three.
The rest of Europe—and much of the world—has turned its eyes towards Italy after the vote on Sunday. So too have Italian Americans, sitting at home in the United States, wondering what this means for their ancestral homeland, for global markets, and for the future of relations between Italy and the U.S.
WHAT WAS THE REFERENDUM?
The referendum would have changed 47 of the Constitution’s 139 articles. The most controversial proposed change was a significant reduction in the size of the Senate and a shift in its role to a more consultative legislative body, giving the lower house increased freedom to pass bills without Senate approval.
The referendum would have also provided for the abolition of Italian provinces, the level of governance below the regions. Some powers currently retained by the regions—such as infrastructure, energy, major transportation, and civil protection—would then have been transferred to the national government. Other changes included abolishing the national council on the economy and labor that advises Parliament, amending the electoral process for selecting judges to Italy’s highest court and Italy’s president, and opening up channels for citizens to propose legislation.
Proponents of Renzi’s plan argued that it would streamline Italy’s legislative process, preventing bills from being stalled for months, if not years, as they often currently are. Italy has had 63 governments in 70 years, something Renzi’s supporters claim is a result of gridlock in the country’s political system due to the over influence of Senate power. Opponents, on the other hand, claim the referendum would concentrate too much authority in the hands of central government and allow a political party that merely won a plurality in the general election to completely dominate the system. The referendum, many argue, was thrown together sloppily and could have been more effective had Renzi introduced measures in pieces.
WHAT ARE THE IMMEDIATE EFFECTS IN ITALY?
Of course, the most immediate effect of the “no” vote in Italy is Renzi’s resignation. Although President Mattarella asked Renzi to remain as Prime Minister until the 2017 budget is passed, the Prime Minister will ultimately step down. The pressing question in Italian politics is who will replace him. A couple names have been put forward, including Pier Carlo Padoan, a former finance minister in Renzi’s cabinet, and Pietro Grasso, the former head of Italy’s Anti-Mafia Commission. Regardless, it is more likely than not that an establishment politician will take over until the next election, which is currently slated for 2018. Parliament will undoubtedly argue over election laws, but that date is likely to remain the same.
Renzi’s resignation, however, does leave the country with a political vacuum. Many experts think this could provide an opening for the increasingly popular Five Star Movement, a populist party that supports an anti-globalist platform, including leaving the euro and returning to the lira as currency. Other experts think a Five Star takeover is still far from likely, given the popularity of the euro with Italians and the high probability that a majority coalition will be needed to form a new government in 2018.
The largest concern in the wake of Sunday’s vote is the fate of the Italian banking system. The country’s banks are in deep financial trouble, nursing $385 billion in suspect debt among them. The vote on the referendum has lessened the banks’ hopes of being recapitalized. Prior to Sunday’s vote, the Financial Times reported that eight of the banks were at a high risk of failure should the referendum fail. Now, much currently hinges on the recapitalization of Banca Monte dei Paschi di Siena, Italy’s third largest bank by assets, which is currently in talks with Qatar’s sovereign wealth fund for funding.
This recapitalization plan, however, looks likely to fail. If the bank cannot get funding from private investors, it will need either a taxpayer-led bailout, a “bail in” of junior bondholders by turning their safe bonds into risky ones, or a Eurozone-level bailout. The European Central Bank could do this through its bond buying program.
WHAT DOES THIS MEAN FOR EUROPE?
Europe’s most immediate concern is financial. There were early losses for the euro immediately after the vote, but the market recovered quickly. This was partly because investors predicted the result, partly because political instability in Rome is not unusual, and partly because it became clear the path to power for the Five Star Movement remains a difficult one. Still, another Eurozone bailout seems increasingly likely, and the financial situation moving forward is a thorny one.
More troubling for Europe, however, would be the rise of populist, anti-European Union sentiment in a politically tumultuous Italy. Italy is the third largest economy in the EU and, if it votes to leave, it could precipitate a massive financial crisis on the continent. After Brexit, there is fear among EU members of any political action or failure that emboldens anti-globalist movements. Once again, though, the referendum’s failure in no way makes the rise of the Five Star Movement inevitable.
WHAT DOES THIS MEAN FOR THE UNITED STATES?
Right now, not much. U.S. banks experienced a boost on Monday when Italy’s banking bailout became less likely, thereby increasing the appeal of U.S. markets. Even so, the U.S. should not experience any major financial or political effects in the short term.
However, the rejection of the referendum does open the door for future actions that could have a major impact on the U.S. and global markets. If the vote signals the continued spread of nationalist populism in Europe and allows for the rise of the Five Star Movement in Italy, the world could witness the breakup of the Eurozone. This could cause geopolitical unrest and a global financial crisis that would hurt U.S. investors. For the moment, however, that still seems unlikely.
All the U.S. and Italian Americans can do right now is sit, wait, and see what happens.