The resignation of Italian Prime Minister Matteo Renzi after he lost a key referendum on constitutional reform is plunging the country into political turmoil, and the EU in further uncertainty.
Roughly 60% of Italians rejected the sweeping changes to Italy’s constitution and parliamentary system, in a vote marked by a high turnout of nearly 69%.
— Bloomberg (@business) December 5, 2016
Spearheaded by the populist Five Star Movement, the biggest rival to Renzi’s Democratic party, the ‘no’ campaign took advantage of Renzi’s declining popularity, a struggling economy and problems caused by tens of thousands of migrants arriving from the Middle East and Africa.
“The experience of my government ends here … I did all I could to bring this [reform] to victory,” an emotional Renzi said in a televised address to the nation, after early results showed he had lost the plebiscite by as much as 20%. “If you fight for an idea, you cannot lose,” he added.
His reform, which was designed in tandem with a new electoral law, aimed to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also vowed to change the distribution of competences between the state and regions.
Renzi said the reforms would have cut Italy’s bureaucracy and made the country more competitive. But many feared the system would remove parliamentary checks on the executive and bring no real positive impact either on the functioning of Italian public administration or on its economy.
Coming to power in 2014, after an internal coup in his party to oust premier Enrico Letta, Renzi said he will convene his cabinet for the last time on Monday afternoon and then hand in his resignation to President Sergio Mattarella.
His departure might lead to early elections next year. President Mattarella is now tasked with brokering the appointment of a new government, or if that fails, ordering early elections.
Many analysts think the most likely outcome is that Renzi’s administration will be replaced by a caretaker one dominated by his Partito Democratico which will carry on until the next election, which must be held by spring 2018.
Mixed bunch of winners
The referendum’s results ushered a major victory for the populist Five Star Movement, which led opposition to the reform, and the xenophobic Northern League. The two locked arms to drive Renzi out of office.
Opposition leader Matteo Salvini, of the anti-immigrant Northern League, said that if the exit polls are confirmed, the referendum will be a “victory of the people against the strong powers of three-quarters of the world.” Some read the referendum as evidence of the growing anti-establishment, populist sentiment in Europe and elsewhere.
Another major winner from the ‘no’ camp could very well be Silvio Berlusconi. The former prime minister fell from power in 2011 at the height of the eurozone crisis and saw his fortunes plummet after a series of scandals.
Some analysts in Italy see him as a possible kingmaker if new elections are held and usher a new coalition government. Forza Italia, Berlusconi’s party, commands roughly 12% of the vote, according to latest results.
Risks for the Eurozone
The delegation of French socialists in the European Parliament warned of political and economic uncertainty following Renzi’s resignation.
They pointed out that in this period, the question of the soundness of the Italian banking system will be reopened.
“This prolonged uncertainty could, once again, challenge the stability of the eurozone, Italy not being Greece by the weight of its economy and its debt”, they state.
— A C Grayling (@acgrayling) December 5, 2016
They further argued that this victory of the “no” also paves the way for those who claim that Italy would be better off outside the European Union. But being on the front line in the context of the refuge crisis Italy needs Europe, the French socialists underlined.
Turbulence on the markets looks inevitable, with the euro falling to 20-month lows against the dollar in the immediate aftermath of Renzi’s decision to resign.
The single currency slumped as much as 1.4% to $1.0505, before recovering a bit to $1.0555.
The drop to its session low was the sharpest since June. Its March 2015 trough was around $1.0457.
Some analysts fear a deeper crisis of investor confidence could derail a rescue scheme for Italy’s most indebted banks, triggering a wider financial crisis across the eurozone.
The vote was not about any financial or economic issue, but the timing and the potential implication for political stability are such that the negative outcome could trigger some financial instability.
Soon, Italy’s oldest and most troubled bank, Monte dei Paschi di Siena, is expected to complete a very important and sizable capital increase.
Italian banks are still bearing the burden of a significant load of bad loans.
As of September 2016, the Bank of Italy was reporting that the total of bad debts in the system was €198.9bn, down from €200bn in August.
Markets are now looking ahead to a European Central Bank meeting later this week and whether President Mario Draghi comments on the Italian referendum.
“The ECB is holding a governing council meeting on Thursday. If president (Mario) Draghi makes dovish remarks in consideration of instability risks (from the vote), the euro would fall,” Nomura’s Ikeda said.