Italy's Referendum: The Implications for Europe

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On December 4th 2016, Italian Prime Minister Matteo Renzi was roundly defeated in a referendum to change Italy’s constitution. The outcome was not unexpected, but with 59.1% of the Italians voting against the proposed reforms, and a high voter turnout (68%) it was a heavy defeat for the Prime Minister, and he initially announced his immediate resignation; the day after the vote, pressed by the President of the Republic, Sergio Mattarella, Renzi accepted to “freeze” his resignation until the final approval of the 2017 Budget Law. The Senate passed the Budget on December 7th, after which Renzi formally resigned. Italy is now navigating towards months of uncertainty: President Mattarella will speak to the main parties to form a plan to move forward. The most likely political outcome is a stop-gap government, backed by only the governing Democratic Party or also supported by opposition parties. This will be followed by general elections, either in Spring 2017, after the constitutional court has ruled on the current electoral law, or in early 2018, which is when the next general election is currently scheduled for. The first names touted to lead a new government include those of current Economy minister Pier Carlo Padoan and of Senate president Piero Grasso, a former anti-mafia prosecutor. It is questionable if Renzi will remain leader of the Democratic Party, the country's largest one, or if he will throw in the towel, but the former option seems more likely. If he does, he may be able to contest an early election. The left-wing populist Five Star Movement (M5S), led by comedian Beppe Grillo, and the far-right, anti-immigration and pro-regional autonomy party Northern League, currently polling in

second and third place behind the Democratic party, called for snap elections, hoping to take advantage of this moment. The recently changed electoral law favours majority voting over proportional representation, hence favouring these populist parties. As the constitutional reform was the reason the electoral law was changed in the first place, Renzi’s Democratic party is now keen to reverse it. Doing so will, however, depend to a large extent on the strategic decisions adopted by Silvio Berlusconi’s party, Forza Italia, which holds the key to form the parliamentary majority needed. Looking at current polls, which see M5S at 28%, not far behind Renzi’s Democratic party with a 32% share, new elections could result in a stalemate similar to the one we witnessed in Spain last year.

The referendum result has an economic dimension as well. While the Euro and European markets recovered after an initial fall, Italian bank shares and government bonds fell, fuelling concerns about financial knock-on effects. Most critical is the rescue plan for some of the country’s largest banks (e.g. Monte dei Paschi di Siena), which could now be in doubt; investors will soon meet to decide whether to back the currents efforts to raise the necessary funds. At the same time, the cost of insuring Italian debt against default has hit a three-year high, although it remains well below financial crisis levels. The ‘No’ campaign and populism Although not traditional political allies, the leftist M5S and the far-right Northern League joined forces behind the successful ‘No’ campaign to stop the reform and bring down PM Renzi.

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK


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