Renzi resignation in Italy sets up defining year for Europe in 2017

The referendum result in Italy, which comes after Donald Trump's election last month and the Brexit referendum in June, could now potentially trigger a further bout of political and economic turmoil not just in Italy, but across Europe too, argues Andrew Hammond.

ITALIAN Prime Minister Matteo Renzi has resigned following the country’s decisive decision to vote ‘no’ on Sunday by almost 60-40 in a landmark constitutional referendum.

Renzi resignation in Italy sets up defining year for Europe in 2017

Following Donald Trump’s election as US president, and the Brexit vote in June, the poll is the latest in which victory by anti-establishment forces has sent shockwaves internationally.

However, showing that there are limits to the apparently growing populist mood across much of the world, Sunday’s presidential election in Austria saw the convincing defeat of Norbert Hofer. The Freedom Party leader, who would have become Europe’s first far-right head of state since 1945, was convincingly beaten.

Nonetheless, most eyes are now on Italy and the ramifications of that referendum, in the Eurozone’s third largest economy, could be both economic and political in nature. Politically, the vote could have contagion beyond Italy, potentially whipping up fresh turmoil across Europe, especially in the context of important elections in countries from Netherlands in March, France in April and May, and Germany in September.

And financial markets are assessing the significance of the economic ramifications of the vote too. This is because Italy is sometimes seen as the biggest threat to the Eurozone’s future given that it has the second biggest debt load in the single currency area at over 130% of GDP, and its banking sector is under significant stress with under-performing loans.

It is feared that post-referendum political instability could now nix political efforts in Rome to resolve this bad loans crisis. Specifically, it is reported that up to 8 of Italy’s troubled banks could risk failing now the referendum is lost, partly because market panic could discourage investors from recapitalising them.

The immediate economic and political focus is on who might replace Renzi who has been prime minister for almost three years. Perhaps unwisely, he linked his personal future to the ballot outcome, which he said would set the tone “for the next 20 years”, asserting that he would resign if his reforms were rejected.

Renzi’s declining political popularity was one factor in the poll outcome, alongside continuing public angst over corruption, and continuing fragility of the economy with unemployment at around 12%. Indeed, GDP per head is now less than in 1997 at constant prices: only Greece has fared worse in the Eurozone during this period.

It is into this febrile political climate that anti-establishment forces have grown in Italy, including the Northern League’s far-right leader Matteo Salvini, and the Five Star movement, which was founded seven years ago by former comic Beppe Grillo.

Five Star, which won mayoral elections in Rome and Turin this year, and has been polling just behind Renzi’s centre-left Democratic Party in national surveys, has said that Italy should reconsider its role in the EU, and called for a referendum on whether it should keep the Euro single currency.

While Renzi has resigned, Italian President Sergio Mattarella may refuse to accept this and ask him to remain in power. If Renzi does go, however, this need not necessarily trigger fresh elections. For instance, a new caretaker government, potentially headed by a technocrat, may take power before the next general election in or before May 2018.

One technocrat who could head up such an administration is economics minister Pier Carlo Padoan.

He sought to calm nervous markets before Sunday’s vote saying that there was “no risk of a financial earthquake” if the reforms were voted down, although he did acknowledge there may now be “48 hours of turbulence”.

This underlines the instability impact precipitated by the vote could be contained, in the short to medium term at least. Rather than triggering new polls sooner rather than later, the parties comprising the present coalition have incentives to keep the current legislature going, and seek to form a new government.

Moreover, former prime minister Silvio Berlusconi, and his Forza Italian platform, which is polling around 10%, has hinted that it might also support a new administration.

Even if instability is now limited, many in Italy will see the rejected referendum reforms as a lost opportunity for the country. There have been more than 60 national governments in the post-war era, and the ambition of Renzi’s reforms was ushering in greater political stability.

The argument he espoused is that more stable majorities in the legislature, and the stronger government this facilitates, will enable reforms needed to enhance economic growth and reduce the public debt.

However, opponents of the reforms, including ex-technocrat prime minister Mario Monti, asserted they would have given the executive excessive power, and made government less accountable, which underlines that it was not just anti-establishment forces ranged against Renzi.

The constitution, which dates back to 1948 after Benito Mussolini’s dictatorship, was designed to diffuse power equally between the Chamber of Deputies and the Senate, whilst giving autonomy to key regions. Renzi’s reforms would have re-centralised power by ensuring that Rome took back responsibilities from provinces in areas like infrastructure and energy projects. Meanwhile, they would have put greater stress on regional governments to display greater fiscal prudence with regards to their remaining responsibilities, including health service provision.

The biggest controversy, however, stemmed from proposals to limit the powers of the Senate, vis a vis the Chamber of Deputies. Various Senate powers would have been removed, including its ability to bring motions of no confidence in a government, and the number of senators would have been reduced from 315 to 100 with these being sourced from local government rather than directly elected.

Taken overall, the vote will see renewed political and economic uncertainty in Italy, although instability may be contained, despite Renzi’s resignation.

Many European political leaders will be unsettled by the result which will shape the political weather across the continent in 2017 with other key elections on the horizon where anti-establishment forces are on the ballot in Netherlands, France and Germany.

Andrew Hammond is an Associate at LSE IDEAS (the Centre for International Affairs, Diplomacy and Strategy) at the London School of Economics, and an Adviser to ReputationInc

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