The accepted wisdom is that Italy’s referendum on the 4th of December is a major political challenge to the integrity of the Eurozone, but do all analysts agree as some appear to be downplaying its importance?
Italy’s referendum on December 4 has been seen as a major event not just for Italy but for the future of the European Project.
Writing in the Financial Times, columnist Wolfgang Munchau entitled his recent piece on the referendum, “Italy’s Referendum holds the Key to the Future of the Euro,” with the subtitle, “On December 5, Europe could wake to an immediate threat of disintegration.”
Yet are such fears warranted?
On the face of it they are not.
The Italian referendum is not even about membership of the EU, it is about reforming the constitution with a focus on the Senate, or upper house of the Italian parliament.
The government wants to reduce the power of the upper house so that legislation can be passed more speedily.
If they win, the Senate’s elected representatives will be replaced by local government representatives, whose mandate will be local issues with a central focus, constitutional affairs and EU matters.
It is hoped by reformists that these changes will speed the progress of legislation from drafting to implementation.
Currently, the reforms are unlikely to be passed as polling data confirms the majority of voters do not want a change (42%).
Those who do currently stands at 37%, whilst 21% remain undecided.
Failure is understandable if we look at past form - there have been many attempts to reform the constitution in the past.
One notable attempt was Massimo D’Alema's attempt in 1997, this came after another attempt in 1993.
A Verdict on Renzi
Polls at the start of the campaign told a different story with the majority saying they would vote “Yes” for reform.
This changed, it seems, after Prime Minister Matteo Renzi staked his job on the referendum, saying he would resign if he lost, and the “No” vote won.
If anything this turned the tide against him and in favour of the “No” campaign.
Although he has backtracked since making the pledge and has now said he will stay even if the referendum fails, most analysts expect him to resign, and it is the threat of his early resignation which is the main risk to triggering a series of steps leading to the possibility of a majority win for an anti-EU party like the Five Star Movement.
“It seems very likely that Matteo Renzi will step down as Prime Minister if the resulting vote is a "No", meaning President Mattarella will grant someone else the right to form a government," notes Handelsbanken’s Lars Henriksson.
If everyone is happy with the new coalition leader then nothing will change and things will go on as usual, however, if there is a problem recruiting a new leader then that could raise problems.
“If no new PM is supported inside the coalition, there will probably be efforts to form a government based on a new coalition. The problem with both alternatives is that Matteo Renzi will probably still be the leader of the biggest party, meaning any new prime minister will have his/hers credibility heavily undermined,” adds Henriksson.
"The problem with both alternatives is that Matteo Renzi will probably still be the leader of the biggest party, meaning any new prime minister will have his/hers credibility heavily undermined,” adds Henriksson.
The reason Renzi threatened to resign if the referendum failed may have been because he thought Italians would want to avoid the chaos caused by his resignation and the vacuum thereby left, however, he may have misjudged things according to Henriksson.
“This is a fact (wishing to avoid political uncertainty) that Renzi has been trying to capitalize on, but instead he is now confronted with the fact that the prospect of political instability does not necessarily frighten Italians,” says the analyst.
In short, his plan appears to have backfired.
But the risk of instability caused by a Renzi resignation is that a viable new leader will not be found.
A "No" vote win, for example, may fracture the tentative bonds of the coalition government, and without Renzi's unifying influence there may be no alternative but to call an early general election to elect a more stable government.
In the end, the decision would be in the hands of the President Sergio Mattarella, a retired Constitutional Judge, who is reportedly against the idea of calling an early election as he is concerned about the prospect of FSM gaining power.
"His (Renzi's) resignation would not immediately lead to a general election, though," comments Commerzbank's Dr Jorg Kramer.
"President Sergio Mattarella has already said that he does not want to dissolve parliament.
"He is evidently concerned that an election would bring Beppe Grillo's anti-establishment Five-Star movement M5S to power, which could further destabilise the country politically.
"The former constitutional court judge will thus be doing his best to form an interim government, either with Renzi as acting prime minister, or perhaps under a technocrat such as that formed under Mario Monti five years ago," adds Kramer.
There is still a risk, however, that a stable government cannot be formed after a Renzi resignation and such a situation the President would be forced to dissolve parliment and carry out elections within 70 days. that election that a party such as Five Star might win.
The worrying thing for pro-Europeans (and the Euro) is that according to current data an early election could well see a majority win for Five Star.
“The Five Star Movement and the governing Democratic Party seem to be neck to neck in recent polls. The FSM are pushing for a referendum on the euro membership and once that comes into play, we all know that anything can happen,” says Henriksson.
This is where the real threat to the EU arrives.
Winner Takes All
Under the current electoral system it is unlikely Five Star Movimiento (FSM) would winn an outright majority, however, to complicate matters, the electoral rules changed in July 2016.
The changes are embodied in what is called the Italicum, and were brought in to help increase the power of the party with the largest share of the vote.
Under the new rules, if a party wins over 40% of the share of the vote, it is awarded 340 extra seats, majorly increasing its parliamentary majority.
On this basis, it is possible that a scenario could evolve in which the referendum could lead, via a sequence of steps, to Italy exiting the Euro.
For example, if the referendum returns a “No” vote (which it probably will do) and Renzi resigns (which he probably will do) and no replacement can be agreed on (odds not known), and there is a snap election in two months’ time, Five Star could win 40% of the vote (which they may do) and then according to the Italicum get the bonus seats for being the largest party.
This would result in a Five Star government, which has said in its manifesto it would call for a referendum on membership of the EU.
Given the majority of Italians are against remaining in the EU, such a referendum might very well result in an ‘Italexit’.
The FT's Munchau note:
“A French or Italian exit from the euro would bring about the biggest default in history.
“Foreign holders of Italian or French euro-denominated debt would be paid in the equivalents of lira or French francs. Both would devalue.
“Since banks do not have to hold capital against their holdings of government bonds, the losses would force many continental banks into immediate bankruptcy.”
Italicum on Trial
If the effect of the electoral changes embodied in the Italicum were a certainty then the above scenario would present a major threat, however, many analysts are more sanguine about the risks of the Italian referendum because the Italicum has had its legitimacy challenged in the Italian courts, and is currently under review.
“Early this year a Court in Messina sent the Italicum law for review to the Italian Constitutional Court under the suspicion it will breach the Italian Constitution,” says Handelsbanken's Henriksson.
The outcome of the case will not be known until after the referendum, but if the Italicum is okayed by the Constitutional Court that will also potentially see scope for a Five Star majority.
Indeed it is not entirely clear the extent of the Italicum's current legitimcay and whether it could hold sway in a snap election or not.
UniCredit Links Referendum Vote Outcome to Risks of Italicum
The greatest risk to the Euro is from Italy leaving the EU but this would require FSM winning a clear majority in a general election, a majority they could only gain with the premium seat add-on enshrined in the Italicum.
“If your obsession is fear of populism (in Italy in the most likely form of the Five Star Movement), then the huge number of bonus seats assigned for the biggest party under the Italicum should be your number one concern, and you should, therefore, hope for the outcome that maximises the probability of the Italicum being significantly changed to sharply reduce, if not eliminate the premium seats before the next election,” says Erik Nielsen, Global Chief Economist at Milan-based Unicredit Bank.
In short, Nielsen sees the referendum result as majorly influencing the outcome of the Italicum.
A win for the “Yes” camp would paradoxically lead to a higher chance of the Italicum being ratified with its premium seat clause intact, whilst a win for the
“No” camp and the resignation of Renzi would probably see the Italicum heavily watered down.
If the “No” vote succeeds, and the threat of early elections looms then there is a strong possibility the powers at B will want the Italicum changed before the election to ensure FSM do not sweep to power.
“A no-vote scenario …will immediately involve the president and a discussion with the key political leaders, all of whom will want the Italicum changed,” says Nielsen.
He sees this as a lesser risk than a win for the “Yes” vote which is ostensibly the less risky outcome