29 November 2016

On Sunday, Italians will head to the polls to either endorse or reject a major constitutional reform tabled by Prime Minister Matteo Renzi’s government and adopted by parliament earlier this year. The hype around the vote could hardly be bigger, mainly because Renzi has staked the future of his government on the outcome of the referendum by saying he will resign if he loses it.

The reform has two main pillars. First, it overhauls the country’s parliamentary system – whereby the two chambers are currently put on equal footing in the law-making process and are both vital to the survival of the government of the day – by curtailing the powers of the Senate, the upper house. The latter would no longer be directly elected, and the number of its members would be cut down from 315 to 100.

Second, it aims to clarify the division of labour between Italian regions and the central government – a source of hundreds of disputes at the Italian Constitutional Court over the past decade or so. The reform would get rid of ‘shared competences’ – meaning that in future the various policy areas could fall within the remit of either the central government or regional governments, but not of both.

From Renzi’s point of view, the rationale for this reform is self-explanatory. Under the existing parliamentary system, a bill can go back and forth between the two chambers indefinitely – thereby slowing down or preventing the adoption of key reforms Italy needs. Streamlining the law-making mechanism, the argument goes, is a necessary step to speed up the reform process.

If you want to know more about the nitty-gritty of the reform, and the main criticisms it has drawn, you can read this primer I wrote for the UCL Constitution Unit blog in October. The purpose of this blog post, however, is more to look at what might happen after the referendum.

In Italy, it is forbidden to publish opinion polls during the two weeks ahead of a vote. The latest batch of polls released before the ban kicked in were unanimous in putting the ‘No’ in the lead – albeit the margin varied from 1-2 to 10-11 percentage points depending on the pollster. As a result, a victory for the ‘No’ camp has now become pretty much everyone’s central scenario.

If Renzi loses, he will resign – but an immediate snap election would be highly unlikely

Let’s start from the basics. Many, including former Italian Prime Minister Mario Monti, have pointed out that Renzi would not be legally required to resign in case of defeat. They are right. However, his credibility as a political leader would inevitably be tarnished – particularly if he intends to stand in a future Italian general election. This is why, although politicians can sometimes be very creative at embellishing U-turns, I believe Renzi will indeed step down if he loses this referendum.

After that, the initiative would be in the hands of Italian President Sergio Mattarella. The most vocal opponents of the reform, notably the Five-Star Movement and Lega Nord, would certainly push for a snap election as soon as possible. However, there are at least two reasons why I see this scenario as highly unlikely.

First, Italy’s new electoral law, which entered into force on 1 July, would be unfit for purpose and would need amending. It was designed for the direct election of only the lower chamber – that is, taking it for granted that the constitutional reform would be confirmed by the referendum. Crucially, the electoral law was also referred to the Constitutional Court earlier this year. The ruling has been postponed until after the referendum – and there is a chance that the electoral law could be struck down in full or in part. Holding a snap general election in such a context may prove a rather chaotic exercise.

Second, the budget for 2017 would surely need to be definitively adopted before parliament is dissolved.

An interim government – but led by whom?

Common sense would therefore suggest appointing an interim government with a clear and tight mandate – pass a new electoral law and finalise the adoption of the 2017 budget – with a view to holding an early general election at some point next year. This need not be a technocratic cabinet, like the one unveiled by Mario Monti in November 2011 – although a technocrat, incumbent Finance Minister Pier Carlo Padoan, is often cited as a strong candidate to take the helm if Renzi keeps his pledge and resigns.

The names of Cultural Heritage Minister Dario Franceschini and Senate speaker Pietro Grasso have also come up as possible options to replace Renzi. Theoretically, Renzi himself could be given the mandate to lead this interim government. However, he flatly ruled out this option in a recent interview. Whether he changes his mind might ultimately depend on the size of the defeat.

The next question would be when to hold the general election. The agenda for next spring looks quite busy. Italy will host the celebrations for the sixtieth anniversary of the Treaty of Rome at the end of March, and then the G7 summit at the end of May. Therefore, late June appears to be the earliest possible window – although September/October might turn out to be more realistic dates.

A victory for the ‘No’ camp would not mean Italy is on its way out of the euro

While Sunday’s constitutional referendum is undoubtedly significant, I have the impression that the potential short-term economic and political fallout of a ‘No’ victory is sometimes being exaggerated. For starters, Renzi’s defeat would not mean Italy is on its way out of the single currency. True, the Five-Star Movement and Lega Nord are vociferously campaigning for the ‘No’ front and are both openly anti-euro. However, this is a referendum on a proposed constitutional reform – not a general election.

In order to take Italy out of the single currency, the Five-Star Movement would first need to be in government, hold a referendum on euro membership as promised (which in turn would require changing the Constitution), and win it. The truth is it is far from obvious that any of the above could materialise – there are just too many unknowns at this stage.

As regards the reaction on the financial markets, some instability in the aftermath of a ‘No’ victory would be guaranteed – but I would not expect a repeat of the widespread panic we witnessed in late 2011. The framework is completely different, the bond markets seem to be already pricing in a ‘No’ win, and the ECB’s on-going Quantitative Easing programme would surely help prevent Italy’s borrowing costs from sky-rocketing.

Arguably, the main concern is linked to the situation of Italian banks. As the Financial Times reported recently, the uncertainty triggered by Renzi’s resignation could discourage investors and make it more difficult for troubled Italian lenders to raise fresh capital – potentially forcing up to eight of them into resolution. A genuine issue whose significance one should not play down, although I believe a lot would also depend on how quickly a new government could be put in place. Furthermore, in fairness, these problems – as well as Italy’s other underlying economic weaknesses – would not magically disappear in the event of a ‘Yes’ victory either.

Would a ‘No’ victory prove that Italy is unreformable?

Looking at the longer term, this referendum is quite clearly being interpreted by many as a litmus test of Italy’s willingness to change more generally. If this constitutional reform really is the mother of other structural reforms, then its rejection would send the message that a majority of Italian voters are not interested in streamlining the parliamentary system so that it becomes easier to do what is needed to get their country out of its slow economic decline – hardly a good sign for the rest of the Eurozone.

All the more so given that Renzi has long been seen abroad as the last bastion of reform in Italy. Who would wear that mantel if he goes? There is admittedly no clear answer yet – meaning that some of the concerns are understandable.

Nonetheless, I believe the reality is more nuanced. To mention but one example, under Mario Monti’s technocratic government, a pension reform was passed in both houses of parliament in just over two weeks. While those were in many ways exceptional circumstances, this does beg the question whether Italy has been slow to reform just because of a dysfunctional parliamentary system or rather because of more deep-seated resistance within its political class.

Can Renzi still pull this one off?

The answer has to be yes. From the Brexit referendum to the US election, pollsters (and analysts) have recently had to eat plenty of humble pie. Furthermore, between a fifth and a quarter of Italians were still undecided according to the latest polls we have seen. The potential for a major surprise is still there. Indeed, a victory against all odds would strengthen Renzi’s hand at home and in Europe. Interestingly, Italian media have been reporting that Renzi may well tender his resignation even in the event of a ‘Yes’ vote on Sunday – in order to be handed a fresh mandate by the Italian President to form a new government backed by a broader majority in parliament.

Conclusion

The Italian constitutional referendum is an important political crossroads for the country. A victory for the ‘No’ camp would lead to Renzi’s resignation and an inevitable period of uncertainty. However, the short-term fallout from Renzi’s defeat should not be over-hyped. Italy has coped with instability and shaky governments for decades. Whatever the outcome on Sunday night, the sun will rise on Monday morning.

The longer term implications for the country’s ability to pursue structural changes in future are admittedly harder to decipher at this stage. Questions would certainly arise around whether the rejection of Renzi’s constitutional reform means Italy will find it even harder to do what it needs to get out of its slow economic decline. However, it would be wrong to assume that a ‘No’ victory would automatically mark the end of reform in Italy.