5 December 2016

Italians yesterday overwhelmingly rejected the constitutional reform tabled by Prime Minister Matteo Renzi’s government. 59.1% of those who cast their ballot voted against the changes. Turnout was over 65%, higher than expected.

Slightly over one hour after exit polls were released, Renzi was already addressing the press to confirm he will today meet Italian President Sergio Mattarella to tender his resignation. That was widely expected, but what happens next? I already discussed the potential fallout from a ‘No’ victory in my preview of the referendum – and the latest events broadly seem to corroborate what I wrote last week.

No immediate general election

Predictably, the Five-Star Movement and Lega Nord have called for a snap election to take place as soon as possible. I remain of the view this is a highly unlikely scenario. The electoral law needs changing and the budget for 2017 needs to be adopted before parliament can be dissolved. Crucially, Silvio Berlusconi’s Forza Italia party – also firmly in the ‘No’ camp – has taken a more cautious approach by signalling its willingness to be involved in the re-writing of the electoral law.

Roberto Speranza, a leading member of the rebel fringe within Renzi’s own party, yesterday said something even more interesting: he suggested it is unlikely that an early election can be held in time for the new government to be in place before Italy hosts the G7 summit at the end of May 2017. This appears to tally with my prediction that late June, or even September/October, are more realistic dates for the next Italian general election.

An interim government will take over, but most certainly not led by Renzi

After Renzi hands in his resignation, President Mattarella will start consulting political parties with a view to appointing an interim government. Renzi was always unlikely to lead it, even more so given the size of the defeat – although I am not convinced that yesterday’s result is going to mark the end of his political career.

Therefore, the names doing the rounds are the same I indicated last week, with incumbent Finance Minister Pier Carlo Padoan widely tipped to take the helm (incidentally, he pulled out of today’s Eurogroup meeting in Brussels). Padoan is indeed a technocrat himself, but I would not expect his cabinet to be comprised of technocrats – unlike the one unveiled by Mario Monti in November 2011.

Once appointed, the new government will need to obtain the confidence of both houses of the Italian parliament. The timeline remains unclear for obvious reasons, but given that the parliamentary majority that has backed Renzi’s government so far would presumably agree to support the incoming cabinet (as long as it is for a clearly defined period of time), I would assume things should proceed fairly smoothly. A quick replacement would no doubt help reduce uncertainty.

No market panic, although questions on Italian banks remain open

There has been some volatility on the financial markets in the wake of the referendum, with the euro temporarily tanking to a 20-month low against the US dollar and Italian bank stocks under pressure – but things look pretty much back to normal at the time of writing. In other words, the markets seem to have taken a wait-and-see approach. This is at least in part down to an important, but often overlooked, aspect. The Brexit vote and the election of Donald Trump, which by themselves are bigger events than the Italian referendum, caught the markets by surprise. The ‘No’ victory clearly has not, as Italian pollsters were unanimous in pointing to that outcome for weeks.

To be sure, there is little room for complacency. Questions about the health of Italian banks remain open – particularly with regard to Monte dei Paschi di Siena, which is looking to raise €5 billion of fresh capital. Prolonged uncertainty over the formation of a new government could discourage investors and compromise this capital increase, which in turn could have repercussions for other troubled Italian lenders.

Nonetheless, I would definitely not rush to predict a full-blown financial crisis.

Italy’s long-term trajectory has become more uncertain, but no reason to hyperventilate

Already two years ago, I observed on this blog how anti-euro sentiment was on the rise in Italy – and how significant that was in one of the historically most pro-EU integration countries. Admittedly, the Five-Star Movement and Lega Nord – both openly anti-euro – have been the most vocal campaigners for a ‘No’ vote.

However, we need to avoid getting ahead of ourselves. European politics is slightly more complex than domino. What took place in Italy yesterday was neither a general election nor a referendum on the single currency. Either would likely be a different proposition. The ‘No’ camp was a very broad church. This makes me wary of summarising the result simply as ‘Renzi being brought down by the populist wave’ – unless we want to describe Mario Monti or former Italian Constitutional Court President Valerio Onida (to mention but two examples) as populists for being against the reform.

There was certainly an anti-establishment (and anti-Renzi) element involved, but one should also bear in mind that – beyond the headlines and the slogans – the proposed constitutional changes did raise some genuine issues and proved more controversial than many seem to appreciate.

Undeniably, Renzi’s resignation opens a period of greater political fluidity during which the reform process in Italy will slow down – and that will be regarded as bad news in Brussels, Berlin, and other European capitals. However, as I already wrote last week, the framework is completely different from late 2011 and there are simply too many unknowns at this stage to assume – as some are doing – that the next Italian general election will certainly open the door to an anti-euro government in the Eurozone’s third-largest country.