Political instability in Italy is nothing new. But Italian voters’ rejection of constitutional reforms in a referendum has not only led Prime Minister Matteo Renzi to resign; it has dealt another blow to a crisis-ridden European Union. In the near term, Italy’s ongoing banking crisis could flare up again and threaten European stability; in the longer term, Italy may have to leave the eurozone, which would put the single currency itself at risk.
The “No” side was widely expected to win. But the scale of its victory – a whopping 59% of the vote – was shocking, and largely a triumph for anti-establishment forces, particularly the Five Star Movement. The movement, led by the comedian Beppe Grillo, is leading in opinion polls, supports holding a referendum on eurozone membership, and is now demanding an immediate general election.
Most Italian commentators have downplayed the referendum’s significance for the rest of Europe. They argue that a new caretaker government, probably led by the technocratic finance minister, Pier Carlo Padoan, will reform electoral laws to keep the Five Star Movement from power. And even if the Five Star Movement captures a majority in the Italian parliament’s lower house, it will not have a majority in the Senate, so it cannot form a government, unless it breaks its pledge not to join a coalition. In any case, the argument goes, a eurozone referendum would be hard to deliver, because it would require a constitutional amendment.
All of that may be true, but it misses the big picture. Renzi was the pro-EU establishment’s best – and perhaps last – hope for delivering the growth-enhancing reforms needed to secure Italy’s long-term future in the eurozone. Muddling through with a weak technocratic-led government amounts to waiting for an accident to happen. And, with the far-right Northern League and former prime minister Silvio Berlusconi’s Forza Italia also aligned against the euro, an anti-euro government is likely to come to power at some point – perhaps after the next general election, which is due by 2018 (but could be held as early as next spring). Then all bets will be off.
The immediate problem is Italy’s zombie banks, which are inadequately capitalised, insufficiently profitable, and saddled with bad loans. These banks need to raise fresh capital, which was already proving difficult before the referendum, and now may be impossible amid the heightened political uncertainty.
Capital is fleeing Italy. Government-bond yields, which rose sharply in the run-up to the referendum, have so far remained steady; if they were to spike, however, Italian banks’ fragile balance sheets would deteriorate further. And, because the European Central Bank has already bought many Italian bonds through its quantitative easing (QE) programme, it could not readily intervene further.
Italians used to be enthusiastically pro-European, and saw EU governance as preferable to corrupt domestic mismanagement. But support for the euro, the EU, and the country’s pro-EU establishment has plunged.
Italy desperately needs bold leadership – to restructure its banks, write down unpayable corporate and household debts, reform its economy, boost investment, and clean up its politics. Yet both the eurozone and Italy are likely to try to muddle on for now.
Most Italian commentators have downplayed the referendum’s significance for the rest of Europe
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