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Italy’s ‘No’ Vote
Dec. 6, 2016 A shakeup of the political establishment is just getting started.
By Antonia Colibasanu and Jacob L. Shapiro
Two important votes occurred in European countries over the weekend. In Austria, a far-right
presidential candidate lost by a margin of 7.2 percent (53.6 percent to 46.4 percent). That is
hardly a landslide, but it still was a defeat for nationalists in Vienna, who had hoped to take the
presidency. In Italy, voters said “No” to a referendum on government reforms. That vote was
more broadly viewed as a referendum on Prime Minister Matteo Renzi’s administration, and he
has since tendered his resignation.
The result of Italy’s referendum means three things. First, the slow devolution of the European
Union rumbles on. Second, Italy has declared itself in open revolt both internally and against the
EU, and this is a challenge not just for the EU, but for Germany in particular. Third, this is the
beginning of a major political shift in the third largest economy in the eurozone. Italy will hold
elections in 2017, and it is unclear whether the political establishment will retain control, or
whether parties like the Five Star Movement and the Northern League, which advocate
nationalist economic policies and a re-examination of Italy’s relationship with the EU, will seize
power. The damage already has been done, and nationalist sentiment won’t go away soon. It
will continue to shape Italian politics no matter who is in power. It is clear Italy will not move
forward in the same way it has before.
The result of the referendum is the latest in the increasing power of nationalist politics in
Europe. Voters rejected Renzi’s proposal for what he hoped would stabilize the Italian
government by reducing the power and size of the Senate and transferring prerogatives from
regional administrations to the central government in Rome. The referendum’s rejection was so
resounding that the government had anticipated it ahead of the vote and had already begun
planning for the aftermath. By promising to resign if the referendum failed, and therefore linking
it to his career as prime minister, Renzi created a significant opportunity for nationalist parties in
Italy to make their influence felt. The anti-system Five Star Movement and the Northern League
turned the campaign against proposed reforms into a full-fledged rejection of the Renzi
government. And it worked. Unlike Brexit or Donald Trump’s victory in the U.S., polls correctly
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predicted Italy’s qualitative outcome of a “no” vote. Still, the margin was bigger than polls had
predicted, as a large number of Italian voters turned out to show their contempt for the current
political establishment. Members of the establishment erroneously believed that even if the
reform proposals failed, the political system would remain intact, leaving members of the
establishment in control. But the opposite is happening.
Italy’s Prime Minister Matteo Renzi delivers a speech after results of a referendum on constitutional reforms at Palazzo Chigi on
Dec. 5, 2016 in Rome. Franco Origlia/Getty Images
Italy is in the midst of a banking crisis. The proposed reforms to simplify decision-making also
attempted to fix the banking sector’s problems in a timely manner to avoid further
consequences. Keeping investor sentiment strong is crucial for Italy’s banking sector. Although
the amount of non-performing loans (NPLs) hasn’t increased in the last year, and banks have
started a recapitalization process to further consolidate in an effort to cut costs, the banking
sector remains fragile. Banca Monte dei Paschi di Siena, the country’s weakest major lender, is a
test case for Italy, as it is the first state-backed campaign to steady the banking sector and
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attempt to clean up the Italian banks’ 360 billion euros ($387 billion) of NPLs. While a debt-toequity swap that ended last Friday managed to raise 1 billion euros of the 5 billion needed, a
share sale to raise more capital likely won’t be launched soon.
The banking woes are not simply an Italian problem. Italy is the third largest economy in the
eurozone, and both Germany and France are exposed to troubles in the Italian banking sector.
The EU and Italy have been negotiating solutions for over two years, with few tangible results.
Tensions over negotiations sometimes surfaced throughout 2016 between Renzi and German
Chancellor Angela Merkel. The referendum was not only about the Italian people’s desire for
change at the top of their government, it also was a message that Italy won’t accept German
methods or directives from Brussels on how to fix Italy’s financial and economic problems. The
EU and Italy have been playing a game of cat and mouse over the issue of NPLs, but the result
of the referendum is a clear signal that Italians want a government that will make decisions in
terms of what is best for Rome, rather then accepting sacrifices for the greater good of the
German bloc and the eurozone as a whole.
Anticipating Sunday’s results, the Italian government moved forward in negotiating with the
European Commission on the country’s next steps. Corriere della Sera reported last week that
Italy had already filed a request to launch a public recapitalization of Banca Monte dei Paschi as
early as next week. At the same time, the media also cited sources saying that financial market
intervention from the European Central Bank would be part of a short-term reaction to the
referendum’s rejection. Other reports have said the EU would be flexible on rules applied to a
potential Monte dei Paschi bailout to avoid damage to the entire Italian banking system. All of
these actions are aimed at preventing investor panic. So far, investors haven’t panicked: While
shares of Italian banks were down as much as 7 to 8 percent at the time of this writing, there is
no evidence of massive shock to investor confidence.
The Italian banking crisis has become a crisis for Italy’s political establishment. While the
establishment tries to save face by pointing out the referendum’s result was expected, and that
it has taken steps to mitigate potential fallout, the referendum undermines the establishment’s
legitimacy both to Italians and those in Brussels who are negotiating with the government. All
eyes should now be on the Five Star Movement, which along with other parties has advocated a
non-binding referendum on whether Italy should remain in the eurozone. The Northern League
also supports such a referendum, and Forza Italia, a populist center-right party, may support it
given the party’s criticism of the EU’s common currency.
A caretaker government will now take the helm from Renzi. Flexible rules for a Monte dei Paschi
bailout will be decided with the European Commission. Another Band-Aid solution will be
successfully administered for the banking sector. But mistrust in the Italian economy will
increase, driving higher interest rates on sovereign debt. The vote against Renzi’s government
was partly caused by social problems, including high unemployment following the 2008
economic crisis. Austerity measures and slow recovery have caused increasing distance
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between the public and the traditional political elite, making room for anti-establishment,
populist and nationalistic parties to appear on the political scene.
Renzi’s resignation will lead to early elections next year. It is possible the political establishment
will lose that vote as well, and as a result, the Five Star Movement could take power. That
scenario, if not probable then at least highly possible, would change the way Italian domestic
politics function and the nature of Italian relationships with Brussels and Berlin.
Investors don’t lose confidence when governments change, but they do lose trust when systems
change and when different government rules could be implemented. Sometimes this happens
overnight and markets react the next day. Sometimes it takes longer. This is currently
happening in Italy. The establishment’s moves are meant to reassure investors. That tactic will
work for several weeks, and perhaps months. But Renzi leaving is not the end of political
upheaval in Italy – it is the beginning. The shockwaves will be strongly felt in Berlin and
throughout the eurozone.
Nationalism vs. Internationalism
Nationalism has influenced recent elections across the world. Learn how
this resurging trend will play out in the coming years with our free
special report Nationalism vs. Internationalism. Click the button below to
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