Italy’s upcoming referendum, which was previously cited as one of the biggest risks to Europe in 2016 alongside Brexit, is now “much ado about nothing,” according to analysts at Citi.
Recent developments in Italian politics mean that the referendum is no longer a make-or-break event for the country, or the continent, according to Citi analysts Giada Giani, Guillaume Menuet, Christian Schultz, and Antonio Montilla.
Italians will go to the polls — probably at some point in November — to vote on a series of changes to the way Italy’s institutional frameworks are structured.
If the ‘Yes’ vote passes, the power of the senate, Italy’s upper house, will be substantially reduced, and large amounts of power will be taken away from Italy’s regions and recentralised to Rome.
Previously, prime minister Matteo Renzi, who has been the driving force behind the proposed reforms, had said that if the referendum ended in a ‘No’ vote, he will step down as PM in a move that would mimic British PM David Cameron’s resignation following the EU referendum in June.
However, in recent weeks Renzi has started to climb down on his promise a little. Last week, for example, he told Italian media that irrespective of the referendum outcome there will be no early elections in 2017. No early election suggests that Renzi’s government may try and stay in power even if it loses the referendum, likely taking the sting out of the referendum result somewhat.
Here’s the key extract from Citi’s research on what happens in the event of a ‘No’ vote against Renzi’s reforms (emphasis ours):
Nothing would change in Italy’s institutional setting, and the constitutional reform would be scrapped. The ensuing complication of a Senate regulated by a proportional representation electoral system and a Lower House regulated by an empowered majority system would inevitably have to be addressed to avoid high risks of hung parliaments before 2018. This makes the chances of early elections in 2017 pretty low, in our view, even in the case the current government falls.
It is plausible that even if PM Renzi does resign, he may well be re-appointed as a head of a caretaker government if only to change the electoral law Italicum and transition the country into the 2018 election. Or, Renzi may well still decide not to resign or call a confidence vote on its government, which he might still win given the lack of an obvious alternative PM within the current parliamentary majority.
On the flipside, if ‘Yes’ wins, it will be big step forward for Italy, Citi argues, saying (emphasis ours):
“Having his centrepiece reform approved by referendum would surely reinforce Renzi’s position against opposition parties and the minority of his own PD. The reform could improve political stability and reform implementation, although it may still have some drawbacks which may have to be addressed at a later stage. A ‘Yes’ win would be welcomed in European capitals and by the EU Commission, as a sign of reform progress and as such could win Rome some additional budgetary leeway (albeit not much, in our view).”
Although Citi argues that a ‘No’ vote won’t be catastrophic for Italy, and Renzi is adamant that he and his government will succeed in their aim of reforming Italy’s senate — saying in a recent interview “I will win” — Nobel prize winning economists Joseph Stiglitz believes that the best option for the future stability of Europe would be for the referendum to be abandoned.
In a recent interview with Business Insider, Stiglitz, a former advisor to the Bill Clinton administration, said: “[There is an argument] to make him even step down from holding the referendum and say that the Brexit has led to a whole change in the debate about the future democracy in Europe, and that we need to re-examine those terms.”
“My feeling is that for anybody concerned about avoiding a disastrous outcome, there needs to be a climbdown. Otherwise, we’re heading towards another cataclysmic event,” an argument in opposition to that of Citi.
Regardless of the long-term impacts of the referendum, Citi notes that recent polls suggest the spread between ‘Yes’ and ‘No’ is closer than ever before, with ‘No’ gaining ground. Here’s the chart:
Whatever the outcome of the Italian referendum, there is bound to be some political and economic upheaval, but if Citi is believed, it might not be as bad as we thought.
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