Post-Referendum, Italys Future Is At Stake

Italians have voted in record numbers on Sunday to reject a series of constitutional reforms proposed by Prime Minister Matteo Renzi that would streamline and make more efficient Italys legislative process by eliminating two-thirds of the Senate and conveying the control of infrastructure, energy and transport to the central government.

Following the outcome of the referendum, Renzi, who had staked his political future on the vote, stood by his initial promise to quit whether the changes he wanted were rejected and decided to resign.

What happened once Renzi announced his resignation?

By stepping aside, Renzi clears the way for what government officials expect to be the rapid formation of a caretaker government that would ensure stability and help the country navigate a looming banking crisis.

According to the Italian constitution, once the prime minister formally submits his resignation to the president,

On Monday, President Sergio Mattarella asked Matteo Renzi to temporarily freeze his resignation and stay in office for a few more days, until the budget bill is passed into law by the Senate.

but it is widely expected that Mattarella will opt to form a new government, which will require parliamentary approval.

Some opposition leaders, like Five Star Movements Luigi Di Maio, called for early elections and criticized the Democratic Party (PD) for toppling the government as a consequence of internal divisions.

President Mattarella made therefore clear that an early vote would add instability to the country and does not correspond to the short term solution he is looking for.

At the moment, three names have been being put forward to head Italys next interim government: finance minister Pier Carlo Padoan, highly respected at the European level, Senate president and longtime anti-mafia prosecutor Pietro Grasso and culture minister Dario Franceschini.

Why did everybody complain about holding new elections?

Italys current electoral law, the so-called Italicum, calls for a two-round electoral system which gives the winning party the 55% of seats in the Chamber of Deputies, the lower house of the Parliament (340 out of the 618 members elected in Italy).

Approved in 2015, the law is currently under review by the constitutional court as some eligibility criteria, like the party-list proportional representation and the majority bonus assigned after the ballot, are believed to be unconstitutional.

President Mattarella has refused to call an early election since the Constitutional Court still has to determine the constitutionality of the Italicum, which was approved by the Parliament in 2015, opting instead for a technocratic-led caretaker cabinet until 2018 elections.

Why was the referendum significant for Italy?

By calling the referendum, Renzi hoped to consolidate central power and heal the internal split that affects the Democratic Party (PD) since 2007 when various centre-left parties was forced to merge into a single political entity. Instead, he has deepened the strife within members of the party, who are still unable to agree on whether he should continue leading or resign as chairman.

Reducing government bureaucracy was another key aspect of the reform intended to streamline Italys rather complex legislative process by reducing the role of the Senate, which would have become a consultative body consisting of regional and municipal officials.

Italys parliamentary legislature, still defined by the constitution of 1948 and based on a symmetric bicameralism system, consists of two debating chambers of 945 members elected for five years.

These changes were initially meant to turn the Italian political system into a partial unicameral system except for legislations concerning European policy, constitutional and electoral laws. Many legal experts though have pointed out the necessity to preserve the existing authority as a check on the government.

Whats the vote impact on the EU?

Similarly to what happened in the United Kingdom with the referendum on Brexit, the outcome of Italys vote will contribute to the rise of a populist sentiment across Europe.

The overwhelming No victory at the polls, suggests in fact that the Prime Minister and his party have lost voters to the anti-establishment, eurosceptic Five Star Movement and right-wings Northern League, both of which led a strong campaign against the proposed reforms and won 60 percent of the vote .

For weeks, opposition leaders

While Five Star Movement and Northern League leaders have welcomed the No victory as a major opposition campaign success, many Italians who voted against the government-proposed reforms would not support these parties in a national election claiming that the rise of populism may be extremely dangerous for the future of Italy and the EU.

A vote on Italys membership in the European Union and a sudden consequent exit from the Eurozone would in fact be fatal for the country as it would undermine the currencys stability and possibly contribute to open a further split among loyal EU members.

What are the consequences for national economy?

The outcome of the referendum has raised long-term concerns among investors and financial analysts about the future of Italian economy and banking sector.

The stability of national banks has in fact been one of the core issues of Renzis attempt at constitutional reform as, for the past year and half, the government had been working to recapitalize retail banks and institutions affected by non-performing loans.

Banca Monte dei Paschi di Siena (MPS), one of the countrys biggest and most troubled financial institution, was the object of the government efforts of stabilization

Over the week-end, banking stocks went through a rollercoaster ride on the Milan stock exchange and opened sharply lower on Monday following the rejection of the constitutional reform and Renzis announcement of resignation.

MPS, who lost nearly 85 percent of its market capitalization since the beginning of the year, becoming the worst performer from European Banking Authority (EBA) stress tests in July, closed the day with its capital shares down at 4.2 percent.

Analysts are now worried that the current political turmoil might turn away private investors, making it difficult for the bank to raise the funds it need to fill capital gaps by selling assets.

Despite that, MPS decided to stick to its plan to sell 5 billion euros worth of new capital shares after Sundays vote with the hope to unload 27.6 billion euros in non-performing loans to ensure its own survival.

An extended period of political instability would in fact hamper the growth of Italian economy and bring back a dark period of stagnation.