Why the Italian referendum matters
While the US Presidential election has the world’s political attention, there is another important event unfolding in Italy. The upcoming referendum on constitutional reform doesn’t have quite the same significance as the US election but it is important for the future of Italy, the world’s 8th largest economy, and has broader implications for the stability of the Eurozone.
Italy has been besieged by political instability since becoming a republic in 1946. Over that 70 year period the country has had 63 governments. Adding to the instability is the ‘perfectly bicameral’ nature of the parliament whereby any legislation is only passed when both houses, the Chamber of Deputies and the Senate of the Republic, agree on exactly the same text. Legislation is often bogged down as it goes backwards and forwards between houses in a process called navetta parlamentare (parliamentary shuttle).
We recently anointed Italy (along with France) as one of the Eurozone’s serial non-reformers. Constant changes in government have not been a recipe for sound growth-enhancing policy development over the years. It’s no coincidence that Italy is one of the poorest performing of the world’s major developed economies. Since the Great Recession GDP growth has averaged 0.1% per annum, the unemployment rate is 11.5%, the public debt to GDP ratio is 133% and its banking sector is weighed down by bad debts.
On December 4 the country votes in a constitutional referendum that, if successful, will lead to the most significant political reform since the republic was formed. If the constitutional amendments are ratified, the major changes will see the Chamber of Deputies become the only branch of Parliament able to grant or withdraw support to governments. The Senate will be reduced in influence and size with representation made up by local government (Regions and Municipalities). Its main focus will become the co-ordination of legislation between central and local government.
Proponents of a “Yes” vote argue this is a once in a lifetime opportunity for stronger government, and with that, greater likelihood of much needed economic reform. We agree. Critics argue future governments will have too much power.
Markets have become far more attuned to European referenda since the Scottish and ‘Brexit’ experiences. The outcomes are uncertain and the stakes are high. Further importance to the Italian referendum has been added by the decision of pro-reform Prime Minister Matteo Renzi to tie his political future to the referendum. He has said he will resign should the vote go against him.
That would be negative for Italy and add to concerns about the economic and political stability of the Eurozone. A strong economic union requires its constituent parts to be strong. Anti-establishment and anti-Europe political groups in Italy, such as the Five Star Movement led by Beppe Grillo (a comedian by profession), would be the primary beneficiaries of further political turmoil in Italy. And remember this comes less than a year before critical elections in France (April/May 2017) and Germany (no later than October 22nd 2017).
Expect market political nervousness to remain around for a while yet.
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