Markets have responded calmly to Italian Prime Minister Matteo Renzi’s resignation following his decisive referendum defeat. But this result effectively sounds the death knell for reform momentum—and doesn’t augur well for Italy’s long-term prospects.
The vote to reject Renzi’s plans to downgrade the role of Italy’s Senate (the upper house) wasn’t a surprise. But the margin of victory for the “No” camp was much higher than expected: 60% No to 40% Yes, with a record 68% voter turnout. Renzi had little option but to step down.
His resignation leaves Italy facing a period of heightened political uncertainty. The good news is that the country’s political system has a long history of dealing with this type of cloudy situation.
The biggest risk, in our view, is that Renzi’s departure could trigger an early parliamentary election. But we think it’s much more likely that Italian President Sergio Mattarella will manage to cobble together yet another interim or technocratic government to stave off that threat (the next election must be held by May 2018).
Now that Senate reform is off the agenda, the new government’s main task will be to rewrite legislation governing elections to the Chamber of Deputies (the lower house). That legislation formed the first part of a broader constitutional reform package that Renzi championed—and it’s now pretty much redundant.
Ultimately, reining in constitutional reform will make it harder for Italy to elect strong, stable governments. It’s going to be as challenging as it’s ever been for the Italian government to pass serious economic or banking-sector reforms.
That’s bad news for Italy’s longer-term economic outlook—and its hopes of generating the type of growth needed to stabilize its public finances. That growth is necessary to ease investors’ concerns about Italy’s membership in the euro currency bloc.
There is a silver lining, though. It will be more difficult for the maverick Five Star Movement (M5S) to gain a majority of seats at the next parliamentary election. M5S vehemently opposed the Renzi reforms and wants to take Italy off the euro. That said, M5S has been the big winner from the referendum vote, and the group will be looking to make further gains from the latest crisis.
So far, markets’ response to the referendum has been quite muted. That’s partly because the result was expected, but also because the Italian bond market is still being supported by the European Central Bank (ECB). Nonetheless, with the referendum result effectively sounding the end of reform momentum, Italy seems set to squander the opportunity provided by the ECB’s benevolence.
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