Italy's Referendum: Not 'Italexit,' but Still Critical

Prime Minister Matteo Renzi has staked his political future on a “yes” vote Sunday. Polls show him losing.

Stefano Rellandini / Reuters

Italians vote Sunday in a referendum that is being called the most significant vote in Europe this year—bigger even that Brexit, the vote in which the U.K. chose over the summer to leave the European Union.

The referendum Prime Minister Matteo Renzi has staked his political future on concerns proposed constitutional changes that would weaken the Senate, strengthen the central government in Rome, and, consequently, make decision-making in the EU’s third-largest economy more efficient. The proposal would also amend the country’s complicated electoral system for the Chamber of Deputies and result in Rome gaining more power over the regions. Renzi says the changes are needed to streamline Italy’s government, but his critics—including members of his own center-left party—say the referendum is an attempted power grab by the government.

Renzi’s proposed changes were approved by both the Chamber of Deputies and the Senate earlier this year. But they failed to gather the two-thirds majority required in each chamber, prompting him to seek a referendum on the matter. Indeed, he was so confident the proposal would pass, he pledged to quit if voters rejected his proposed changes. But it’s been a year of shocks for the political establishment in Europe (and indeed the U.S.): Following the success of the Brexit campaign, which defeated the better-funded “Remain” side, Italians appear poised to hand Renzi a defeat. Brexit comparisons abound. But Matteo Garavoglia, a nonresident Italy Program Fellow at the Brookings Institution, told me that they’re overblown.

“As it is often the case with a referendum, people do not vote on the question itself,” Garavoglia said. “For most people it is, as very often the case, a vote for or against the government.” He added the similarity between the two situations ends with the populist tone of the campaign in Italy, with “crass slogans that have nothing to do whatsoever with the substance of the proposed referendum on the constitutional reform.”

Indeed, Italy’s relationship with the EU is not in question. Italy was after all one of the founding members of the bloc, and most Italians still view membership favorably. “No Italian would seriously argue leaving the European Union,” Garavoglia said. “It would be absolutely suicidal for Italy.”

Still the political developments in Europe this year have obscured the widespread economic problems across the eurozone, many of whose 18 members have not recovered fully from the global recession of 2008. The EU’s formula for the most imperiled nations—Portugal, Italy, Spain, and Greece—was austerity, a prescription that stung the most vulnerable citizens in those countries. In the political backlash that resulted, far-left and far-right populist movements made gains, the establishment lost favor, and the political parties that seemed secure across Europe since the end of World War II were severely weakened. Amid this, the economic vulnerabilities remain. Italy, for instance, is struggling with massive public debt—130 percent of GDP—and a fragile banking sector where about 20 percent of loans are seen as troubled—problems that Renzi says he will be able to tackle if Italians vote “yes” in the referendum. If they vote “no,” it could unleash a period of political uncertainty and, consequently, economic uncertainty.

“If Italy were to enter a phase of uncertainty, with shaky governments, with a new government, and be attacked on the financial markets, this would be a huge problem,” Garavoglia said. “Not just for Italy, of course, but for the rest of Europe. Italy is just too big to fail.”

In the event of a “no” vote, Garavoglia says, Italy could expect to see a speculative attack on Italy in the bond market. But it’s the political repercussions that could be bigger. Several scenarios have been outlined: The president would ask Renzi to form a new government; or the president would appoint a respected technocrat as a caretaker prime minister to shepherd the electoral law and pass the budget for 2017. This could lead to instability and a general election that could propel the populist Five Star movement, which is riding high in the polls, to power.

If Renzi triumphs, and his constitutional changes are put into place, it would remake modern Italy, handing the central government more power, at the expense of the regions and the legislature. The repercussions would be felt far beyond Renzi’s tenure in Italian politics.

“The fundamental question that should be asked is this: Is Italy a sufficiently mature and sophisticated democracy to handle a concentration of power in the hands of the executive?” Garavoglia told me. “Are the democratic institutions strong enough to handle this or is it better not to touch things? This is a country that had Mussolini and fascism, and, more recently, 20 years of Silvio Berlusconi.”