Italians voted against the establishment, what’s next?

The Italian voters decided yesterday to reject the plans for a constitutional reform proposed by the government of the now former Prime Minister Matteo Renzi. This will certainly result in more political and economic uncertainty for the already chaotic Italian panorama.

The objectives of the requested reform was to end Italian’s “perfect bicameralism”; that is, the institutional arrangement whereby the house of representatives and senate have exactly the same powers and the government needs to receive a vote of confidence in both Houses. Perfect bicameralism was introduced in the first Republican Constitution, right after the end of Fascism, as a way to prevent the possible rise of a new dictator.

Matteo Renzi invested his entire political capital in the reform, to the point that the referendum itself was seen as a vote for or against the prime minister. Approximately 60% of Italians voted against the reform (and consequently the prime minister). With such defeat, Renzi had no option but resign.

Many of the parties that campaigned against the reform will probably call to immediate elections. The Five Star Movement (M5S), Italian’s largest opposition party, argued for this in a press conference held right after the announcement of the results of the referendum.

A possible, albeit unlikely, alternative would be a “Grand Coalition” with the Five Star Movement, the Democratic Party and Forza Italia. In this case, the Five Star Movement would probably want to nominate the Prime Minister. This could be either of two eminent jurists who have strongly opposed Renzi and his reform, Gustave Zagrebelsy and Stefano Rodota.

In any case, the new government would be short-lived. Its mandate would be limited to completing the budget law for the next fiscal year while the parliament designs a new, more broadly accepted electoral law. Italy would then go to elections in April or May 2017, almost at the same period of the next French presidential elections.

Daniele Capezzone, Member of the Italian Parliament, for the center-right movement Conservatives and Reformists shared with me his point-of-view about the referendum result:

Yesterday, the Italian electors voted to smash the establishment. The real point the establishment fails to consider is an immense middle-class (and lower middle-class) whose living standards have been stagnating for years. Mr. Renzi made a giant mistake.

When he took over, in 2014, instead of focusing on a shock tax cut, a shock spending cut, and a shock sovereign debt cut with a proper privatization-plan, he decided to waste three years on the institutional architecture (transforming the Senate, etc). Yesterday, the electors had their final say on this political choice.

Now Italy will have to come to terms with reality, and it will be no picnic: the third largest sovereign debt in the world, some major banks on the verge of crisis, in a stagnating economic environment.

The outcome of the vote had an initial huge impact on the euro, but the market already has started to react. Truth is that the greatest fear of the markets is a potential future government lead by the 5 star movement would call for a referendum to consult about a future leave from the euro zone, but analysts say that this is an unlikely scenario to happen because the current popular support for the euro.

The already fragile economy in the country will also be probably affected by the referendum outcome. Banking system, in particular, needs immediate attention. A number of large banks are overloaded with bad loans and need some form of re-capitalisation or even bailouts. Will this be possible now with the new chaos caused by Renzi resignation?

What seems clear is that Italians are sharing the same anti-establishment wave that enabled the Brexit and Donald Trump’s victory in the US. What is unclear, though, is if M5S or any of the other large Italian parties does have any objective proposal to recover the Italian economy and confidence.