lorenzo codognoItaly’s prime minister, Matteo Renzi, has stated that he will resign if he loses a referendum on constitutional reform scheduled to take place before the end of the year. Lorenzo Codogno writes that although the referendum will have major implications for the Italian government and the next general election, concerns about the wider impact on Italy’s political and financial stability are overblown. He argues that the reform would be a positive step for the country, but that the supposed risks of a no vote – prolonged political instability or the Five Star Movement rising to power – are very low probability scenarios.

Interested in other points of view? Check out EUROPP’s full coverage of Italy’s constitutional referendum.

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Italy’s policymakers will try their best to avoid overcrowding an already heated autumn with a cluster of banking, political, and fiscal events. The referendum on constitutional reform will be the most crucial event by far, as it could have consequences for the survival of the current government, future political developments, and the timing of the next elections. Would a ‘no’ vote send Italy into a tailspin? What are the possible scenarios?

Changing the Constitution is no small feat

There have been many attempts to reform the Constitution in the past. One of the major attempts dates back to the ‘Commissione Bicamerale’ led by Massimo D’Alema in 1997, following another attempt a few years earlier in 1993. Both failed miserably. Since then, several laws of constitutional importance have been approved, most of them with a simple majority, lacking both 2/3 support in Parliament and a referendum. An exception was the referendum held on 7 October 2001. Participation was low, at 34.1%, and 64.2% of voters were in favour of the changes.

Thereafter, the Berlusconi government introduced major changes related to the form of government, the structure of Parliament, the shape of the State, the relations between the State and the twenty Italian regions, which was then submitted for popular vote. The second referendum took place on 25 and 26 June 2006. Participation was much higher, at 52.3%, but 61.3% of voters rejected the proposed constitutional changes. On both occasions, the referendums were very politically charged, akin to a vote of confidence on the government.

Renzi presented the current proposal to the Senate on 8 April 2014. Since then, it has been discussed and approved in the two Houses of Parliament, and the final vote took place on 11 January 2016. The government then submitted the reform for a popular vote (Art.138 of the Constitution).

What is at stake?

In a nutshell, it is about three issues. First, the reform would entail a major change in the perfectly symmetric nature of the Italian parliamentary system, i.e., both Houses effectively having the same powers. Currently, this makes laws bounce back and forth from one House to the other, thereby lengthening the legislative process. According to the proposal, the Lower House will remain the primary legislative body, while the Senate will become a House of Regions and Municipalities, with limited and specific legislative powers and no veto. There would also be a sizeable reduction in the number of MPs (from 315 to 100 in the Senate) and a streamlining of the legislative process.

Second, there would be a change in the relationship between central and local governments, especially by clarifying competencies and reducing overlapping. This will be a very significant change, as it would allow the government to regain certain key responsibilities, which would make the public administration more effective, while allowing simultaneous devolution and control in other areas. It would also affect the privatisation of local utilities and various entities connected to the public administration.

Third, there would be a change in the principles governing elections. An ordinary law would introduce changes to the electoral law, in line with constitutional guidance. The new electoral system is called “Italicum”.

Renzi has been keen to support an electoral system that gives a clear majority to the government (with a sizeable majority premium). The key feature of this electoral law is the strong majority premium it gives to the largest political party that receives more than 40% of the vote in the first round, automatically assigning it 55% of the seats. If no party gets more than 40% of the seats, as looks likely now, then the two largest parties would go for a second ballot to gain the majority bonus. At least in theory, this system would ensure that a party controls 55% of the seats, a feature perceived to provide political stability.

However, such a scheme is designed for a bipolar political system. With the rise of the Five Star Movement, Italy has become tri-polar, and this may lead to unpredictable results. According to opinion polls, in a ballot between the PD and the Five Star Movement, centre-right voters are more likely to vote for the Five Star Movement, with a risk that the Five Star Movement gets into government. This message emerged from the local elections in June, which were held using the ballot system. The Five Star Movement won 19 ballots against 11 of the centre-left and 8 of the centre-right.

The opposition parties (and part of the PM’s own party, the PD) claim that the system proposed in the referendum does not offer adequate checks and balances or enough representation to small parties. PM Renzi forced approval of the new electoral law in Parliament with a confidence vote, and, thus, he is unwilling to backtrack. Recently, however, he made some concessions to the opposition by saying that the government is open to constructive proposals to change the law, which are unlikely to be presented before the referendum.

The electoral law is by far the most controversial component. From the point of view of Italian politicians, the electoral law is the most important piece of legislation, far more important than constitutional changes. In fact, the law determines everything from their survival, to alliances and potential electoral outcomes.

Will the Constitutional Court change the outcome?

The electoral law is politically linked to the referendum, but it is de facto a different parliamentary process. The Constitutional Court will have to issue an opinion on the electoral law, which was supposed to happen on 4 October. However, on 19 September, it declared that any opinion will be postponed until after the referendum, both for technical reasons and to avoid any interference with the vote. After the referendum, the Court may issue one of three opinions:

  • A flat-out rejection of the electoral law, i.e., the so-called “Italicum”. This would be a blow to Renzi. The Court may do it on the basis that it does not respect the principles of the Constitution.
  • An approval, which would be a big plus for Renzi but may upset many others. Renzi has already said that he is open to making changes to the law in an effort to deflect PD internal and external opposition. If encouraged by the Court decision, he may be tempted to forge on with the current electoral law without changes.
  • A green light with modest changes would possibly be an even better outcome for Renzi, as it would give him an excuse to introduce some changes to the law to comply with the Constitutional Court and, at the same time, provide some sweeteners to the opposition parties and, more importantly, to internal opposition within the PD.

At any rate, the delay in the Court’s decision avoids any interference with the referendum. Following the referendum, it may provide useful input for a revision of the law. It is widely expected that a possible revision would give the majority premium to coalitions rather than parties and that smaller parties may get some benefits in terms of representation.

De facto, any such change would eliminate the outlying risk of an outright majority for the Five Star Movement, at the expense of a higher probability of coalition governments. Therefore, the widespread concern in financial markets that the Five Star Movement wins an outright majority in Parliament at the next political elections is grossly overstated.

The average of recent opinion polls on the next national election suggest 31.5% for Renzi’s centre-left Democratic Party (PD), 28.4% for the Five Star Movement, 12.4% for the Northern League, and 11.8% for the centre-right Forza Italia. The Five Star Movement has recently suffered a blow from the rocky start of their local government in the municipality of Rome.

Possible outcomes

Much to my surprise, I have discovered that there are hundreds of constitutional experts in Italy. Given that I now live in a country (the UK) that happily survives without a Constitution (or, I should say, without a codified Constitution), I am a bit suspicious. Many of these experts have criticised the proposal on technical and substantive grounds. My personal take is that there may be some technical hitches with the current proposal, or even some real faults, but the bulk of the reform would represent a substantial improvement on the current situation, and the vote should thus be a no-brainer for Italian voters (but I am not here to campaign for it).

The opposition parties, some of which were originally in favour of the proposal, have seized this opportunity to re-unite in an effort to knock Renzi out. Many Italians do not know what is at stake (even more so than in the case of the Brexit vote) and will likely vote in line with what their favourite leader tells them to do. It will essentially be a referendum on Renzi’s government, as Renzi has already clearly indicated that he would immediately resign if the ‘no’ camp wins.

In terms of the actual result, the two charts below show how the polls have changed over the last year. The first chart shows ‘yes’ (sì), ‘no’ and ‘undecideds’ (indecisi), while the second chart shows the yes and no figures with undecideds and abstentions removed.

Figure 1: Opinion polling on Italy’s constitutional referendum (including undecideds)

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Source: Sondaggi politico elettorali, Italian government.

Figure 2: Opinion polling on Italy’s constitutional referendum (without undecideds)

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Source: Sondaggi politico elettorali, Italian government.

The polling is therefore too close to call and the percentage of undecided voters is still very high. A victory for the ‘yes’ camp (a 50% chance) would give a boost to Renzi, and possibly increase his electoral chances at the end of the current political term, i.e. spring 2018. His government will hold power until the end of this political term. A defeat (also a 50% chance) would trigger Renzi’s immediate resignation. In the latter case, there are four possible scenarios:

  • The President of the Republic rejects his resignation and immediately gives him a mandate to form a new government. Renzi accepts the mandate and is successful in forming a new government with small changes relative to the current one (probability: 18%).
  • The President accepts Renzi’s resignation and gives the mandate to form a new government to someone else. The most likely candidates, in my view, would be Pier Carlo Padoan, the current Finance Minister, or Enrico Letta, a more ‘political’ choice backed by the PD and the same coalition currently supporting the government, i.e., the centrist groups key to gaining a majority in the Senate. Other names could be Del Rio or Calenda. Any shift to the left would undermine the support of centrist groups in the Senate and, thus, the probability of this outcome is somewhat low (probability: 12%).
  • Renzi ends up without a majority in the Senate, where he currently commands a razor-thin lead, courtesy of some centrist groups (Verdini’s and Alfano’s). These groups may decide to re-join forces with the centre-right. Thus, there would be no choice but to broaden the coalition to include Berlusconi’s Forza Italia and other smaller groups, but not the Northern League or Brothers of Italy. Officially, Forza Italia is not seeking such an arrangement, but they are not ready for general elections and they may well take part in a coalition government, if asked.

This would also give Berlusconi’s party a much-needed fresh new role, which may stop the free fall of their support in opinion polls. In this case, the President would accept Renzi’s resignation and give the mandate to a politician perceived capable of leading a grand coalition. This route would likely be possible only after the failure of the first two options. Candidates would probably be the same as above, with a preference for Enrico Letta, who already led a grand coalition between April 2013 and February 2014. The new government would have a limited mandate, i.e., to pass the Budget, prepare a new electoral law, and a few other bits and pieces. Then, there would be general elections. However, agreeing on an electoral law may take longer than people expect, and, thus, the government may very well complete the current political term, i.e., it may run until spring 2018 (probability: 18%)

  • After many failed attempts to form a new government, there is no option but to call early elections (with the old electoral law). This seems a remote possibility as no party would agree to go to elections with the current system (as modified by various Court rulings). It has two very different schemes for the two Houses and would make a deadlocked parliament almost a certainty (probability: 2%).

What are the economic, political, and financial implications of a ‘no’ vote?

Let me make one thing clear—the sun will continue to rise and set even after a ‘no’ vote. As I said before, if the current coalition does not hold, there would almost inevitably be a grand coalition. It may initially be difficult to form a new government but, eventually, a grand coalition, which would be tasked with designing a new electoral law and then calling elections, would come together. In financial markets, this may trigger some volatility, but systemic consequences for the country are very unlikely.

The task of designing a new constitutional reform would likely be given to a new parliamentary commission or an ad hoc assembly. Many fear that a grand coalition would end up helping the Five Star Movement at the next elections, which is quite possible. However, it would also be an opportunity to re-design the electoral law in a way that effectively rules out the Five Star Movement getting a sizeable majority premium and, thus, an outright majority in Parliament. The huge mess in the municipality of Rome, led by the Five Star Movement, is also contributing to the reduction of this outlying risk.

As a result, the two outcomes perceived by financial markets as very dangerous, i.e. prolonged political instability and a country led by the Five Star Movement, appear a distant possibility for now. So, are there only rosy outcomes? Not really. A ‘no’ vote would effectively have negative political, economic, and financial consequences, and it would mean three things in particular.

First, it would mean that protest and populist votes can lead to unpredictable outcomes even in Italy, which may become a danger as Italy approaches general elections in 2018 (not just for the Five Star Movement).

Second, it would mean the reform of the Constitution, which took two and a half years to proceed through Parliament, would have to restart from scratch. It may very well take at least 2-3 years to produce a new proposal. This would highlight an institutional stalemate and the inability of Italy’s lawmakers to reform the country. Inevitably, it would also slow the legislative process for all other reforms.

Third, it is puzzling, to say the least, to see some MPs who voted for constitutional reform in Parliament now campaigning for a ‘no’ vote for purely political reasons. It suggests that the country is unable to reform itself due to parliamentary infighting and that elected representatives are unable to govern the country effectively. Not a nice feeling, given poor economic growth and high public debt.

In sum, a ‘no’ vote would not be a disaster, nor would it immediately lead to disastrous outcomes for Italy. However, it would deepen the country’s sense of impotence and inability to move itself out of the political quicksand.

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Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics. Featured image: PM Matteo Renzi in Venice. Credits: Università Ca’ Foscari Venice (CC BY 2.0)

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About the author

lorenzo codognoLorenzo Codogno – LSE, European Institute
Lorenzo Codogno is Visiting Professor in Practice at the European Institute and founder and chief economist of his own consulting vehicle, LC Macro Advisors Ltd. Prior to joining LSE he was chief economist and director general at the Treasury Department of the Italian Ministry of Economy and Finance (May 2006-February 2015) and head of the Italian delegation at the Economic Policy Committee of the EU, which he chaired from Jan 2010 to Dec 2011, thus attending Ecofin/Eurogroup meetings with Ministers. He joined the Ministry from Bank of America where he worked over the previous 11 years and he was managing director, senior economist and co-head of European Economics based in London. Before that he worked at the research department of Unicredit in Milan.

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