The Italian referendum and Europe’s growing wave of political uncertainty

By Katarzyna Mirecka, Economist, CASE

Italy has become yet another country to take steps towards populism, a change that has been much feared in Europe over the past few months.

On December 4th, a referendum, which aimed to introduce constitutional changes that the (soon-to-be ex-) Prime Minister Matteo Renzi has been promoting since the very beginning of his mandate, faced a resounding “No” by Italian voters (59.1 per cent of total votes). It would appear that investors were prepared for the outcome of the referendum, with little signs of it generating financial market turmoil.

The goal of the referendum was to transform the Senate (which, currently, shares many similarities with the Chamber of Deputies — the “bicameralismo perfetto” — a system considered to be the reason for numerous political gridlocks), by reducing the institution’s overall size, costs, influence, and composition (from one composed of directly elected senators to one composed of appointed senators).

In the lead-up to the vote, Mr. Renzi promised to resign in the event of a “No” vote, which is perhaps a signal that the referendum was more of a plebiscite for his government than a question of legitimate constitutional change. Nonetheless, Mr. Renzi’s resignation could lead to an early election, possibly taking place as early as next year.

This could open the door for the most popular opposition party in the polls, the populist and anti-establishment Five Star Movement (M5S), who is calling for an immediate election. Given M5S’s questioning of Italian membership in the EU, and their strong opposition to participation in the euro zone more generally, this has raised many concerns for the EU’s third largest economy, as it adds to the country’s laundry list of problems (e.g. financial problems in the banking sector, the second-largest debt-to-GDP ratio in the EU at 133 per cent of GDP, instability faced by industry, and a continuous shrinking of the economy since the beginning of the crisis in 2008).

It is clear that, if elected, M5S would only further solidify the global rise in populism and increase political uncertainty in Italy. While the populist wave in Europe recently faced pushback, with the rejection of Austrian far-right presidential candidate, Norbert Hofer, the result of the election (with 48.3 per cent voting for Mr. Hofer) was far from reassuring. Whether or not this new movement will materialize in Italy remains to be seen when an election date is decided. For now, the next big test will be the upcoming elections in the Netherlands and France.

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