Another Black Swan – the Italian Referendum

By William Zheyuan Shi (CMC ’20), Staff Writer

I. Introduction

Accompanying the wave of populism, black swans, or perceived highly improbable events, have been confounding Western democracies. Matteo Renzi, Italy’s Prime Minister, gambled his political career on the referendum deciding whether to curtail the power of the Senate in order to enhance the efficiency of the government.[1] Despite Renzi’s gamble, on December 5, 2016 he lost the referendum by a considerable margin of almost 20 percentage points and announced his resignation.[2] This was likely because the Italian referendum was not as simple as casting votes for a constitutional reform. The referendum stems from economic and social issues, and widespread disillusion with the incompetent government. The stagnating economy, perilous banking sector, and cumbersome governmental structure provided the impetus of the referendum, signifying another black swan comparable to Brexit and Donald Trump’s victory in the U.S. presidential election that has potential to wreak havoc in the EU and beyond.

II. Background

The referendum happened in the first place because the constitutional reform bill lacked a two-thirds majority in the parliament, but what really catalyzed the referendum was Italy’s stagnating economy, which has been characterized by tremendous non-performing debt, the risky banking sector, inflexible EU regulations, and poor governance.

i. The poisoned economy

Severely hit by the Financial Crisis from 2008 to 2009, Italy experienced a dismal decade: its economy is “seven percent below its pre-2008 crisis peak” and will not fully recover until 2025 according to IMF’s predictions.[3] Accompanying the recession was the collapse of over 100,000 Italian construction companies, which partly lead to the 12.5 percent unemployment rate, with a staggering 40 percent youth unemployment rate.[4]

Moreover, this collapse generated substantial nonperforming loans of €360 billion.[5] Italy’s share exceeds one-third of the EU’s €1 trillion total non-performing debt.[6] The rising Italian bond seems to suggest that it is functioning properly, but this is merely an illusion that masks the underlying cause: the European Central Bank’s large-scale asset purchase program sustained the demand of Italian bond, but will expire in March, 2017.[7] With €300 billion of foreign deposits, any major default of major Italian banks likes Unicredit or Monte dei Paschi di Siena would destabilize the entire European banking system. Therefore, investors have become increasingly reluctant to invest in Italy due to its volatile banking system, which is draining the liquidity for economic development, further complicating the vicious cycle.[8]

Italy’s budgetary status is equally perilous: its sovereign debt is over 133 percent of its GDP. Facing such a debt behemoth, Italy has neither fiscal capability nor flexibility to save the banking sector with an effective bailout. In addition, because of its membership in the eurozone, Italy cannot implement independent fiscal and monetary policies to stimulate the economy. Any budget forecasts are subject to the E.U.’s inflexible requirements of “balancing revenues and expenditures while also developing a plan to manage its large public debt [of over 130 percent of GDP].”[9] Eurogroup, which is composed of the eurozone’s 19 finance ministers, dictates the fate of whether Italy can have a more favorable budget forecast.[10] Trapped in the dilemma between a balanced budget and economic stimulus, Italy is struggling to get out of its quagmire.

ii. The root of poor governance

Tackling those economic issues needs governmental action, which can be difficult to achieve.

Within the Italian parliament, the Senate and the Chamber of Deputies perform the same functions of law-making, impeachment of the President, election of a portion of justices of the Constitutional Court, and formation of ad hoc committees.[11] The major difference is that the Chamber of Deputies has 630 deputies, while the Senate has 315 senators.[12] With a population of only one fifth that of the U.S, Italy has a Parliament of 952 members, compared to the U.S. Congress, which has only 535 members.[13] The sharp contrast between the population and the size of each country’s legislature helps explain why Italy’s Parliament has constant conflicts and gridlocks in its legislative processes. The cumbersome structure emerged from WWII to forestall a fascist-like government.[14] Although the Parliament’s structure prevents dictatorship, it creates too many obstacles to pass a bill. For example, a legislative proposal to give children born out of wedlock equal rights as other children took 1,300 days to be approved.[15] All economic problems discussed in the last section need decisive actions, but it is hard for the government to amass consensus.

Many lament Italy’s economic stagnation characterized by high unemployment, low growth, huge toxic assets, and inflexible budgets. Moreover, the structure of the parliament is too complicated to lifts the entire country out of the quagmire. Feeling the urgency to deal with those problems, Renzi introduced a constitutional reform bill, aiming to simplifying the structure of the parliament.

IV. What the referendum is about

In October 2015, Confronting the defects of institutional design and an economy on the brink of paralysis, Renzi and his center-left Democratic Party introduced to the Senate a constitutional reform bill. The bill aimed to curtail the number of senators from 315 to 100 and nullify the right of Senate to cast a vote of no confidence.[16] Meanwhile, senators would no longer be directly elected, but selected by regional assemblies.[17] Renzi wanted to retain the power of the Chamber of Deputies (the lower house)[18] because he would face a lower likelihood of passing the bill if he simultaneously reduced the power of both chambers, whose members have relevant interests at stake. Under this new version of the parliament, it would be easier for the Chamber of Deputies to pass more laws without consulting the Senate, which only retain its control on crucial issues like constitutional reforms and ratification of foreign treaties.[19] Although the bill received approval in both the Senate and the Chamber of Deputies after some amendments, it lacked a qualified majority of two-thirds in both chambers and thus had to undergo a referendum.[20]

Given the popularity Renzi gained in his administration, he boldly gambled his political career on this referendum by giving the public a platform to voice opposition, claiming that he would resign if the referendum were not to pass.[21] Nevertheless, Renzi overestimated his popularity and lost the referendum by a considerable margin: 59.11 percent of voters voted no; 40.89 percent voted yes.[22] Although Renzi was not legally bound to resign, he chose to keep his promise, viewing the result as a clear indicator of his citizens’ disapproval of his performance as Prime Minister.

V. Why the referendum failed

Among the concerns of the merits and demerits of the constitutional reform package, many focus on the centralization of the government: the majority party would more easily get extra seats in the parliament if it either were to win more than 40 percent of the votes or if there were to be a run-off election between the two most contested parties.[23] Moreover, one criticism shows that that the prime minister under the reformed government would possess too much power by having a five-year period year term with a guaranteed majority.[24]  However, these criticisms fails to capture the essence of the referendum.

If Renzi had won the referendum, he would have taken advantage of the impetus to quickly call a “snap election” to strengthen his Democratic Party and relevant coalitions.[25] He would have also used the valuable political stability to propose more bills to stabilize and stimulate the crumbling economy.[26] A more expansionary budget, more talk of the common insurance with the troika (EC, ECB, and IMF), and plans to bailout big yet risky banks are all reasonable conjectures of what he intended to do. With a parliament that is more likely to agree on something, Renzi hoped to save the country and leave a legacy. In hindsight, the referendum failed, so Renzi resigned as he promised. But it is perplexing that he made such a huge mistake in estimating his approval among the public.

Social discontent fueled the major coalition against the constitutional reform. Despite Renzi’s high approval rate when he took office, the social discontent gradually gathered its strength because sword of the flawed banking system and massive debt still lingers above everyone’s head,[27] and the refugee crisis has created a huge influx of migrants into Italy. In April 2016 alone, 9,149 migrants arrived to Italy, which considered increasing its long-term capacity to 150,000. [28] Renzi was arguably not inept, but the sudden emergence of so many urgent issues was too convoluted to handle so that the general public would be satisfied.

Perhaps the biggest problem is the disillusion of the youth.”[29] Indeed, despite more education and more qualified capabilities, the youth has been hit the hardest by the unemployment rate that exceeds 40 percent. The disillusion has also prompted the youth to lose confidence in their own country and lead to huge brain drain and less political participation.[30] Renzi initially regarded the youth as the core area of his support. In fact, the reverse is true: 55 percent of Italian voters from ages 18 to 24 claimed that they had rejected the reform, so did 51 percent of ages 25 to 45; 59 percent of students voiced the loudest and strongest objection and constituted one major coalition against the reform.[31]

The public wanted to get rid of the bleak economy, but it turns out that they distrusted Renzi as well. Despite Renzi’s promises to tackle these problems, he faced too many obstacles, like the complexity of the parliament at home and inflexible rules in the EU. Italian citizens are well aware of the cause of this terrible status quo: politicians in the 1980s and 1990s “spend money like water” and transfer the burden on future generations; the elite in the 2000s failed to act decisively to cure the country.[32] Renzi might have kindled hope, “[b]ut now he seems like just another normal politician.” [33]

VI. Domestic and international implications

Renzi’s resignation means a new administration. A very likely choice is the Five Star Movement(M5S), a right wing group lead by Beppe Grillo, once comedian and political commentator. M5S completely disregards political parties and views them as the fountain of patronage and corruption. It does not have a clear dichotomy in its political view and thus successfully attracts a number of voters both on the left and right.[34] With strong anti-EU, anti-immigration, and anti-globalization rhetoric,[35] it once proposed an Italexit like Brexit.[36] It defeated the Democratic Party’s past rival Forza Italia and the Northern League in 2013.[37]Its candidates for mayors of Rome and Turin secured their victories.[38] These phenomena substantiate the M5S’s burgeoning support. According to the polling, if the new election had been held immediately after the referendum, the Five Star Movement could have won.[39]

So what would happen if the Five Star Movement did come to power? What if Italy really exits like Britain? Perhaps the effect of Italexit would dwarf that of Brexit. As one of the founders of the European Coal and Steel Community (the predecessor of the European Economic Community), Italy means greater importance to Europe than Britain. Although some argue that the EU could use the same method to solve Italy’s problem as it with the Greece’s bailout in July 2015,  Italy is arguably too large to save. As the world’s third largest government bond market with total asset of more than €4 trillion euros and €360 billion nonperforming loans, Italexit would be disastrous to Europe and would trigger greater economic and political uncertainty. Any huge default or collapse of the banking system would even trigger a financial crisis that may spill over to the rest of the world.[40] This potential tragedy may also have a similar contagious effect to countries with similar problems like Spain, Greece and Portugal and intensify the blow against European integration.

VII. Conclusion

Italy’s referendum covers more than just a constitutional reform. The reform intended to put Italy back on track and lift the economy out of the chaos of the mountainous nonperforming debt, a strangulating budget forecast, and a fragile banking sector. It wanted to rekindle the spark of hope among the public for a better future. However, the distrust and disillusion among the public shattered everything and arguably signified its support for the populist Five Star Movement. Although the worst may not materialize in the future, there is no room for optimism.



[1] “No, grazie Italian voters have rejected Matteo Renzi’s constitutional reforms.” Economist. December 5, 2016. Accessed March 5, 2017.

[2] Ibid.

[3] Desmond Lachman and Ryan Nabil. “Does Italy pose a threat to the global economy?”  American Enterprise Institute. September 2016. Accessed March 5, 2017.

[4] Ibid.

[5] Ibid.

[6] Richard Partington. “European Banks Stuck With $1.3 Trillion of Bad Loans, KPMG Says.” Bloomberg Market. ‎October‎ ‎30‎, ‎2016‎. Accessed March 6, 2017.

[7] Erik Jones. “After the Italian Referendum.” Foreign Affairs. March 6, 2017. Accessed March 6, 2017.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] “Parliament.” Accessed March 19, 2017.

[12] Ibid.

[13] “United States vs Italy – Country Facts Comparison.” Accessed March 5, 2017.

[14] Mark Gilbert. “Italy’s EU Retreat.” Foreign Affairs. March 6, 2017. Accessed March 6, 2017.

[15] Stephanie Kirchgaessner. “Italy referendum: all you need to know about Renzi’s crunch vote.” The Guardian. November 30, 2016. Accessed March 6, 2017.

[16] “Not just hand-waving.” Economist. October 15, 2015. Accessed March 6, 2017.

[17] Stephanie Kirchgaessner.

[18] Mark Gilbert.

[19] Stephanie Kirchgaessner.

[20] “The Economist explains: Why is Italy’s constitutional referendum important?” Economist. Sep 28, 2016. Accessed March 5, 2017.

[21] Ibid.

[22] Matthew Weaver, Claire Phipps and Jon Henley. “Italy referendum: ‘Period of uncertainty’ predicted after Matteo Renzi’s defeat – as it happened.” The Guardian. December 5, 2016. Accessed March 5, 2017.

[23] Mark Gilbert.

[24] “The Economist explains: Why is Italy’s constitutional referendum important?”

[25] Matteo Garavoglia. “What Italy’s referendum could mean for Europe.” Brookings Institution. November 30, 2016. Accessed February 15, 2017.

[26] Desmond Lachman. “Italexit would make Brexit look like a picnic.” American Enterprise Institute. August 22, 2016. Accessed February 15, 2017.

[27] Stephanie Kirchgaessner.

[28] Matteo Garavoglia. “Is Italy the new Greece? New trends in Europe’s migrant crisis.” Brookings Institution. June 13, 2016. Accessed February 15, 2017.

[29] Erik Jones.

[30] Ibid.

[31] Ibid.

[32] Mark Gilbert.

[33] Ibid.

[34] “The Economist Explains:   Five Star Movement.” Economist. October 24, 2016. Accessed March 6, 2017.

[35] Thomas Colson. “’Italy’s Trump’: This is what the Five Star Movement is all about.” December 5, 2016. Accessed March 6, 2017.

[36] Desmond Lachman.

[37] Thomas Colson.

[38] “Italy’s Five Star Movement has taken Rome, and Turin too.” Economist. June 20, 2016. Accessed August 18, 2017.

[39] Desmond Lachman. “Will the next president face a full-blown eurozone crisis?” American Enterprise Institute. September 9, 2016. Accessed March 6, 2016.

[40] Desmond Lachman. “Italy’s lost decade: Is Italy the world’s new Greece?” December 29, 2016. Accessed March 6, 2017.

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