Italian Prime Minister Matteo Renzi announced his resignation shortly after midnight on Dec. 5 after his government was defeated in a referendum on constitutional reforms. According to early results, roughly 60 percent voted against the reforms, which were designed to reduce the size and attributions of the Senate and concentrate powers in the lower chamber. The goal of the constitutional reforms was to sever the link between political instability and financial fragility in Italy, but the referendum result instead will open a new phase of uncertainty in the country.
Renzi's resignation does not mean that Italy will automatically hold early elections. In the coming hours, Italian President Sergio Mattarella will meet with the main forces in Parliament to determine whether a new prime minister and a new government can be appointed. This could result in the appointment of a caretaker government tasked with passing several political and economic reforms. In particular, this government would be in charge of adopting a new electoral law. The current law, approved in 2015, has never been used and is currently being challenged in court, giving the Italian Parliament a pretext to delay a new vote.
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Should Italian lawmakers fail to appoint a new government in the coming days, elections would be held in early 2017. Renzi's center-left Democratic Party and the anti-establishment Five Star Movement are polling neck and neck. The potential victory of the Five Star Movement, a party that wants to renegotiate Italy's debt and hold a referendum on the country's membership in the eurozone, will create uncertainty about Italy's future. The European Central Bank (ECB) could act to mitigate a rise in Italy's borrowing costs, which should be able to keep Italy's interest rates under control. But the ECB is less effective when it comes to assisting Italy's troubled banking sector, as some banks are struggling to recapitalize and reduce their burden of nonperforming loans.
In addition to these financial issues, the referendum result raises questions about Italy's ability to introduce structural reforms. Since 1946, Italy has had more than 40 governments, and economic and political reforms have proved difficult to achieve. The constitutional changes promoted by Renzi sought to build more stable governments and reduce market uncertainty about the country's governability. But Renzi's decision to link the reforms to his personal political future is now putting Italy in a fragile situation. Even if the Italian Parliament manages to avoid elections for a few more months, anti-establishment sentiments in the country will not go away. With the exception of the Democratic Party, the rest of the country's main political forces are critical of the European Union and the eurozone, which means that elections — no matter when they are held — will raise questions about the country's membership in the currency union.
Italy could, therefore, join France and Germany in holding general elections next year. It will make 2017 a crucial year for the future of the European Union. The French vote is particularly important because the Euroskeptic National Front party is polling strongly and will probably make it to the second round of the presidential election in May. The possibility of a eurozone breakup is still distant because the Five Star Movement and the National Front would first have to win an election, and then hold a referendum on eurozone membership and win it. But the mere announcement of a referendum on eurozone membership in France and Italy (Europe's second- and third-largest economies, respectively) could be enough to precipitate the collapse of the entire currency area. And even if Euroskeptic parties fail to access power in 2017, popular discontent with the status quo will continue to influence European politics and challenge the continuity of the European Union in its current form.
"Italy: Prime Minister Resigns After Referendum Defeat" is republished with permission of Stratfor.
