Stratfor: Italy After the Referendum. What comes next?

Summary:  Brexit and Trump’s election were followed by hysterical predictions of doom by experts, helping journalists manufacture exciting news for their apathetic audiences. Italy’s citizens defied their centrist technocratic leaders, producing yet another round of ominous forecasts. For those who like their news straight and sober, here is an analysis of Italy’s situation by Stratfor.


Italy After the Referendum
Stratfor, 6 December 2016.


Italy’s voters have spoken loud and clear. During Sunday’s referendum on constitutional reforms, more than 65% of the country’s electorate turned out. Nearly 60% of voters rejected the measures, prompting Prime Minister Matteo Renzi to resign immediately after the results were announced, as promised. Renzi’s quick resignation, coupled with the international market’s staid response to the vote’s outcome, suggests that the immediate repercussions will not be as dramatic as some in Italy and abroad had expected. Nevertheless, Italy’s political and financial troubles will endure, as will its threat to the eurozone.

The referendum in Italy
Photo by Filippo Monteforte/AFP/Getty Images.


Though it is obvious which side lost in the referendum, it is hard to point to a clear winner. A majority of voters in nearly all regions — except for a few areas in northern Italy — rejected Renzi’s plans, but they did so for different reasons. Some were genuinely concerned about the effect that the constitutional changes, which proposed to reduce the Senate’s size and power in favor of the legislature’s lower chamber, would have on Italy’s government. Others saw it as an opportunity to get rid of the prime minister, who had predicated his political future on the measure’s success. The “no” camp drew citizens who are against austerity measure and concerned about Italy’s economy, as well as those who are opposed to immigration and weary of professional politicians. Its constituent voters do not have a clear leader, and outside the context of the referendum, the parties that campaigned against the reforms are competitors.

Unlike the Brexit referendum, the issues at stake in Italy’s vote had no direct link to the European Union. Even so, the referendum raised questions about the future of the eurozone and fueled fears in the country over what the next general election could bring. Two of the main parties that opposed Renzi’s reforms — the anti-establishment Five Star Movement and the anti-immigration Northern League — hope to organize a referendum on Italy’s membership in the currency bloc. If either party, or another Euroskeptic force, managed to gain power during the next general election and hold such a vote, Italian voters may well choose to withdraw from the eurozone. In fact, the vote itself might not even be necessary since merely announcing the referendum could trigger a run on Southern European banks, precipitating the demise of the eurozone. Though that scenario is unlikely, it is possible nonetheless.

To ease concerns about a potential Euroskeptic victory in early elections, the Italian Parliament will probably appoint a new government in the coming days. The government’s main goal will be to reform Italy’s current electoral law, known as “Italicum.” Under the law, which has not been applied since it passed in 2015 and has faced legal challenges, general elections take place in two rounds of voting, and the winning party receives bonus seats in Parliament. Renzi’s successor will probably replace the existing procedure with some kind of proportional system that forces parties to form coalitions, thereby reducing the Five Star Movement’s chances of accessing power. (The party refuses to forge alliances with other groups.)

Five Star logo

But even if it defuses the threat of early elections, a new government will not solve Italy’s problems. Meager growth rates, high levels of unemployment and general skepticism toward the country’s traditional institutions could give rise to populist and protest movements, whether an established party such as the Five Star Movement or an emerging political force. Low growth rates and political uncertainty will also put a damper on Italy’s banks, which are struggling to find new capital and free themselves from the heavy burden of their nonperforming loans. Unless the country can implement structural reforms, private companies may be loath to lend a hand to Italy’s banks.

At the same time, if Italy were forced to bail them out on its own, it would likely invite a confrontation with the European Union, and with Germany in particular. Rome would then have to choose between rescuing its banks at the expense of investors, in keeping with EU rules, or diverging from Brussels’ regulations at the risk of damaging the credibility of the entire system.

Furthermore, the rocky outlook for Italy’s economy, and especially its high levels of government debt, could be an important consideration in the European Central Bank’s policy meeting on Thursday. Recently, a case has been building for the ECB to consider tapering its quantitative easing program in 2017 to keep inflation in check and prevent asset bubbles from forming. Scaling back quantitative easing, however, would expose Italy’s bond yields — which have risen over the past few weeks — to market forces that could drive them too high. In the months to come, the issue will likely emerge as a battleground between EU members, such as Germany, lobbying for tighter monetary policy and ECB factions trying to preserve overall stability by protecting the eurozone’s peripheral members.

Still, the immediate fallout of Italy’s referendum was not as dramatic as many in the country and around the world expected. Financial markets reacted with relative calm on Monday: Shares in Italian banks took a hit, but the euro recovered ground after an initial drop. To a certain extent, investors had already anticipated the cost of the referendum, based on opinion polls (which by and large correctly predicted the results of Italy’s vote, unlike those of the Brexit referendum). Markets seem to be betting against snap elections in Italy, and Renzi’s prompt resignation will enable Parliament to appoint a new government instead. But Italy’s political and economic troubles — as well as its brush with Euroskepticism — are far from behind it.

Italy After the Referendum” is republished with permission of Stratfor.


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About Stratfor

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For More Information

Another excellent analysis of the causes and effects of the “no” vote in Italy: “After Renzi” by
Thomas Jones (editor), London Review of Books. Also see “Italy voted ‘no’ to constitutional reform. This is why, and what will happen next.” by Chris Hanretty (U of East Angelia) in the WaPo.

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10 thoughts on “Stratfor: Italy After the Referendum. What comes next?”

  1. Italy is in terminal decline. The process was already visible in the early 2000s but has now reached critical levels with mass unemployment, no end in sight economic stagnation and so on. It will likely become one of the first developed countries to turn into a failed state or at the very least a messed up 3rd world one.
    Timing is hard to predict but negative economic and political dynamics could well reinforce each other speeding up the process.
    So far that the M5S has had the chance to prove itself at the local level the results have been a mixed bag at best, spectacular embarrassment at worst. Its party platform centered around a basic income and anything else could appeal to lowest common denominator will nevertheless bring it to power, if perhaps not immediately.

    1. marcelloi,

      I worry that you are correct about Italy. Sometimes nations do enter long periods of decline.

      But what is “terminal decline”? Other than by losing wars, I cannot recall a developed nation turning into a third world nation — let alone into a failed state.

      On the other hand, history shows that nations often renew themselves after long periods of stagnation or even decline. In other words, long-time forecasting is difficult — and should be stated with humility.

  2. “But what is “terminal decline”? Other than by losing wars, I cannot recall a developed nation turning into a third world nation — let alone into a failed state.”

    In practical terms I expect Italy at some point won’t be anymore a country where the things that in a modern first world country are taken for granted (a certain level of prosperity, electricity 24/7 etc) will still be in place. This might well spell the end of the existing nation state or hollow it to a large degree.
    The ongoing Völkerwanderung might also ensure that the successor state(s) could be quite different beasts.
    It is true that industrialization has changed dynamics in profound ways but it might not necessarily be a dispensation from the cycle of rise and fall.

  3. Good analysis, fits in with what I’ve read elsewhere.

    There’s a good chance that Italy will continue to rumble on with high debt levels, almost zero growth, chronically low levels of investment and any chance of recovery being hamstrung by being part of Germany’s currency union. Then some largely unpredicted external event will administer the final push and the Italian banks will collapse, very probably taking the Euro with them.

    Le Pen, Grillo et. al. will never achieve power, but their ‘corrosive’ influence will continue to have an effect on the more mainstream parties, with them sliding toward more populist policies and continuing the push back against globalisation.

    I’ll probably think something different next month. It’s been that sort of year.

  4. “Do you have a time horizon for this outcome? Aprox how long?”

    Perhaps something like a data based forecast might be attempted. I would expect that by 2030 or so the country would be firmly into 3rd world territory.
    A decade ago oil pipeline pilfering was something one read happening in Nigeria. Now is a routine local criminal operation.

  5. ” Pen, Grillo et. al. will never achieve power”

    Under the esisting Law M5S has a clear path to achieve majority in at least one chamber were election held tomorrow. The law may be changed but it will probably keep them from power only for few short years.

  6. 1) i dont’ agree on observation that “terminal decline” happen only with war: two exemple are Spain and URSS, both failed empire collapsed without losing war. And there are a lot more.

    2) i’ m not so sure that “Grillo et al” never achieve power: the trouble of losed credibility of liberal elite is here in Italy as in UK and USA. with italicum electoral law there are very high probability of this happen. and even without italicum Grillo and “lega nord” have around 50% of vote: now they compete for the same electors, but if go toghether….

    3) in italy we see the same that brexit and Trump: the social groups that have hit the more from economical situation react repelling the “liberal elite” suggest for costutional change: this is more evident if we go inside local resoult: as an exemple Milan: in the historical center (cost of home 20000 euro/mq) the yes win, but going from the center to the border the no start to growth and gradually become the maiority. where the yes win are provinces where concentration of wealth is lower and welfare state work better…. it was a social vote not a political vote.

    1. Paolo,

      Thank you for your observations about Italy. It’s difficult to see what’s happening over there from across the Atlantic.

      “dont’ agree on observation that “terminal decline” happen only with war: two exemple are Spain and URSS, both failed empire collapsed without losing war.”

      Replay what I said: “But what is “terminal decline”? Other than by losing wars, I cannot recall a developed nation turning into a third world nation — let alone into a failed state.”

      Neither Spain nor the USSR declined to become a third world nation or a failed state, which is how I defined “terminal decline.”

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