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Italy’s Constitutional Reform Referendum

On 4th December Italy goes to the polls: a constitutional referendum is going to give Italians the chance to choose whether to accept or reject the constitutional reform bill approved by Parliament and proposed by Matteo Renzi’s centre-left government. The constitutional reform is one of the most elaborate and ambitious reform bills ever to be put forward in Italy. The outcome, according to latest polls, is too close to call. Some of our readers have asked us what the referendum is all about, so in today’s blog post, we attempt to address the key issues and impacts.

What is Italy voting for?Ballot Form for Italy's Reform Referendum

Currently, Italian laws need to be approved by both houses of the Italian parliament: The Chamber of Deputies and the Senate of the Republic. This “bicameral” system pits the state against the regions, which frequently leads to delay or scuppering of new laws, and undermines the stability of the Italian government.

In an attempt to rectify this situation, Italy’s Prime Minister and Reform Minister have proposed key changes to the constitution, effectively reducing the power of the Senate. On 4th December, Italy will vote ‘Yes’ to approve their reforms or ‘No’ to maintain the status quo.

What Reforms Are Being Proposed?

The major changes are to the composition and role of the Senate. Under Renzi’s constitutional reforms, it will be reduced to 100 members, down from 315 currently. Members will be elected indirectly. 74 of them will be councillors, 21 mayors, and 5 will be appointed by the Italian President.

The role of the Senate will be to represent local institutions. The members won’t be compensated for their Senate roles, only for their roles as mayors or councillors. And when their term as mayor or councillor ends, so will their senatorial term. The reform aims to end the competition between state and regions.

Overall Amendments to 47 of the current 139 articles are proposed. Alongside Senate reform, Italy will be voting to approve four other key changes to Italy’s constitution:

  1. Both of Italy’s political houses will exercise legislative power in respect of constitutional laws, electoral laws, referendums, treaties of the European Union, linguistic minorities and those governing in the territories. But all other laws will be approved by the Chamber of Deputies alone, with the trust of the government.
  2. The National Economic and Labour Council (CNEL) – an advisory body on economic and social matters that also has the power to submit draft bills to parliament – will be abolished.
  3. The number of signatures needed to propose new legislation will increase from 50,000 to 150,000.
  4. Instead of both houses jointly electing five judges to the Constitutional Court, three will be elected by the Chamber of Deputies and two by the Senate.

Why is a referendum being held?

A referendum must be held because, while the reforms were approved by overall majorities in both the Senate and the Chamber of Deputies, they were accepted by less than two-thirds of each chamber, which constitutes a so-called ‘qualified majority’. Under Italian law, this means that the reforms have to be put to a public vote.

What Will the Impact Be?

Italy may be mainly voting on reforms to the Senate, but the potential fallout from the referendum is much wider. Here’s what it might mean, politically, economically and financially, in both Italy and beyond.

Political and Economic

  • Renzi has threatened to resign as prime minister and leave politics if his reforms are rejected. In this sense, the referendum has become more a vote about the Prime Minister than the constitution. A ‘No’ vote could therefore result in a new governmental crisis and a further period of instability.
  • With key elections coming up in France and Germany in 2017, Italy’s referendum also comes at a pivotal point for the future of the EU. The instability that a ‘No’ vote would cause in Italy could further strengthen the position of Eurosceptic parties across Europe – parties that have already been emboldened by the UK’s Brexit decision and Donald Trump’s win in the US Presidential Election.
  • The populist Five Star Movement’s (M5S) Luigi Di Maio, who, polls show, has a good chance of succeeding Renzi as prime minister, has reiterated his party’s long-standing call for a referendum on the Euro.
  • Analysts are warning that any turmoil in Italy could spread to the rest of the Eurozone. The risk of contagion is due to the so-called “doom loop” which exists between European governments and European banks, which have more than doubled the holdings of their own governments’ debt from €355 billion in September 2008 to €791 billion today.
  • A ‘Yes’ vote should strengthen Renzi’s government and his centre-left Democratic Party, bringing greater stability to Italy and lowering the chance of an early general election. This means that Renzi will most likely keep going until the natural end of the legislature, in early 2018, with a view to winning the next national elections and defeating the main challenger, M5S.
  • It is hoped that the political system is going to be more simple, that passing laws will be more efficient and electing a government will be easier. Herein lies the main criticism of the proposed constitutional reform, which is seen by ‘No’ voters as concentrating too much power in the hands of the sitting government. This would occur partly because of the dramatically diminished Senate, but also because of its interaction with a new electoral law in the Chamber of Deputies. ‘No’ voters say it is a dangerous power grab by Mr Renzi, but even some of his allies are jittery, fearing the populist Five Star Movement could take power, for instance, with a much reduced set of checks and balances.

Market

  • The impact of the referendum will be seen in the financial markets first and the real economy second. A ‘No’ vote is likely to have more of an impact than a ‘Yes’ vote, and the banking sector is likely to be most affected.
  • Italian banks remain fragile, and any impact is likely to reverberate across the European banking sector as a whole. What that might mean for the huge amount of non-performing loans overhanging Italian banking system and the capital increases being proposed by some Italian banks is unclear. It is no coincidence that Unicredit is not planning to announce its new business plan until December 14 – after the referendum has taken place.

Italy’s Credit Rating

  • A period of economic and political turmoil could also compromise Italy’s credit rating, which would in turn push up the cost of borrowing for the Italian government, its municipalities and businesses.
  • DBRS, the Canadian rating agency, holds the highest rating on Italian debt but has a negative outlook and will review its rating after the referendum. The three major ratings agencies: Fitch, Moody’s and S&P, which has a BBB- rating for Italy, the lowest of the investment grade ratings are also likely to review ratings after the referendum.
  • Many national and international investors have already temporarily frozen Italian investment plans ahead of the referendum. If there’s a ‘No’ vote, the situation could deteriorate rapidly, with a heavy toll on employment and growth.
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