Renzi's Referendum

Italy's Zero Hour

  • Why it matters

    Why it matters

    If Italians vote against the prime minister’s constitutional reforms on Sunday, Italy could be the first country to leave the euro zone.

  • Facts


    • Mr. Renzi says he will resign if he loses the referendum on December 4, turning it into a vote of confidence in his government.
    • Should Italians vote “No,” there will likely be a new referendum on the country’s participation in the euro.
    • Either way, Italy will likely distance itself from the European Union, breaking austerity requirements on the way.
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Matteo Renzi
Matteo Renzi's fate will be decided on Sunday. Source: DPA

After the largely unexpected Brexit vote in June, the next setback for the European project might come from Italy, a founding member of the union, no less.

A referendum on Sunday will not only decide the fate of current Prime Minister Matteo Renzi, but also signal Italy’s stance on its relations with the European Union. A “No” vote could plunge the bloc into an unprecedented crisis.

Officially, Italians are voting on a constitutional reform that is supposed to speed up parliamentary procedures. In reality, however, Mr. Renzi and his opponents have turned it into a vote of confidence in the current government.

If Italians vote “No” on Sunday, they won’t only be punishing Mr. Renzi for slow progress on reforms and high unemployment rates, but mostly for being a mouthpiece for the European Union agenda.

Many consider the E.U.’s tough stance on ailing banks and strict austerity measures a reason for Italy’s economic problems. Combine that with the country bearing the brunt of the current refugee crisis without notable support from Brussels, and trouble is in the air.

“The refugee, banking and austerity issues are overshadowing the actual topic of this referendum. And current policies can hardly do anything against that,” said Erik Jones, an economist at the Johns Hopkins Institute in Bologna.

Mr. Renzi knows what’s at stake. The 41-year old is giving five to six campaign speeches a day at the moment, trying to rally last-minute support.

And he has numbers to show for his time in office, numbers that he espouses at every opportunity: The economy grew by 1.6 percent, twice the growth rate under his predecessors. A total of 656,000 new jobs were created, and families have 3 percent more purchasing power, he claimed last week in Rome.

But there’s a flipside to all these numbers. Unemployment among young people stands at 37 percent. Compared to the period before 2012, purchasing power dropped by 5 percent. The Kiel Institute for the World Economy recently stated that “the economic development in Italy has been lagging behind the development in the euro area for many years.”

“We have revived the country, but it’s not enough yet,” Mr. Renzi said. “Are we content? No. But we’re hungry for the future.”

“It’s still not enough” seems to embody the view of many Italians. And that could come back to haunt him when the country goes to the ballot on Sunday. Recent polls see his opponents in the lead.

The prime minister has announced he will resign should his reform proposal be rejected. He might have miscalculated.

“The refugee, banking and austerity issues are overshadowing the actual topic of this referendum.”

Erik Jones, Economist, Johns Hopkins Institute in Bologna

But a rejection of the reform would not just plunge the current government into crisis, it could have an impact on the whole of the European Union.

In Italy more than any other E.U. nation, the euro zone’s problems are visible: Banking crisis, sluggish growth, excessive debt, interest rate erosion, refugee disaster.

A “No” to Mr. Renzi would also mean a “No” to the European Union. A referendum on Italy’s exit from the common currency will likely follow.

That could ring in the euro’s death-knell. “A negative vote would have worse consequences than the Brexit decision,” said an E.U. official who declined to be named.

When Mr. Renzi became prime minister in 2014 at not even 40 years old, he embodied the great hope for change in sluggish, corruption-ridden Italy.

The former mayor of Florence started out as a reformer, ready to “scrap” the old Italy, as he put it. He made it easier to hire and fire people, and tightened civil service laws.

But soon, he ran into a wall: unions and the establishment of his center-left PD party blocked his agenda. The fight against high government spending and stagnant productivity turned into tilting at windmills. As a result, Italy’s gross domestic product remains at about the same level it was in 2000, the Kiel institute calculated. GDP in the euro zone grew by 17 percent over the same time, in Germany it was even 20 percent.

“It doesn’t matter who’s at the helm in Italy,” said Daniel Gros of the Centre for European Policy Studies. “The system has proven to be resistant.”

To cut through red tape and sleaze, Mr. Renzi came up with the constitutional reform. The plan was to concentrate power in the lower house of parliament, so that the legislature and government don’t end up in deadlock so often.

But his decision to put the reform up for a referendum was the start of his problems. Italians view the 41-year old as a puppet of decision-makers in Brussels. Now they want to punish him – and with him Brussels and Berlin – for leaving the Italians to fend for themselves with their biggest problems, the banking crisis and excessive debt.

“We definitely have too many banks,” said Carlo Messina, head of Italy’s second-largest bank Intesa Sanpaolo, which was formed out of two ailing banks. The new bank got rid of government bonds and focused on wealthy clients. Today Intesa Sanpaolo is faring better in the European Central Bank’s stress tests than its German counterparts.

But Mr. Messina’s bank is the exception. Most Italian banks are struggling. They depend on interest rate margins from corporate loans. But at the current zero-interest rates in the euro zone and stagnating growth, many firms can’t afford to take on debt.

Many can’t even afford to pay back their existing debt. Bad loans totaling €360 billion ($384 billion) are on the Italian banks’ books.

What makes the banking crisis even worse is that many ordinary Italians are entangled in the system: a large number holds bonds.

Since the European Union in 2014 decided that such investors will forgo their money first when banks fail, before the government can even intervene, the Italian government finds itself in a dilemma. If the banking sector downsizes, winnowing out ailing financial institutions, citizens will get hurt. If the government protects citizens, the banking sector won’t stabilize.

Thousands of Italians already lost their investments when Mr. Renzi made banks pay up. That’s when the tide turned against the prime minister for the first time.

Italy’s second big problem besides the banking crisis is its excessive spending. “We actually do have another big weakness, and it’s national debt,” Mr. Messina said. The country has accumulated debt worth €2 trillion ($2.13 trillion), which amounts to more than 130 percent of its GDP.

To remedy that, the German government demanded the Italians cut down on spending.

But Mr. Renzi did the opposite. New borrowing will rise to 2.3 percent of gross domestic product, instead of the 1.8 percent the prime minister had promised the European Union.

Just last week, the German Bertelsmann Foundation in its sustainable governance report supported this stance. Some of Mr. Renzi’s predecessors adhered to fiscal austerity. “That didn’t stop gross domestic product from decreasing,” the report said. If the economy shrinks, companies suffer and tend to not service their debt. That’s poison to a banking system so dependent on corporate loans.

Because the private investors who would have to foot the bill are also voters, it would be political suicide to cut down spending. So nothing happens.

To pile on the economic problems, Italy is also suffering disproportionately from the refugee crisis. Ever since the Balkan route through Eastern Europe was closed, more and more migrants are taking the route across the Mediterranean Sea to Italy. This year, more asylum seekers than ever before landed in the country.

Most of them want to travel North, to Germany or Scandinavia. But Italy is playing by the E.U. rules, registering first arrivals and stopping them from moving on.

“The question is how long any Italian government can endure the fact that only parts of the European agreement are enforced,” said Arno Kompatscher, governor of the northern Italian province South Tyrol. “There’s the other part too, the solidarity among member states in dealing with these tasks. And that’s missing,” he added.

And so the current consensus in Italy is that it just hasn’t paid off to be good Europeans. Many Italians at least partially blame Brussels for the crises at home.


And they are angry. Like Eugenio Caracciolo, a steel mill worker from Taranto in the struggling south of Italy. “For years, Brussels has left us to fend for ourselves against the Chinese. And nobody’s doing anything against it,” he said. He was referring to the workers in one of Europe’s largest steel mills.

Mr. Caracciolo blames lax E.U. policies for cheap steel imports from China that have pushed his employer to the brink. He said he’s sick of the uncertainty and doesn’t believe in help from the government anymore. “So we’ll just oust governments until one of them will listen to us,” he added.

Italy, the euro-zone’s third-largest economy and the world’s fifth-largest industrial nation, has many angry workers like Mr. Caracciolo these days.

In the run-up to Sunday’s referendum, tension and uncertainty are rising by the day. The Italian central bank has already issued a warning, forecasting “extraordinary volatility” in the markets. The Milan-based stock index FTSE MIB has lost 24 percent since the beginning of the year.

There are three scenarios for Italy on Sunday. Either Mr. Renzi wins, and Italy gets a new constitution. Or he loses, in which case he’ll either leave, making a technocrat head of government, or he’ll break his word and stay, trembling all the way to the next elections.

But there’s only one scenario for Europe. No matter who will end up in charge, no Italian government can currently support the northern European idea of the euro, nor give into calls for stricter austerity.

Brussels and Berlin better buckle up: All roads leading to Rome are bumpy ones these days.


This article first appeared in WirtschaftsWoche. To contact the authors:;

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