Italy at the Brink: From Renxi’s Referendum to "Italexit"

Italy at the Brink: From Renxi’s Referendum to "Italexit"

“Thank you Great Britain, next it is our turn,” tweeted Matteo Salvini, the leader of the right-wing Northern League (NL), a major Italian center-right opposition party. Euro-skepticism is on the rise in Italy, as it is elsewhere in Europe. Until recently, Italy saw itself as part of an integrated Europe, but this was before the immigration crisis and the bloc’s continued economic stagnation. After Brexit, Italy is defying Brussels to bail out troubled banks and is preparing for a constitutional referendum in October. If Prime Minister Matteo Renzi fails to achieve adequate support, economic destabilization may shift from the United Kingdom to Italy, which could pave way to the rise of anti-system right and left.

“Whether you like it or not, the British people have chosen,” said Alessandro Di Battista, after the UK’s Brexit referendum. He is one of the leaders of opposition center-left 5-Star Movement (M5S), Italy’s second-most popular party. Brexit will impact over 300,000 Italians, who are official residents in the UK, and another 300,000 who work illegally at low-paying jobs. Brexit’s effect will also have repercussions on Italian businesses, as well as the country’s economy and markets, especially because the Milan bourse is now part of the London Stock Exchange.

The indirect impact of Brexit in Italy, however, will be broader. As far as major opposition leaders, such as Salvini and Di Battista, are concerned, the Brexit vote will pave the way to Italy’s own referendum and – as the opposition hopes – Renzi’s defeat in October.

In February 2014, the 41-year-old Renzi became the youngest person in history to be elected Italy’s Prime Minister. Under Renzi, the good news was that, by the end of 2013, the longest recession in Italy’s postwar history had ended. The bad news, however, was that the Italian economy was a tenth smaller than it was before the crisis – and the unemployment rate had doubled to over 12 percent since 2007.

Yet, Renzi’s political starting-point was favorable. Italy’s (PD) Party has its strongest constituencies in Northern-Central Italy and other big cities. Internationally, the party is regarded as social-democratic, progressive by outlook, and reformist by inclination. Renzi himself was seen as a liberal modernizer with a penchant to tweet his ideas and latest achievements. Representing a much-needed generational change in an aging Italy, Renzi initially hoped to reverse the country’s decline by launching major projects, including a new electoral law consolidating political decision-making, reforms in the public administration, and the tax system.

However, in December 2014, Standards & Poor’s ratings lowered Italy’s long- and short-term sovereign credit ratings to “BBB-/A-3.” Nevertheless, S&P expected Italy’s government to implement reforms, in addition to a monetary policy that would support the normalization of inflation. In reality, however, Renzi’s political capital may collapse in October, which would effectively nullify his attempts at reform. In turn, the eclipse of Renzi’s reforms could herald Italy’s next sovereign downgrade, which could foster a perception about the European Central Bank’s quantitative exhaustion.

In Italy, unease is increasing as Renzi willingly defies the EU by pumping billions of euros into the country’s troubled banking system. As the result of Italy’s three-year recession and a decade of stagnation, bad loans have restricted the bank’s ability to lend, which, has weakened the government’s efforts at rejuvenation.

To recapitalize Italy’s banks, Rome needs a waiver from European commission state-aid rules. While German Chancellor Angela Merkel rebuffed Renzi’s request, Berlin supports Rome’s efforts to clean up the banking system. Recently, Brussels signed off some $170 billion worth of precautionary measures to help Italian banks with short-term liquidity challenges. However, pressure on capital is a greater concern, especially as the results of new stress tests. The results could indicate that Italy’s weaker banks are undercapitalized, including Italy’s third-largest bank, Banca Monte dei Paschi di Siena, which has close ties with Renzi’s center-left Democratic Party.

Renzi has a limited amount of time left to reverse Italy’s economic and political headwinds, and odds are against his ability to enact reforms. Despite half a decade of promises of deleveraging, Italy’s general government debt is still at 133 percent of the GDP – higher than at the onset of the European debt crisis. Even as Italy is amid a cyclical rebound, the country’s GDP growth will likely remain at barely 1 percent in 2016-17. Thanks to aging, slowing productivity, and de-industrialization, growth will decelerate to 0.6-0.8 percent by the early 2020s. And as challenges increase, its economic muscle will shrink.

Concurrently, Renzi is surrounded by political enemies on the right, on the left, and within the PD. In local elections last June, the M5s and center-right parties beat PD in key municipalities. In Rome, M5S’s lawyer, Virginia Raggi, defeated Renzi’s candidate for mayor by running on an anti-establishment platform that pledged to fight corruption. The message reverberated in Italy’s capital, where Gianni Alemanno is on trial for corruption. Renzi, however, has refused to resign as party leader and is instead staking his political future on the constitutional referendum in October.

If Renzi loses the referendum, he will resign from the role of the prime minister and the PD’s leadership. That, in turn, would end the post-Berlusconi period of relative stability in Italy, while paving way to “Italexit” - an Italian referendum on the EU.

Only a few years ago, Renzi took power in Rome with promises of ambitious reforms and real recovery. Today, as Renzi’s power base softens, the PD risks fragmentation. Despite his electoral win in 2013, Renzi controls only two-thirds of the party representing the liberal, Third Way-oriented modernizing bloc. Other factions, including Christian leftists, social democrats, leftist democrats, and the reformist left that now opposes Renzi’s policies.

If Renzi falls, PD will pay the price and the radical right and anti-establishment left could move into its place. The 5-Star Movement, the Northern League, and the center-right opposition party, Forza Italia, strongly oppose the October referendum, which they call undemocratic and favorable to the incumbent PD. The NL is reorganizing and moving towards becoming a national party with a Euro-skeptic platform. The party’s rising star, Matteo Salvini, has a critical view of the EU and sees the euro as a “crime against mankind.” On economic issues, he supports flat tax, fiscal federalism, and protectionism. During demonstrations, he dons a Mussolini-style black shirt to court Italy’s extreme right group, Casa Pound. In his foreign policy, Salvini emulates Le Pen’s ideas, opposes the international embargo against Russia, and supports Italy’s broader economic opening to Eastern Europe and Asia. He has also endorsed U.S. Presidential Candidate Donald Trump, whom he met in Philadelphia last April.

Renzi wants structural reforms, EU integration, and U.S. cooperation. Salvini wants political power, an exit from the euro, and Euro-skeptic cooperation with Russia. Whatever the outcome of Italy’s October referendum, it will be preceded by the Italian banking debacle. Both Brussels and Berlin know only too well that too much for Renzi could mean they risk losing the support of EU integrationists. However, they also realize that should they not support Renzi enough, they risk losing Italy. And after Brexit, Brussels simply cannot afford an Italexit.

Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see