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Eurozone

Italy’s referendum shock sparks contagion fears amid rise of populist forces in Europe

Andrew Hammond says European leaders readying for polls amid a rising anti-establishment tide will be closely watching the fallout of the defeated referendum and PM Matteo Renzi’s impending exit

PUBLISHED : Monday, 05 December, 2016, 5:16pm
UPDATED : Monday, 05 December, 2016, 6:42pm

Italian Prime Minister Matteo Renzi has resigned after the country decided to vote “no” on Sunday in a landmark constitutional referendum. Following Donald Trump’s election as US president, and the Brexit vote in June, the poll is the latest in which victory by anti-establishment forces has sent shock waves radiating internationally.

However, showing that there are limits to the growing populist mood across much of the world, the presidential election in Austria, also held on Sunday, saw the convincing defeat of Norbert Hofer – the Freedom Party leader who would have become Europe’s first far-right head of state since 1945.

Austrians narrowly reject far-right – again – in presidential vote

Nonetheless, most eyes are now on Italy and the ramifications of that referendum in the euro zone’s third-largest economy. Politically, the vote could spread contagion beyond Italy, especially in the context of key elections in the Netherlands in March, in France in April and May, and in Germany in September. And financial markets are assessing the significance of the economic ramifications, as Italy is sometimes seen as the biggest threat to the euro zone’s future, given that it has the second-biggest debt load in the single currency area, at over 130 per cent of GDP, and its banking sector is under significant stress with underperforming loans.

Italy’s referendum: all you need to know about vote that could put nation next in line for upheaval

It is feared that post-referendum political instability could now nix diplomatic efforts in Rome to resolve this bad loans crisis. Up to eight of Italy’s troubled banks could risk failing, partly because market panic could discourage investors from recapitalising them.

The vote could spread contagion beyond Italy, in the context of key elections in the Netherlands, France and Germany

The immediate focus is on who might replace Renzi, prime minister for almost three years. He had linked his personal future to the ballot outcome, which he said would set the tone “for the next 20 years”, and had vowed to resign if his reforms were rejected.

His falling popularity was a factor, alongside public angst over corruption and the fragility of the economy, with unemployment at around 12 per cent. GDP per head is now less than in 1997 at constant prices: only Greece fared worse in the euro zone during this period.

It is in this febrile political climate that anti-establishment forces have grown in Italy, including the Northern League’s far-right leader Matteo Salvini, and the Five Star movement, founded seven years ago by former comic Beppe Grillo. Five Star, which won mayoral elections in Rome and Turin this year, and has been polling just behind Renzi’s centre-left Democratic Party in national surveys, has said that Italy should reconsider its role in the EU, and called for a referendum on whether it should keep the euro.

Italian President Sergio Mattarella may refuse to accept Renzi’s resignation and ask him to remain. If Renzi does go, this need not necessarily trigger fresh elections. For instance, a new caretaker government, potentially headed by a technocrat, may take power before the next general election in or before May 2018.

One technocrat who could head up such an administration is economy minister Pier Carlo Padoan. He had sought to calm nervous markets, saying there was “no risk of a financial earthquake” if the reforms were voted down on Sunday, though he did admit there may now be “48 hours of turbulence”.

This underlines that the instability precipitated by the vote could be contained, in the short to medium term at least. The parties comprising the present coalition have incentives to keep the current legislature going, and seek to form a new government.

Europe’s left parties in distress over boom in populism

Still, many in Italy will see the rejected reforms as a lost opportunity for the country. There have been more than 60 national governments in the post-war era, and Renzi’s reforms aimed to usher in greater political stability. His argument was that more stable majorities in the legislature, and hence stronger government, would enable reforms needed to enhance economic growth and reduce public debt. However, opponents including ex-technocrat prime minister Mario Monti asserted that they would have given the executive excessive power, and made government less accountable.

Many European leaders will be unsettled by the result that will shape the political weather across the continent in 2017, with anti-establishment forces on the ballot in the Netherlands, France and Germany.

Andrew Hammond is an Associate at LSE IDEAS (the Centre for International Affairs, Diplomacy and Strategy) at the London School of Economics