THE ITALIAN REFERENDUM: WHAT’S AT STAKE?

The Italian government has announced that a much-anticipated referendum on constitutional reform is to be held on December 4th 2016. The aim is to make Italy, a more governable country. Currently, the two legislative chambers have equal powers, so bills must go between them until they are approved in identical form. The constitutional-reform bill would drastically curb the power of the Senate. The referendum proposes to radically transform the Senate – from a chamber of 315 directly elected politicians and six lifetime appointees to smaller “Senate of Regions”. The new parliament would have just 100 seats – 74 regional councillors, 21 majors, and five presidential nominees, with the latter serving for seven years rather than for life. The Senate will retain its veto on constitutional matters, but the Deputies will have final say on everyday bills. The Senate will also be able to examine bills if a third of its members wish to do so, although its suggestions will not be binding.

Critics argue that, when taken with a new electoral law that has already been approved by parliament (but which could be reopened), the reform would give the next prime minister too much power. The head of government would have five years in office with a guaranteed parliamentary majority, free of even the threat of a rebellion in his own ranks—deputies’ prospects for re-election will depend not on their popularity with their constituents but on their standing with their party leader.

If Renzi wins the vote his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms. If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself. As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis.

Italy’s fundamental problem is that it’s stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house—the Senate and the Chamber of Deputies—wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards as Italy’s real GDP per capita has slumped to a 20-year low.

Such a below-par economic performance has led to a build-up of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. In turn, this bad loan overhang has eroded the ability of the banking sector to extend new credit to the thousands of small businesses which are the engine of Italy’s economy and which normally power employment growth. The result is stagnation.

To stand any chance of escaping this low growth trap, Italy needs to enact wholesale structural reforms to enhance its competitiveness relative to its eurozone neighbors. Notably, it needs to make the labor market more flexible to encourage job creation, it needs to lower the barriers to entry that protect much of the country’s service sector, it needs to overhaul a judicial system so sclerotic that bankruptcy proceedings can last 10 years or more, and it needs to restructure its fragmented and dysfunctional banking system.

The prescription might be clear, but Italy’s political system makes enacting reform all but impossible. Renzi has already tried to overhaul Italy’s labor market by attempting to dismantle the generous protections that make it difficult and expensive for companies to dismiss staff, and which therefore encourage businesses to hire only temporary workers, heightening economic insecurity among the young.

But Renzi’s attempt ran into bruising opposition from Italy’s powerful and well-subscribed trade unions. The results were a watered-down reform package that entitles existing permanent staff to a near-guarantee of lifetime employment, and a severe dent in Renzi’s popularity from which he is yet to recover. It’s a familiar story in Italy. Entrenched interests—whether represented by local and regional political leaders, unions, protected professions, or established private sector companies—exert enormous influence over the political process. All profit from the status quo, which promises they will continue to benefit from special protections and payouts. And because of the equal balance of power in Italy’s parliament, which means the Senate can block government legislation indefinitely, the consequence is political—and economic—stagnation.

Italy Economic Data (2016)

• Population (Million): 60.2
• GDP per Capita (EUR): 27,152
• GDP (EUR Billion): 1,636
• Economic Growth (Est): 0.8%
• Unemployment Rate: 11.9%
• Public Debt (% of GDP): 133%