A “no” in the Italian referendum would be the beginning of the end of the Euro

The Italian referendum on 4th December is actually about the constitution. The intention with a yes vote would be to reduce the size and limit the power of the upper house to make it easier for governments to govern. But it is indirectly also a referendum on the Euro. While a “yes” vote would allow Matteo Renzi to continue as Prime Minister, and though it will be a great relief for the Eurocrats, it would be far from a ratification or an approval of the EU or the Euro. A “no” vote on the other hand would be a Brexit-like, hammer blow to the Euro and to the misguided concept of a Holy European Empire. I suspect it would be the beginning of the end of the Euro.

The Spectator:

Though he is a big fan of the European Union, Barack Obama brings bad karma to it. …… His farewell visit is, if not a kiss of death, surely a bad omen for the EU and most immediately for one of those present in Berlin to bid him goodbye: Italy’s prime minister, Matteo Renzi, who has called an all–important referendum on constitutional reform for 4 December. If he loses, as looks ever more likely, it could cause a run on Italy’s sclerotic banks that could engulf the eurozone. ….

….. In essence, Renzi wants to curtail the powers of the upper house, the senate, and to cut the number of senators — who would no longer be elected, but appointed by regional governments — from 315 to 100. If he succeeds, his economic reforms should be easier to pass. ……… 

Grillo has dismissed the referendum question as ‘incomprensibile’. His movement and most of what remains of media tycoon Berlusconi’s party, Forza Italia, will vote ‘no’ in the referendum. So too will the right-wing populist Northern League party, which also wants Italy out of the euro and illegal immigrants out of Italy. On top of that will be a significant tranche of Renzi’s own party.

So this has become a referendum not just on constitutional reform but on Renzi — and if not on Italian membership of the EU, certainly on the euro. The Brexit vote, the triumph of Trump and the populist spring tide sweeping Europe are sure to convince many Italians to vote against Renzi.

The connection between a constitutional question (almost imcomprehensibly phrased) and the Euro is obscure but real.

Italy: Performance in the Eurozone (graphic via Forbes)

Italy: Performance in the Eurozone (graphic via Forbes)

ForbesKnow this: The European Monetary Union does not work very well, if at all, without Italy. A “no” vote would be the death knell of the euro. …….

……… 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. ……..

………. All this means that the possibility of a “No” vote in Italy’s constitutional referendum ……. is the biggest clear and present danger to the euro’s survival. …… the only economic choice for Italy would be between continued stagnation, or a return to the old economic model of successive devaluations. The latter course would naturally mean exiting the eurozone anyway. ……..

…….. If Renzi wins ……. the eurozone has fresh hope. But if he fails, Italy fails—and very likely the eurozone fails too.


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