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Renzi resigns after referendum rout

Knapps

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05, Dec 2016

He asked for it. He got it. Italian Prime Minister Matteo Renzi dared to call for a referendum on proposed constitutional reforms in the age of Brexit and Trumpism. The voters comprehensively rejected his proposals, and Renzi has now quit as Prime Minister declaring "The experience of my government ends here". The result puts Italy’s struggling banks at risk and may boost calls for Italy’s exit from the EU.

What is the development?

Though the exact details of the question Italians voted on were quite technical – whether or not to accept constitutional reforms promoted by the centre-left Prime Minister, Matteo Renzi - the outcome was supposed to have significant political and economic consequences – not just for Italy, but for financial markets and the future of the euro. Now, the worst fears of the Eurozone have come true. They are calling it the biggest moment since Brexit.

  • Matteo Renzi said on Sunday he will resign after suffering a humiliating defeat in a referendum over his plan to reform the constitution, throwing the country and the euro zone into confusion.
  • Renzi said voters had shown a "clear" rejection of legislative reform measures and that he would meet with his cabinet on Monday and then hand in his resignation to the President Sergio Mattarella, taking full responsibility for the defeat.
  • "The experience of my government ends here," Renzi said in a televised address to the nation as results showed his 'Yes' camp was well on track to lose the referendum.

What was the referendum about

It was about a purely domestic - some would say boring - issue. Renzi, however, must only blame himself for making the referendum also link to his popular approval. What was originally a rather dry referendum on constitutional change turned into a high-stakes game with the political and economic stability of Italy — and ultimately the euro zone — at risk.

  • Renzi burst on to Italy’s political scene two years ago promising to reshape his country’s moribund politics, but it was an exhausted, careworn Matteo Renzi who urged Italians to say "yes" to his constitutional reforms when they voted in the referendum. Two years is a long time in Italian politics.

A key element of the proposal intended to alter Italy’s decision-making processes. Currently, both houses of the Italian parliament have the same legislative functions and powers.

  • Had the constitutional reforms been approved, only the Chamber of Deputies (the lower house) would be fully involved in passing laws. The Senate (the upper house) would became a body representing local authorities, while retaining some legislative power in key areas such as constitutional reform and the ratification of EU treaties.
  • A second important change would have given the state more power and remove that of local authorities. Supporters and critics debated issues of governability, potential for excessive authority in the executive, and the reduced democratic accountability of the new Senate.

Why was the referendum so vehemently opposed?

With all opposition parties lined up against the reform, a victory for Renzi would have been considered as a surprise and represented an enormous personal triumph for Italy's youngest prime minister, who often appeared to be fighting the campaign single-handedly.

The ballot effectively became a vote on Renzi’s overall performance and came as mainstream politicians across Europe face challenges from antiestablishment forces fueled by economic discontent and unease over immigration.

  • Europe is facing a prolonged period of political upheaval, with elections also slated for 2017 in Germany, France and the Netherlands.
  • Renzi has pursued a program of easing regulation, including labor laws, and making it easier for companies to do business in an effort to reinvigorate the eurozone’s third-largest economy. But unemployment has stayed stubbornly high and a nascent recovery petered out earlier this year.

Leading the campaign against Renzi was the populist Five Star Movement, which says deeper changes are needed than those the premier is proposing.

  • The movement, led by former comedian Beppe Grillo, has called for a nonbinding referendum on the country’s euro membership.The party wants to abandon EU budget strictures and offer a guaranteed income to citizens. It has also said it might favor printing a parallel currency.
  • Public-opinion surveys indicate that roughly 30% of Italians would back Five Star candidates if parliamentary elections were held now. That puts it neck-and-neck with Renzi’s Democratic Party and means it will have an influential voice and could even end up in power if fresh elections were held.
  • This is where the concerns of the European Union come from. And this is where the fears after Brexit appear justified. More countries may exit EU inspired by Brexit.

Since when has the Italian economy been struggling?

Italy has an unemployment rate of 11% and living standards have barely grown since the country became a founder member of the single currency Euro 15 years ago.

  • Nine years after the onset of the financial crisis in 2007, output remains 8% down on its pre-crash level. Shweta Singh, of Lombard Street Research, said Italy’s weakness since the turn of the millennium was the result of three factors: a slow takeup of new information technology; the inability of the government to devalue the currency to restore competitiveness; and the challenge posed by China in many of the markets where Italy has traditionally been strong.

The country’s banking system is fragmented, with more branches than restaurants dotted across its high streets. They are weighed down by $400bn of bad debts.

  • The industry took too long to tackle the mountain of bad debts and by the time the regulators wanted action a change in EU rules meant it was difficult to set up a “bad bank”. Renzi is credited with helping devise a solution, creating a backstop fund – known as Atlante – for the industry.
  • Renzi bought time by injecting $45 billion into the banks to provide the cushion they need to ride out a wave of loan defaults.

It is not that Italy cannot save its banking sector - it is that Italy is not allowed to do so.

  • Post-crisis EU rules prohibit governments from doing no-strings-attached bailout. Under European law, a bank’s own creditors — investors in the banks’ bonds — must take losses before the government can spend taxpayer money shoring up the bank's finances.
  • Since 45 percent of Italian bank debt is held by ordinary Italians, complying with the EU rules could mean some Italians lose a big chunk of their life savings. This is where the popular discontent against the EU comes from.

Renzi’s resignation could have big implications not only for Italian politics, but more so for the health of Italy’s banks.

  • Italy’s third largest bank and the oldest surviving bank in the world, Monte dei Paschi di Siena, is planning to sell new shares days after the vote to shore up its balance sheet.

Where is the global significance of this vote?

In January 2016, Renzi reached an agreement with the European Commission on how to address Italy’s $400 billion bad loans problem. The deal involves a guarantee scheme backed by the Italian state and the use of private investors to purchase those non-performing loans.The collapse of Renzi’s government calls into question this guarantee scheme, deterring investors from recapitalising troubled banks.

  • Renzi, 41, did not just stake his personal future – he also put into risk Italy’s relation with Europe itself - on the reforms, which he said were vital to reinvigorating a nation mired in debt and ravaged by a 36 per cent youth unemployment rate and a decade of stagnant middle-class incomes.
  • Analysts have warned that, as a prominent centrist voice in Europe, Renzi’s departure will weaken the EU and potentially trigger a fresh eurozone banking crisis if market uncertainty caused by the "no" vote derails plans to recapitalise Italy’s debt-laden banks.

Regional analysts warn that, in the current feverish political climate caused by Brexit and the election of Donald Trump in America, Renzi’s defeat will not be viewed as an Italy-only problem, but a further indication that Europe is at risk of being engulfed in a populist downward spiral.

There is some consolation for the Euro Zone though.

  • Far-right candidate Norbert Hofer has lost Austria's presidential election. Although the post is ceremonial in Austria, the poll had been seen as a sign of how well populist candidates might do elsewhere in Europe.
  • Mr Van der Bellen, the leader of the Greens, who won the election, called the result a vote for a "pro-European" Austria based on "freedom, equality and solidarity". "Finally, you know, I will try to be an open-minded, a liberal-minded and first of all a pro-European federal president of the Republic of Austria."

Who have benefitted from Renzi’s tenure?

When Renzi came to power, he inherited a country beset with problems. Two years on, his desire for reform has not been wholly satisfied. He should have been given more time, but then again - he asked for it.

  • At the age of 39 years and 42 days upon assuming office, Renzi became the youngest Italian Prime Minister, 52 days younger than Benito Mussolini, who took office in 1922. He was also the first serving Mayor to become Prime Minister.
  • Since coming to office, Renzi's Government has implemented numerous reforms, including changes to the electoral system, a relaxation of labour and employment laws with the intention of boosting economic growth, a deep reformation of the public administration, the simplification of the civil trial, the introduction of same-sex civil unions, and the abolition of many small taxes.

Ideologically, Renzi is believed to be a centrist. Centrism is a political outlook that involves acceptance or support of a balance of a degree of social equality and a degree of social hierarchy; while opposing political changes which would result in a significant shift of society either strongly to the left (towards social equality) or the right (which believes that social orders and hierarchies are inevitable and even desirable).

  • As a "master of telepolitics (use of TV for political ends)," Renzi uses his own skills and accomplishments as evidence of his ability to lead, promotes the Internet as a platform for democracy, and uses heavy emotional appeal and relatable, persuasive Italian language to advocate issues.

Rezi has achieved - at least to some extent:

Stronger economy

  • When Renzi took office, turning around an economy deep in recession was his top priority. Today, the Italian economy is growing, albeit at a slow pace of 0.7% in 2015.

Enhanced Italy’s credibility

  • Renzi’s premiership has gone a long way to restoring Italy’s credibility on the global stage. His two predecessors, Mario Monti and Enrico Letta, were competent but ultimately weak leaders. He is viewed as a strong leader who has recently become more vocal in his criticism of EU policies on austerity and Germany’s dominance within the EU.

Gender diversity

  • Women still have a long way to go in Italy, which has the third lowest female labour participation rate (51%) among developed countries. But Renzi helped to address the gender divide in at least one high-profile way: half of his cabinet ministers were women when he became prime minister two years ago.

Renzi’s biggest failure - which caused his downfall - was his inability to convince Italians that Italy belongs in the EU and the eurozone.

How will the result affect the Opposition?

It was clear from the high voter turnout – 68% of eligible voters cast ballots on Sunday – that Italians were indeed sending a message to the political establishment in Rome.

The movement that spearheaded the winning "no" campaign in Italy's referendum has called for early elections to replace Prime Minister Matteo Renzi, who has said he will resign following the vote.

  • Leaders of the populist Five Star Movement (M5S), the main rivals to Renzi's Democrats, are anxious to achieve national power for the first time.
  • The M5S was started in 2009 by comedian Beppe Grillo and web strategist Gianroberto Casaleggio, who had the intuition that the internet could be used as the basis for a new kind of party – one without organisation, money, ideology or headquarters. This encouraged Grillo to use his blog and the social networking site, Meetup.com, to bring people together to campaign on local issues and then field candidates for elections.
  • At the 2013 general election, the M5S came from nowhere to become the second most voted for party. Through ups and downs, its poll ratings have stood at around 30% ever since, only just behind the centre-left Democratic Party.

But deciphering the message from the Italian voters will not be easy, despite celebratory claims from Europe’s far right.

  • The fact is that Renzi’s defeat was almost a foregone conclusion give the scale of the opposition he faced, and not just from the opposition but even from within his own Democratic Party and leftwing voters who defied the prime minister for a whole host of reasons. Renzi was fighting a lonely battle. Sadly, he is no gladiator.

Italy is facing a number of big issues that were not technically on the ballot:a migration crisis in which the country feels abandoned by Europe; an unresolved banking crisis; steep unemployment and a debt load of 132% of GDP with no solution in sight.

Renzi has lost. But the Opposition has not won yet.

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Tags | Italian Prime Minister Italy Matteo Renzi Renzi

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