Blog Post

AEIdeas

Last weekend’s dismal Italian local election results should serve as a reminder that the forthcoming Brexit referendum is not the only European referendum this year that is cause for major concern. Those local election results suggest that this October’s scheduled Italian referendum on constitutional reform could have consequences that could adversely impact the European economic recovery and reignite the European sovereign debt crisis.

Over the weekend, Mateo Renzi’s Democratic Party suffered a major setback in local elections. Specifically, it managed to lose by a wide margin the mayoralties of Rome and Turin to the populist Five Star Party. These election results suggest that the shine has come off the Renzi government and that the public is becoming increasingly restive about Italy’s continued economic stagnation and mismanagement. It has to be of particular concern that the Five Star Party has now become Italy’s main opposition party since it is openly hostile to the notion of Italy’s continued Euro membership.

The last thing that Italy now needs is a period of political instability that could undermine investor confidence in its economy.

The recent local election results do not bode well for October’s referendum on reforming the Italian Senate, since it is all too likely that the Italian opposition parties will convert that referendum to one of a no-confidence vote on the Renzi government. Should Mr. Renzi lose that referendum, his government would almost certainly fall and Italy would be forced to hold early parliamentary elections.

All of this has to be very troubling for Italy’s European partners. After all, Italy is the third largest Eurozone economy and, with more than two trillion USD in public debt, it is the world’s third largest sovereign debt market. Equally troubling is the fact that Italy’s economy remains very fragile and subject to a loss in confidence. Italy’s public debt as a ratio to GDP has now climbed to above 130% and its non-performing loans now constitute over 18% of the banking system’s balance sheet. Meanwhile, its economy still remains some 6% below its 2008 peak and the country keeps flirting with deflation. The last thing that Italy now needs is a period of political instability that could undermine investor confidence in its economy and that could raise questions about its ability to service its debt.

Hopefully, on Thursday voters in the United Kingdom will vote with their heads and not their hearts and choose to remain in Europe. However, such an outcome should not be allowed to breed a sense of complacency among European policymakers about the urgency of reinvigorating the European economy. As the forthcoming Italian referendum should be reminding them, many more European political challenges lie ahead.