The impact of Italy’s “No” vote is likely to be contained

The “No” vote in yesterday’s referendum was expected by most observers. But its consequences are likely to be less dramatic than many feared. While it is tempting to draw parallels between the Italian vote, the UK’s vote to leave the EU, and the election of Donald Trump, this was not a revolt against globalisation and metropolitan elites. In Italy’s case, the elite was split in two: opposition to the constitutional changes proposed by Prime Minister Matteo Renzi did not only come from the populist Five Star Movement and the far right Northern League, but also from mainstream political figures, including many from Renzi’s own Democratic Party, academics and former constitutional court judges.

Rather than a revolt, the vote marks a rejection of controversial constitutional changes, with shades of a protest vote towards a government that has been in power for over two years. The vote should not be seen as a repudiation of economic reform. The government had overstated the economic dimension of the constitutional changes, which in themselves did nothing to address Italy’s shortcomings, such as its low productivity, rigid labour market, inefficient public administration and lengthy judicial proceedings.

Despite Renzi’s resignation, the spill over from the vote is likely to be less severe than international observers fear. Of course, a degree of market volatility can be expected in the short term following the result. Yields on Italian government debt will probably rise slightly, and bank shares will likely fall. But the ECB will step in to make sure yields on Italian bonds do not rise too far. Italy’s banks will see shares fall and may find it harder to find capital for their recapitalisation needs as investors wait on political developments. But if it becomes clear that Italy’s underlying political stability has not been affected the banks are unlikely to be compromised and volatility will likely be contained.

And political stability is unlikely to be affected. Renzi’s resignation does not automatically lead to new elections. Instead, the Italian president Sergio Mattarella would first explore options for a new government. He will likely give the mandate to form a new government to a respected political figure such as the economics minister Pier Carlo Padoan.

There are two reasons why the relatively quick formation of a new government seems likely:

First, appetite for holding elections now is limited, because of the prospect of a strong showing by the Five Star Movement and the Northern League, which would seek to capitalise on the referendum result.

Second, there is cross party consensus that it would be inappropriate to vote with the current electoral law for the lower house, which was designed under the assumption that the referendum’s constitutional changes would be approved. Moreover, voting with the current law is unlikely to lead to a winner, as the voting system would be different in the lower house and the Senate. The law is also under consideration by the constitutional court, and it would be inappropriate to use it to vote before the verdict.

A new government will face the same challenges as those Renzi would have faced had he won the referendum. It will continue to govern much in the same way as he did, pursuing the narrow path of incremental economic reform and steering the country towards new elections in late 2017 or 2018.

Past the next election, Italy’s political and economic stability will depend on developments at the European level as much as on domestic politics. However, the idea of a takeover by the Five Star Movement is far-fetched. Reform of the electoral law will likely lead to a more proportional system that will make it harder for any single party to form a government. This will lead to the continuation of coalition governments, which the Five Star Movement refuses to take part in.