Italy: After the Referendum

Published on November 17, 2016

With just little more than two weeks to go before the December 4 Italian constitutional referendum, polls continue to ominously point to a “No” vote on the proposed reforms, and a defeat for Prime Minister Matteo Renzi.

*** A “No” vote will surely be a negative event for Italian markets, but we do not believe it will lead to a snap election, and our understanding continues to be that Renzi, even with a No, intends to stay on as Prime Minister, so long as he is not relegated to the role of a “caretaker PM.” ***

** Renzi may, therefore, leave office in the event of a particularly bad defeat – where he would “re-dedicate” himself to the Democratic Party (PD) and gear up for the 2018 elections. In that case PD secretary Dario Franceschini or Minister for Infrastructure Graziano Del Rio have been floated as possible “caretaker” Prime Ministers. But even there, both are staunch Renzi supporters who would be expected to keep the seat warm for their boss while he renegotiates the Italicum electoral law with former Prime Minister Silvio Berlusconi. ***

*** And against all consensus and polls, we believe there is even still a small – but not insignificant – chance Renzi might end up beating the odds, and pulling a last minute surprise Yes vote. That could be delivered by Italians living abroad, who already gave the PD a majority in the Lower Chamber in the January 2013 elections and are overwhelmingly pro-Renzi, and by a traditionally low participation rate in the south of the country where the “No” side prevails in the polls. ***

In the unlikely, but not impossible, event of a surprise “Yes” vote, Renzi could call a snap election under the recently approved “Italicum” electoral law with its majority prize, and consolidate his power.

Margin will Matter

Renzi and his surrogates have been campaigning hard for the past few weeks, but their efforts appear to be yielding little result with the electorate, and if anything, previously undecided voters seem to be moving towards the “No” camp in growing numbers.

Renzi has been very cagey about what might happen in the event of a “No” vote, and so has the majority of the PD leadership. There appears to be enormous fear among Renzi’s closest allies that the slightest hints of potential post referendum scenarios could in and of themselves influence the outcome of the vote.

But the key point to understanding the aftermath of a “No” vote is that Renzi intends to remain fully in control of the reins of power. But he will seek to stay on only if he has a “full” mandate, and will not accept a role of “caretaker,” under which he believes his party minority, as well as part of the opposition, could plot to “slow-roast” him.

If he doesn’t retain full powers as Prime Minister, Renzi has threatened to instead go back to his original job as secretary of the PD, where he can settle scores with the party’s internal opposition and prepare for the 2018 elections, and let another caretaker Prime Minister take the blame for lackluster growth, high unemployment, and the possible aftershock of key votes in other EU countries such as France and the Netherlands.

While cynical, that would only follow recent precedent, as when Berlusconi pushed deputy Angelino Alfano in 2012 as a “face” of the party to support former Prime Minister Mario Monti, only to resurface in December of that year to pull the plug on Monti, and run a campaign that forced Bersani’s PD – the overwhelming favorite before the elections – to enter into coalition government with his Forza Italia.

Ultimately, the decision to stay or go might come down to the size of the loss: if “No” prevails by a wide margin, Renzi will be more likely to take a step back and let someone else take charge.

In that instance the key power broker within the PD will be a faction called “Area-Dem,” which has given Renzi prominent appointees such as Defense Minister Roberta Pinotti and EU Foreign Affairs High Representative Federica Mogherini.

The Area-Dem faction was also incidentally key in helping secure Renzi his primary victory in 2013, after switching its endorsement from Bersani to the current Prime Minister.

Speculation within the PD party over potential contenders for caretaker PM centers around former party secretary Dario Franceschini, Area-Dem’s most prominent member, who is a Christian-Democrat with many friends in the “right places,” including with Renzi’s current center-right allies.

Another name being floated is current Minister for Infrastructure and Transport Graziano Del Rio, who is even closer to Renzi than Franceschini, and who has been the Prime Minister’s shadow for the past year and half, helping him navigate the functioning of the state machine.

The Unthinkable Upset

If Renzi were to pull out the unthinkable with a Yes vote, there would be little standing in his path to consolidate power further.

Rather than going back to the drawing board to redesign the electoral law as he recently promised the PD minority and Berlusconi, we believe he could be tempted to “flip the table” and call a snap election under the newly approved Italicum electoral law.

The Italicum law allows party leaders to appoint the top one hundred candidates who they believe have the best shot at getting elected, and favors a strong degree of party control over all elected officials. That means Renzi would be able to stuff the lists with candidates faithful to him, and decisively consolidate his grip on power.

In the meantime, Renzi is doing everything in his power to attract the populist vote in pushing the boundaries of his anti-European rhetoric to levels not seen since the tumultuous Berlusconi days.

In short order, Renzi has proceeded to violate once again EU budget rules (see SGH 10/19/16, “Italy: Renzi to Survive a ‘No’ Vote”), and yesterday threatened to veto the EU budget in a spat on immigration with the EU’s eastern bloc.

He has even added some pointed symbolism to his protests in removing the EU flag from the background of his press conferences in favor of a field of Italian flags, a gesture that has attracted compliments from none other than France’s National Front leader, Marine Le Pen.

And Renzi has been campaigning not just around the country, but also overseas, where the vote could in theory be decided by the almost three million Italian voters that reside outside of the country who have not been polled.

The expat community has always been a strong bastion of the PD, handing the party a majority in the Chamber of Deputies in 2013. It usually has a lower turnout, however, than the domestic vote, even as unofficial polls currently estimate their “Yes” vote beating the “Nos” by a whopping 80-20.

That in and of itself would not be enough to overturn the domestic No majority that is being reflected in the polls. For that, Renzi will have to count also on an even higher than usual traditional degree of abstention in the south of the country, where the “No” vote is currently polling at higher rates.

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