Italy: Renzi to Survive a “No” Vote

Published on October 19, 2016

Key Takeaways

* For all his efforts to reverse the rising tide against him, Italy’s Prime Minister Matteo Renzi appears more than likely at this stage to lose the critical referendum on constitutional reform that is slated for December 4.

* But we believe Renzi will survive a “No” vote, even if he is left badly bruised in the process and is forced to beef up his majority with yet more center-right MPs. We do not believe he will be forced, as is speculated, into a weak caretaker leadership position and early elections in the event of a ”No.”

* Indeed we believe a widened coalition will not even jeopardize Renzi’s efforts to stimulate the economy through greater spending. On the contrary, Renzi may be pushed after defeat to double down on stimulus efforts.

October 19, 2016

As things stand, the odds seem stacked against Prime Minister Matteo Renzi and the “Yes” camp in the Italian referendum on recently approved constitutional reform measures that is planned for December 4.

But that outcome may not be as bad for markets as widely presumed.

Renzi’s Flagging Efforts

On the surface, things do not appear good for Italy’s Prime Minister Matteo Renzi.

Not even a strong media offensive by the Prime Minister himself, and a swiftly approved expansionary budget that stretches the limits of European rules, appears to be helping Renzi and the “Yes” camp regain ground. Indeed, all polls continue to show a “No” vote consistently ahead, even if by a narrow margin.

Renzi has even resorted to what detractors call the “dirty” trick of drafting the referendum question in a way that would clearly favor a “Yes” vote, breaking with the Italian tradition of never actually mentioning the substance of legislation on the the voting card.

Instead, the December 4 ballot explicitly refers to three key aspects of the reform that are overwhelmingly appealing to the average voter: the reduction in the number of Members of Parliament, the elimination of the Senate, and the scrapping of the National Council for Economy and Labor, a truly useless and costly administrative body.

Some further bad news for Renzi has come from former Prime Minister Silvio Berlusconi’s camp, which had been previously divided but is now solidly supporting a “No” vote.

While the lack of support from Berlusconi is mainly a tactical move – from what we understand – intended to force Renzi back to the table to modify the recently approved “Italicum” electoral law, it is bad news for the PM nevertheless (see SGH 7/5/16, “Italy: Renzi’s Referendum Gamble”).

The Fix to Keep Renzi in Power

But even in the event of a “No” vote, Renzi is likely to survive. And he may not even be as weakened as markets assume.

Party officials expect Renzi would in the case of a “No” hand his resignation over to President Sergio Mattarella, only to be re-appointed immediately after.

There would be a price to pay. It remains to be seen, for example, if Renzi is pushed into a reshuffle that would formally include the center-right, and former part Forza Italia party, “ALA” (The Liberal-Popular Alliance).

But for all that, ALA is already for all practical purposes supporting Renzi’s wobbly majority in the Senate, offsetting some of the defections Renzi’s center left Democratic Party’s minority left wing uses from time to time to blackmail its own leader.

And President Sergio Mattarella has signaled privately – and hinted publicly – that he has no intention of dissolving Parliament. The President is fully aware – as is the leadership in the 5Star Movement despite their public statements – that in the event of a snap election the Senate, which would remain in place following a “No” vote, would then have to be re-elected on a purely proportional basis. That would almost certainly produce a similar outcome to 2013, a hung Chamber with no clear majority for any party.

So for all its kicking and screaming, not even the 5Star Movement seems all too keen on pushing for a snap election before a new electoral law is discussed and approved by the Parliament.

On that, we understand, a debate on amending the recently approved “Italicum” electoral law is going to be held regardless of the referendum outcome. But either way, that is likely to take some time, while the “natural” end of the legislature will be coming quite soon, in January of 2018.

When the dust settles, we believe a second Renzi government, even if weakened, will push even harder on the fiscal accelerator, committing at least on paper to more infrastructure spending. Renzi already has for example revived the grand proposals for a bridge from the mainland to Sicily over the Messina strait, dusted off from the Berlusconi days.

And when it comes to further spending, Renzi should get some help from a weakened European Commission in Brussels, as well as from a German Chancellor Angela Merkel who will be busy fighting a tough national election of her own.

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