Italy: Renzi’s Referendum Gamble

Published on July 5, 2016

Key Takeaways:

On balance, we still believe Italian Prime Minister Matteo Renzi has better than even chances of winning the upcoming October referendum on the abolition of the Senate, but things are not looking as smooth as a month ago.

Crucial help could come from former Prime Minister Silvio Berlusconi, who still must choose sides but who could flip the balance by throwing the full weight of his media behind Renzi — or against him.

A “Yes” camp defeat would most likely lead to a technical government that would have to approve a new electoral law, before new elections are held. This would be a major blow to the country’s recently found political stability, although a 5-Star win might not translate into a challenge against the EU or Italy’s role in the Eurozone.

July 5, 2016

Italian Prime Minister Matteo Renzi’s choice to put his government and his own political future on the line in the October confirmatory referendum on the abolition of the Senate seemed like a well calculated risk only a few months ago, when the Prime Minister was at the peak of his popularity.

It is starting to look like a bit of a gamble now.

*** While odds of a “Yes” victory are still better than even, the outlook has worsened after a dismal show by Renzi’s party in the recent local elections. Adding to the uncertainty is the scarcity of reliable polls – the latest one puts “No” ahead 54-46 but it’s been commissioned by the “No” camp – and the voters’ lack of knowledge of the issue, as almost 50% of the Italian electorate admitted in a poll to not understand the reform well enough. ***

*** Meanwhile, a revived Silvio Berlusconi, who hasn’t yet decided where to side, could well be the kingmaker given the strength of the media he controls and the still significant share of Forza Italia voters that would follow his advice. ***

*** A referendum defeat by Renzi would lead to a period of extreme political uncertainty, and we understand that a technocratic government could take over, though only to swiftly lead the country to snap elections once a new electoral law is approved. A 5-Star victory would be a clear source of upheaval for markets, however the party has been tempering its anti-EU and anti-euro rhetoric to become an acceptable alternative to Renzi. ***

Shifting Allegiances

The abolition of the Senate, the key feature of the constitutional reform approved on April 12 this year, combined with the new “Italicum” electoral law for the Lower Chamber, has been universally seen by pundits and experts as a way to strengthen the executive power at the expense of the legislature.

The reform does indeed make the Prime Minister’s job much easier and the country more stable, but of course on the other hand it would tie the Parliamentary majority’s fate to the Prime Minister, thus eradicating some of the checks and balances previously a feature of the Italian Parliamentary republic, where power was supposed to lie with the elected representatives rather than with the executive.

Opposition parties such as the 5-Star movement and the Northern League immediately announced they would support a “No” vote in the confirmatory referendum, which will be held in October. They claim the reform was just a disguised attempt at a “coup” by Renzi, at a time when there seemed to be no alternative to him as Prime Minister.

But since then, the political landscape has changed.

The 5-Star movement has done extremely well in the local elections held in June with a two-round electoral system similar to the “Italicum” and its leadership is now intrigued by the idea that the newly approved law could increase its chances to win a national election – if and when it is held.

So right now, while actively campaigning for a “No” vote in the referendum, which would lead to Renzi’s resignation, the 5-star movement is no longer advocating for changes in the electoral law.

Meanwhile, the 5-star candidate in pectore, Luigi Di Maio, is being groomed, his rhetoric smoothed and his attacks on banks, the EU and the euro tempered. Di Maio now effectively acts and talks like a potential prime minister, and he is only 30 years-old, which means Renzi – himself only 41 – would not be able to claim to represent “change.”

But before elections are held, even in the event of a “No” vote and subsequent resignation by Renzi, there will be a relatively long hiatus during which a lot of things can change.

Indeed, in the event that a “No” vote prevails, our sources point to the likelihood of a technical government, led perhaps by a neutral bi-partisan personality (Senate President Pietro Grasso is the name we heard) and tasked with approving a new electoral law that would also work for the Senate and then calling elections.

Berlusconi’s Comeback

But in what has perhaps been the most unexpected twist of events, partly due to Renzi’s weakness, former Prime Minister Silvio Berlusconi has suddenly emerged as a key player in the referendum campaign. In what appears to be a tight race, Berlusconi’s faithful electorate and large media empire could make the difference.

The former Prime Minister and Cavaliere is as torn on the constitutional reform issue as he is on Renzi: for more than a year, after having been sidelined by Renzi’s January 2015 Machiavellian move – the Prime Minister chose then to unite his own PD party behind Sergio Mattarella as a candidate for the Italian Presidency of the Republic instead of discussing a possible shared solution with Berlusconi himself – he has been pretty much out of the game. Since then, Berlusconi has been hostage to the more bellicose wing of his party which had pushed for an alliance with the eurosceptic Northern League.

But things seem to have now changed, as the dovish wing of Forza Italia appears to have retaken control and is now instead promoting a new alliance with Renzi, currently seen as the only possible political guarantor of Berlusconi’s assets.

Berlusconi’s newspaper and TV news channels have been for now very much neutral on the issue of the referendum, refusing to endorse either side until the boss himself makes up his mind.

When push comes to shove, they might prove crucial to determine the outcome, and Renzi’s fate itself.

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