In the period following the British vote to leave the European Union, Italian prime minister Matteo Renzi was one of the first EU figures to offer a positive vision for Europe. He suggested EU leaders should gather in Rome on March 25th, 2017, to mark the 60th anniversary of the signing of the Treaty of Rome, the founding document of the European community.
Renzi’s defeat in Sunday’s referendum on constitutional change means that this celebration will take place with someone else at the helm. Instead of an affirmative symbol of European unity, the March 25th gathering risks becoming a symbol of fragmentation and instability, particularly if political wrangling about a new government is still ongoing.
Senior EU figures were quick to point out that Sunday’s referendum was not a ballot on the European Union, but an internal constitutional matter. To this extent they are correct.
A changing of the guard in Italian politics does not have the same import as a similar scenario in France and Germany. Unlike most European countries, Italy is accustomed to political change, having had more than 60 prime ministers since 1945. This was also reflected in markets, which had priced in a Renzi resignation.
But it is the context of the referendum that makes its outcome potentially dangerous for Europe.
Third-largest economy
Italy's banks are struggling with €360 billion worth of non-performing loans, equal to more than one-fifth of gross domestic product. While the attempts by the EU institutions and the European Central Bank to avert a bailout of the euro zone's third-largest economy at the height of the euro zone crisis were successful, ultimately it meant Italy's financial system escaped the kind of financial clean-up that others such as Ireland faced.
The country’s anaemic growth levels, huge debt-to-GDP ratio, as well as the fact that retail investors hold about one-third of bank bonds, have also compounded problems.
Further, the referendum coincided with a particularly sensitive capital-raising exercise for Monte dei Paschi di Siena, whereby the bank was asking investors to swap debt for equity. The referendum result looks to have scuppered the plan.
The banking problem also has a specific EU dimension.
The Italian government has been locked in debate with the European Commission about securing an exemption from new "bail-in" rules introduced in the wake of the crisis, effectively prohibiting state bailouts of banks, and instead obliging bondholders, including unsecured depositors, to shoulder the burden. The issue is particularly sensitive in Italy given the relatively high level of bank debt ownership by regular savers.
Tensions between Rome and Brussels don’t end there.
Budget targets
Renzi has been a thorn in the side of his French and German counterparts over the past two years, one of the few senior politicians willing to question Brussels’ policy of austerity. Italy’s persistent failure to meet annual budget targets set by the European Commission has been a recurring source of tension, with Renzi criticising the EU rules as too inflexible and prescriptive.
He is known for his feisty personality, and multiple officials have spoken of his “petulance” at EU summits, when he regularly clashed with counterparts. In February, he said of the EU: “We can’t continue with a technocracy of people who no longer relate to people.”
Those tensions appeared to spill into the open in September, when he did not attend a planned joint press conference with the German and French leaders at the Bratislava summit of EU leaders.
With the resignation of Renzi, Europe has lost one of its strongest champions of change in European economic policy, something that appeared to be recognised last month when the commission called for a 0.5 per cent fiscal expansion for the euro zone. Ironically, euro zone finance ministers were holding their first discussion on the proposal for a positive fiscal stance on Monday in Brussels as news of the Italian referendum result was reverberating.
Despite irritation by some EU leaders at Renzi's personal style, and frustration at Italy's dovish attitude towards Russia at a time when member states in the east are pushing to renew sanctions on Moscow, the former mayor of Florence was a pro-EU force, and a powerful centre-left voice at the EU table.
Eurosceptic fears
Renzi's departure comes ahead of national elections in the Netherlands, France and Germany next year. All four countries are founding members of the European Union. With Beppe Grillo's Five Star Movement party polling strongly, there are obvious fears the election of a Eurosceptic party could herald a call for an "Italexit". But Italy, like France, is not Britain.
Even disregarding the fact that a referendum on EU membership would necessitate constitutional change, support for the union, though ebbing, is still relatively strong.
Whatever the rights and wrongs of Renzi’s referendum question, Italy’s biggest tragedy is that it has failed to restructure its system of governance once again. By not doing so, the country risks being trapped in a cycle of low growth, high debt and fragile banks for the foreseeable future.