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Italy on the Brink

LONDON – Political instability in Italy is nothing new. But Italian voters’ rejection of constitutional reforms in a referendum has not only led Prime Minister Matteo Renzi to resign; it has dealt another blow to a crisis-ridden European Union. In the near term, Italy’s ongoing banking crisis could flare up again and threaten European stability; in the longer term, Italy may have to leave the eurozone, which would put the single currency itself at risk.

The “No” side was widely expected to win. But the scale of its victory – a whopping 59% of the vote – was shocking, and largely a triumph for anti-establishment forces, particularly the Five Star Movement. The movement, led by the comedian Beppe Grillo, is leading in opinion polls, supports holding a referendum on eurozone membership, and is now demanding an immediate general election.

Most Italian commentators have downplayed the referendum’s significance for the rest of Europe. They argue that a new caretaker government, probably led by the technocratic finance minister, Pier Carlo Padoan, will reform electoral laws to keep the Five Star Movement from power. And even if the Five Star Movement captures a majority in the Italian Parliament’s lower house, it will not have a majority in the Senate, so it cannot form a government, unless it breaks its pledge not to join a coalition. In any case, the argument goes, a eurozone referendum would be hard to deliver, because it would require a constitutional amendment.

All of that may be true, but it misses the big picture. Renzi was the pro-EU establishment’s best – and perhaps last – hope for delivering the growth-enhancing reforms needed to secure Italy’s long-term future in the eurozone. Muddling through with a weak technocratic-led government amounts to waiting for an accident to happen. And, with the far-right Northern League and former Prime Minister Silvio Berlusconi’s Forza Italia also aligned against the euro, an anti-euro government is likely to come to power at some point – perhaps after the next general election, which is due by 2018 (but could be held as early as next spring). Then all bets will be off.