Financial Post, 8 December 2016

Rarely does a chance come along to shift a nation’s fortunes by changing its constitution. Italy had that chance and, in the process, could rid itself of an elite and bloated public administration and effectively abolish one branch of government — the Senate — that entrenches delay, waste, and corruption.

But Sunday night, Italy voted “no” overwhelmingly for the status quo. Only two regions of 20 voted for constitutional change. The final count was 60 per cent against change, and 40 per cent in favour.

If any country needs political reform, it’s Italy. Growth has been stagnant for the past 15 years with one of the highest unemployment rates in Europe, at 12 per cent, and a youth unemployment rate of 40 per cent. All this coupled with a staggering national debt of 130 per cent of GDP, while Italian banks carry massive non-performing loans. Real per capita income in Italy has been falling since 2007, the second worse in Europe after Greece. The country now faces a critical flight of capital: nearly 20 per cent of Italy’s GDP is moving out, given the political and economic uncertainty.

The no vote now shifts political power to parties such as the extreme-left Five Star Movement (M5S), and right-wing parties of the Northern League and Silvio Berlusconi’s Forza Italia. Matteo Renzi took the blame and immediately stepped down as prime minister without remorse.

Since taking power two years ago, Renzi attempted to get the economy moving by making it easier to hire younger workers and easing some protections for older workers. He even raised, though moderately, the retirement age to reduce social spending. Renzi ran out of time struggling with an economy that suffered under a heavy debt load left by Berlusconi and a constitution incapable of dealing with a stagnant economy. Tinkering at the edges of the economy wasn’t enough. Real change would only come with constitutional reform, and that meant getting a mandate from the people.

The question is, why did Italy blow a chance for real change?

Some blame the anti-establishment contagion that started with Brexit and the U.S. election of Donald Trump, and might now be moving its way across Europe. Others saw the referendum as a crass power grab by Renzi. But a good part of the “no” vote was not only against Renzi, whose popularity took a serious fall over the past year, but against the EU, with Renzi suffering the consequences. Renzi had tried and failed to get the European Commission and the European Central Bank to bail out his economy and his banks. Instead, the EU left Italy to handle 170,000 refugees and migrants from North Africa.

Italy passed on Renzi’s version, but change will come just the same. The dangers are just beginning. With the defeat of the “yes” side, power now shifts to populist leaders such as the wacky, unpredictable leader of M5S Beppe Grillo who wants to dump the euro and return the lira. EU membership may have its benefits, but maintaining the euro has prevented Italy from devaluing its currency to regain a modicum of competitiveness. Coupled with the limits the EU puts on its members ability to adjust interest rates to discourage capital flight, and their spending, it seems as if “the union and common currency were made for good times, not for bad ones” as described by Philipp Ther, a professor at the University of Vienna. Italy is the third-largest economy in the Eurozone; if it gives up the euro, that could easily put an end to the EU as we know it. What happens next in Italy has the potential to dwarf the impact that Brexit has had on Britain, Europe and international markets.

Leaping into the unknown goes against the Italians’ nature as a cautious nation, known for a history of political cunning handed down from the great Florentine political thinkers Francesco Guicciardini and Niccolo Machiavelli. Renzi took a gamble without calculating the consequences of his actions. Now his countrymen have doubled down with their own risky bet. Italy will suffer the consequences of their audacity. So will Europe and the world.