The Italian Referendum Could Result In The Death Of The Euro

Tyler Durden's picture

Submitted by John Mauldin via,

An important election is coming up, and I’m not talking about the US presidential election. The upcoming referendum in Italy this fall will have a major macroeconomic impact on the world. But hardly anyone outside of Italy is paying much attention to it - yet.


I’ve been saying for some time in interviews around the country that the referendum in Italy could have even more of an impact than the Brexit vote did in the UK. And like the Brexit vote, it is rife with emotion and political turmoil, making the outcome too close to call.


The current prime minister, Matteo Renzi, has basically bet his career on this referendum, which would allow him to enact much-needed reforms. In fact, they’re the same reforms that I have written about in my letters over the past five years and that I talked about in my previous two books.


Italy has about as sclerotic a governmental process as any country in Europe. And that is saying something. There is no end to corruption and crony politics. Each faction wants to keep the status quo and keep its perks but wants everybody else to give theirs up. If you’re a voter in Italy, your frustration is understandable.


This vote in Italy needs to go on your economic radar screen. If the “no” vote wins, Renzi has promised to resign. This would throw Italy into a political crisis. Then there would be a real potential to elect parties that would call for a vote on whether to stay in the European Union. And at this point, it is not clear what the Italians would decide to do.


Know this: The European Monetary Union does not work very well, if at all, without Italy. A “no” vote would be the death knell of the euro.


Nick Andrews, who writes for my friends at Gavekal, gives an excellent summary of the situation in Italy. And, it is worth every bit of your attention.

Renzi’s Great Gamble

By Nick Andrews and Stefano Capacci

Prime ministers come and go in Italy—four since the financial crisis—but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms. If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself. As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis.

Policy no man’s land

Italy’s fundamental problem is that it’s stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house—the Senate and the Chamber of Deputies—wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards as Italy’s real GDP per capita has slumped to a 20-year low.

Such a below-par economic performance has led to a build-up of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. In turn, this bad loan overhang has eroded the ability of the banking sector to extend new credit to the thousands of small businesses which are the engine of Italy’s economy and which normally power employment growth. The result is stagnation.

To stand any chance of escaping this low growth trap, Italy needs to enact wholesale structural reforms to enhance its competitiveness relative to its eurozone neighbors. Notably, it needs to make the labor market more flexible to encourage job creation, it needs to lower the barriers to entry that protect much of the country’s service sector, it needs to overhaul a judicial system so sclerotic that bankruptcy proceedings can last 10 years or more, and it needs to restructure its fragmented and dysfunctional banking system.

The prescription might be clear, but Italy’s political system makes enacting reform all but impossible. Renzi has already tried to overhaul Italy’s labor market by attempting to dismantle the generous protections that make it difficult and expensive for companies to dismiss staff, and which therefore encourage businesses to hire only temporary workers, heightening economic insecurity among the young.

But Renzi’s attempt ran into bruising opposition from Italy’s powerful and well-subscribed trade unions. The results were a watered-down reform package that entitles existing permanent staff to a near-guarantee of lifetime employment, and a severe dent in Renzi’s popularity from which he is yet to recover. It’s a familiar story in Italy. Entrenched interests—whether represented by local and regional political leaders, unions, protected professions, or established private sector companies—exert enormous influence over the political process. All profit from the status quo, which promises they will continue to benefit from special protections and payouts. And because of the equal balance of power in Italy’s parliament, which means the Senate can block government legislation indefinitely, the consequence is political—and economic—stagnation.

Bloated and wasteful

Renzi’s referendum aims to change that. The prime minister is seeking popular approval for constitutional reforms that promise to cut the size of the upper house from 315 to 100 senators. Under his proposals, senators will no longer be directly elected, but will instead be chosen by regional councils, nominated by the mayors of big cities, or—in the case of five—be appointed by the Italian president. The reform will cut the costs of the notoriously bloated and wasteful upper house, where senators have traditionally enjoyed lavish expenses and generous pensions. Most importantly, it will downgrade the political power of the Senate so that it will no longer be able to obstruct government legislation entirely, but only to propose amendments that will be adopted at the discretion of the lower house (although the Senate will retain a say on constitutional matters, including the ratification of European Union Treaties). The objective is to increase the executive power of the government, and to tackle entrenched interests with additional measures that allow for new laws to facilitate popular referendums and to promote citizen participation in the political process.   

Unlikely alliance

However, powerful forces are arrayed against Renzi, and a “Yes” vote is far from assured. The proposed reforms have attracted opposition from establishment voices who benefit from the current arrangements. They have also drawn fire from constitutional lawyers and anti-establishment parties, including the populist 5-Star Movement, which argues the 50% simple majority needed to win the referendum is too low for constitutional changes that promise a concentration of political power unprecedented since the formation of the Italian republic in 1946.

Perhaps more importantly, Renzi’s pledge to resign in the event of a “No” victory has raised the possibility of a protest vote against the prime minister himself—the third unelected head of government in succession—from a broad cohort of the electorate, which is thoroughly disillusioned with Italian politics. Increasingly disgruntled, these voters are sick of the corruption and self-interest of politicians, and fed up with painfully austere policies that they believe to be dictated from Brussels and Berlin, and which they hold responsible for Italy’s poor economic performance.

The chances of a “Yes” vote in the referendum have not been improved by the slump in Renzi’s personal popularity following last year’s attempt to reform the labor market, and a series of small bank restructurings that saw retail savers “bailed-in”—forced to take losses—under new European Union banking regulations. From 40% after Renzi entered office two years ago with optimistic promises of reform, the approval rating of the prime minister’s PD party has fallen to little better than 30% today, much the same as that of the opposition 5-Star Movement. As a result, with two months to go the referendum is too close to call. Opinion polls indicate the “Yes” and “No” camps are running roughly equal, with a large proportion of voters still undecided.

If Renzi loses the referendum, not only will Italy remain in policy limbo, but it is highly likely his subsequent resignation will trigger a parliamentary election. Under new election laws passed last year, if a party fails to win 40% in the first round of voting, the top two parties go through to a second round. The latest opinion polls put Renzi’s governing PD party on 31% and the 5-Star Movement on 29%, with the next two largest parties—Silvio Berlusconi’s Forza Italia and the anti-establishment Northern League—level pegging on around 13%.

In recent years, Renzi’s PD government has represented the best hope for structural reform and economic modernization. But even if the PD party were to win a post-referendum election, there is a risk that, following Renzi’s resignation, the left wing of the party would wrest back control from the reformist center-right faction, damping hopes for further restructuring. Such a swing to the left would hardly be unique to Italy. In the UK, the militant left has captured the leadership of the main opposition Labour Party. In Spain, Podemos has split the left wing vote, and in France the ruling Socialists have come under pressure in the polls from the radical and Euroskeptic Left Party led by Jean-Luc Mélenchon.

At the moment, an election victory for the 5-Star Movement, which identifies as neither left nor right, appears at least as probable as a second round win for the PD. The Movement has already scored significant victories in mayoral elections in Rome and Turin and enjoys increasing support across the country. Its broad stance is anti-establishment and in favor of direct participatory democracy rather than representative democracy, which it regards—with some justification in Italy—as an invitation to corruption. Beyond that, however, its platform is so vague that it is hard to pinpoint any concrete policies, except its call for a referendum on Italy’s membership of Europe’s single currency.

Leadership vacuum

Perhaps the biggest problem for 5-Star, however, is that it has no clear leader. Its founder and leading voice, Beppe Grillo, was found guilty of involuntary manslaughter in 1980 following a fatal road traffic accident, and so cannot run for public office under Movement rules barring candidates with criminal records. Without Grillo, the parliamentary party would be leaderless, meaning 5-Star has no obvious prime ministerial candidate even should it secure a majority in the election.

All this means that the possibility of a “No” vote in Italy’s constitutional referendum come October or November is the biggest clear and present danger to the euro’s survival. Both 5-Star and the Northern League are promising a plebiscite on euro membership should they come to power in a post-referendum election. That does not mean a vote on Italy’s eurozone membership would lead directly to its exit—many likely “No” voters in this year’s constitutional referendum favor continued euro membership. However, a “No” vote come October would effectively be a vote against the structural reforms needed to ensure Italy’s economic growth and prosperity within the eurozone.

In other words, in the event of a “No” vote in October, the only economic choice for Italy would be between continued stagnation, or a return to the old economic model of successive devaluations. The latter course would naturally mean exiting the eurozone anyway. But even if Italy were to take that path, it would hardly be a less painful way to restore the economy to health. Whether inside or outside the single currency, Italy still needs structural reform to ensure future growth. The only potential benefit to leaving the eurozone would be that deep devaluation of a reconstituted lira could help to ease some of the transitional pain (although it is probable the palliative effect would be more than offset by the additional economic and financial damage wreaked by an exit).

Europe in microcosm

Clearly investors should be concerned. Italy is the third biggest economy in the monetary union and one of its core members. Its departure would surely hasten the break-up of the whole euro project. What’s more, the political and economic tensions within Italy ahead of October’s referendum mirror those at work across the eurozone as a whole. In Italy, the wealthy north makes up the industrial heartland which drives the economy, while the south is underdeveloped and poor. There is little enthusiasm for structural reforms, and throughout the country, populist movements—which promise to tear down the self-serving political establishment—are rapidly gaining ground.

Italy is the wider eurozone in microcosm. In the EU as a whole, progress towards creating the political and economic institutions that could ensure the success of the single currency project have been comprehensively obstructed by narrow—but deeply entrenched—national interests. This failure to advance, and the economic hardships and sense of disempowerment that have resulted, has fueled the rise of populist political parties from Greece to Finland—parties that are challenging an increasingly distrusted political elite and questioning not just the status quo, but the whole European project. If Renzi wins come October, the eurozone has fresh hope. But if he fails, Italy fails—and very likely the eurozone fails too.

Each week in Outside the Box, John Mauldin highlights a thoughtful, provocative essay from a fellow analyst or economic expert. Some will inspire you. Some will make you uncomfortable. All will challenge you to think outside the box.

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bjax's picture

And it's being orchestrated by Jim Messina, same guy who works for Hillary Clinton, and was the campaign manager for the UK's conservative party, oh and Obama. I hope the Italians can see through the bull shit and vote to get out. Since when do european governements need to use American campaign managers, making sure that the America gets what it wants?

Infocat's picture

The International (((Elites))) we have are buying Politicians, Hillary is nothing but a puppet, so are all central bankers. Big Money likes the idea of a globalist one world government and this is what they are working towards. Like all Utopias it is going to break apart, the people of the world are simply too different from each other.

ebear's picture

"Big Money likes the idea of a globalist one world government and this is what they are working towards."

OK, this is the part I don't understand, which is why I tend to resist this notion of a globalist conspiracy (not that it doesn't exist in some form, but that it's widely supported by Big Money)

Seems to me the Big Money game today is basically a form of arbitrage - i.e. exploiting the difference between wages, social and environmental standards, taxation and so forth, with China being the leading example. Additionally, they make money off the differential between currencies, and govt. debt that arises from these imbalances (carry trades), plus insurance (derivatives) related to same.

So, where's the advantage in having a single set of global standards (however weak) built around a single global currency that effectively eliminates that arbitrage?  How do you make stuff cheaply in China and sell it for more in the USA if these differences disappear?

Seems to me Big Money has more of a stake in maintaining these differences than removing them.  What am I missing here?

Cycle's picture

Because they are a client state of the US deep state. Any move towards independence is countered by a color revolution orchestrated by same. If the color revolution does not work, then other means may be used.  See Ukraine for an example.

jeff montanye's picture

nice info bjax.  here's a relatively poorly translated story from italy that clearly backs your comment up:

that messina worked for david cameron as well as obama seems telling, imo.

of the bunch renzi seems most appealing (and i know least about him, funny how that works).

Sandmann's picture

Italy's problem was that the USA kept the Christian Democrats in power for so long and like the LDP in Japan it was riddled with corruption and inertia embodied in such persons as Andreotti who rid himself of Aldo Moro.

Once these Consigliere figureheads are removed the voters see just what has been crawling around and react by splintering the voter bloc. The same is happening in Germany where 4 Sept will see Merkel's party fall to 3rd place in the very state her constituency is located and also the SPD family Minister who funds the Antifa "Fascist" groups burning cars in Berlin and Leipzig and beating up rival politicians.

Italy as a founder member of the EEC has been destroyed by the Euro and de-industrialised. It was a centre of machine-tool manufacture to rival Germany and highly specialised. The destruction of Libya by UK and France with US connivance has endangered Italy, the country that built Libya before WW2

X_in_Sweden's picture
X_in_Sweden (not verified) SteelRust Sep 2, 2016 3:57 AM

C'est vrai.

Déjà view's picture

Take Greece with you...both NEVER qualified for € critiera.

4freedom78's picture

Who fucking care to the euro "qualification" anymore

Sandmann's picture

nor did France and Germany which is why they relaxed the rules and the US then pressured them to admit Greece

Déjà view's picture

2002 D/F were certainly under total debt/GDP ratio 60% as upper limit...Greece & Italy were nearly DOUBLE that limit before 2002. Politics and promises to reduce those debt levels allowed that Trojan Horse through gate...Denmark and Sweden knew better that was not going to happen.

X_in_Sweden's picture
X_in_Sweden (not verified) Sandmann Sep 2, 2016 4:00 AM

Always nice to get a proper historical reconstruction with some details.

Vielen Danke Sandmann.

;) X-

Anarchy 99's picture

@ sandman:


brilliantly stated!!!  +1000

GoldenDonuts's picture

geur - if you believe that the euro cannot last.  sells euro buys gold


To da MOON!

jeff montanye's picture

bank bail ins don't seem to me to support holding much assets beyond transaction needs in the local fiat currency.  one can argue the alternatives but one sector does seem undervalued relative to the others.  and in one form at least, not vulnerable to counter party risk.

crakerman's picture

monte dei paschi is fine! - J. Cramer 

Quantum Bunk's picture

All closet dollar bull BS


Euro will be worth double the dollar before it ever sees par.

Quantum Bunk's picture

This is all rank keynesian nonsense. Yes the Euro system does not work good within the 45 year old \Bretton woods system. It was built for a post Bretton Woods world which cant be far away considering this is the oldest monetary order since the 1800's


Go do some more cocaine Mauldin you fool.

GoldenDonuts's picture

in what world does the euro work?  The one where germany militarily rolls over all of the other countries in the euro, takes over their central banks, and governments.  That is the world in which the Euro works.   29 different countries issueing bonds with 29 central banks, 29 different tax systems, and 29 different cultures does not make for a monetary system that lasts any length of time.

Quantum Bunk's picture

The PIIGS have all reversed completely,their current account deficits with minimal damage to the value of the Euro. Thats how it works.

It is a thing of beauty from an Austrain view


One day the US will also erase its current account deficit. And the dollar will take the brunt of it.

jeff montanye's picture

first off, i agree with your comment on the dollar.

however linking to a subscription only source is not helpful.  and the euro project is still vulnerable to the critique above: only a very few countries have flourished under the euro: germany, austria, finland.  the fact that current account deficits may be reduced is not the end all of well being from the point of view of the natives of these less developed countries.

imo the eu makes the most sense as a free trade zone with labor mobility within.  the leadership of the eu is not worthy to rule the eu politically and, if you will, fiscally.

Sandmann's picture

German could not militarily do anything. Economically it is at the end. Its bridges are collapsing and infrastructure crumbling. New German factories are being built in Russia not Germany. Germany is a giant Care Home for the Decrepit Old and Ignorant Lazy. It is a Socialist Republic

Sandmann's picture

Bretton Woods never worked because the US blocked tariffs on Japanese and German exports which the Bretton Woods system required for persistent surpluses due to undervalued currencies

SteelRust's picture

"If Renzi wins come October, the eurozone has fresh hope. But if he fails, Italy fails—and very likely the eurozone fails too."




Crawl under a rock and die, you moronic zio-Sorosian puppet! 



jeff montanye's picture

fair enough but the reforms renzi wants seem to have some merit.  too bad they are held hostage to the euro project which, imo, is not workable long term and exaggerates the problems of the deflationary depression that continues to creep over the world since the dawn of this century.


Markinkus's picture

It was and it still is a big aim for US to have a "common" foreign and security policy in place with Italy. Did you every visit Napoli - there is an important military base.

Ivanof's picture

This is total bullshit!! The idea that the economic problems in Italy are related with its Constitution is totally insane. We had an international EU inspired "coup" in 2011 in which Mario Monti was appointed PM. Then to tackle down the debt, or so they sold it this way, he implemented drakonian fiscal msures expecially in the house sector with a new tax on first home and a more bigger on the second one. Italians were always big saver and they always in uncertain time put money in the house sector... but with this tax move they lost the small confidence that was remaining. Last but non least important in the same time Gheddafi Libia was in chaos and the financial consequences were important as ENI and Unicredit were deeply linked with Libia. BTW Renzi retracted his resignation with a NO vote in the referendum.... but we sadly live in a world were some guys word don't worth shit

jeff montanye's picture

thank you so much for local knowledge.  obviously there is controversy but it is good in any event to know some details.

capitallosses's picture

I'm ordering spaghetti for lunch tomorrow. I will try to carefully unravel each noodle and ingest them individually. If I am successful, I will vote for success for Italy's reforms. If not, I'd say it is unfixable. 

flowerson's picture

Mauldin, it is clear that you don't know what you are talking about. I will vote NO! Better no reform than a fake one. 

Yabadaba's picture

I'm from Italy anv support Renzi. I think that not so many things are going to change if No wins (I'll vote Yes and think Yes will win). From about the beginning of July Renzi is saying it was an error to personalize the referendum and that he will not resign if No wins.

So we'll vote at the beginning of 2018. Renzi's party is going to gain about 1/3 of the votes, 5 stars movement (Grillo) after gaining the government of Rome has big problems, I think they'll gain stg like 28%. The right oriented electors (1/3 of the votes) are divided in two, about 16% is on positions similar to Front National in France, 16% are governative votes. So Renzi will govern with 33% of people directly voting him plus 16% of right oriented electors plus 5% of other center and left oriented parties.

If Yes wins the big problem could be to have a very uncertain ballot between Renzi and Grillo. But I think that Renzi will get the first position and right parties (if coalized) will get the second. In that case PD (Renzi's party) will win with no problem.

nevenbridge's picture

i am from italy, me, my family, my friends, my town will vote NO. Have you read the reform? It is shit, a 8 years old child could write it better. It greatly represents the fucking bad side of italy, that big chunk of italian idiots

Déjà view's picture

NO vote bye bye Liga Norte en Italia and Süd Tirol who wishes to return to their historic homeland Tirol, Austria.

East Indian's picture

This fellow Renzi looks like the architypal hatchetman for the super-rich. Unelected, tries to concentrate powers into his hand, promises "efificiency"...


nevenbridge's picture

it is the bad side of italy, i realy loved my country, today i hate it. Italians are dead. Italy is no more. If things are going to change italy will require something like 50 years to recovers, 2-3 generations of idiots must be purged first but meanwhile i think that italians as a race, ethnicity will become extinct, we are unable to reproduce, we dont make children. We are losing our skills because all entrepreneurs are going away, our politicians just import incompentent tribal africans with absolutely no competence, real taxation at 70%, sometime going till 85%, fiscal hell, we have fiscal police that try everything to make companies go bankrupt. Hell, it's HELL on earth

sinbad2's picture

"Under his proposals, senators will no longer be directly elected, but will instead be chosen by regional councils, nominated by the mayors of big cities, or—in the case of five—be appointed by the Italian president."


Will the President be called el Duche?



Sandmann's picture

Surely the US will repeal the 17th Amendment so The Atlantic Council and Trilateral Commission can nominate Senators ?

Arrest Hillary's picture

Italy is like the average ZH commenter .... they actually have a gold stash ?

nevenbridge's picture

theoretically 2450 tons of gold but a third is at the FED so it should be considered lost i guess

RattieNomNom's picture


unklemunky's picture

Europe is like a spoiled kid that never had to work for anything and his parents just paid his way. The US, via a few intense bombing campaigns in the last century or so have provided free cover to Europe under the promise that there will be no fighting with your I mean, no bombing each other because we said so, and most importantly, if there will be any bombing of anyone, it will be us doing the bombing....because, remember, you idiots have been trying to kill each other for millennia and that's not gonna happen in our house. Besides, you suck at it. So, we let you have bombs without any boom boom in them that you can use for your missile parades. Rest assured, the one thing not made in china are bombs made in the USA......because of currency dontcha know. So meanwhile, you all get to fight over who gets the toys, but dont fuck up and make us come up there and blow you fuckers off the planet. Because we said so. Now get back to being gay, which is europes job.

Anarchy 99's picture

funny....but pretty accurate, maybe not the gay part (not totally, except the brits of course)

ebear's picture

deleted - incorrectly placed. (see below)

PontifexMaximus's picture

An American, with all respect, neva, eva can write about Italy. Everyone knows, italy is broke, but who cares? draghi? renzi, la merkel? the french nonvaleur, forget it. it will be business as usual: 5' before the deadline, the rabbit out know the game, seen with MPS and the stress test. who cares? Mauldin, tell me, who will be US pres.!