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Key elements of the Italian referendum


The constitutional reform has three components: a change to the Electoral Law of the Chamber of Deputies to introduce a strong majority framework (a Law already in force and unaffected by the referendum), a territorial reform strengthening the powers of the State, and a reform of the Senate which would reduce the number of senators from 321 to 100, no longer elected directly but by regional councillors.

The stakes of the referendum are high. Political stability is extremely important for a country that must contend with many challenges and will have to take large-scale structural measures in the years to come. A victory for the "no” side could trigger Matteo Renzi's resignation and begin a new period of political instability. However, even if this occurs, there is unlikely to be a large-scale impact on Italian bonds given the steady pace of the ECB's asset purchases.



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Why is a referendum being held in Italy?

The new Constitution was voted on by both chambers: 20 January 2016 in the Senate, and 12 April 2016 in the Chamber of Deputies. However, a two-thirds majority was not reached. Under Article 138 of the current Constitution, a referendum must now be held to approve the new Constitution. 

What does the reform of the Italian constitution stipulate? It is the broadest reform since the monarchy abolition. It stipulates:

1. A new Electoral Law for Deputies: known colloquially as Italicum, which entered into force on 1 July 2016. The electoral law voted in by the Chambers in May 2015 retains proportional representation, but also introduces a second round of voting. All parties participate in the first round of the election. Those who receive at least 3% of votes will be represented in the Chamber of Deputies. The second round is held if none of the parties gets 40% of the votes in the first round. In this case, the two parties that got the most votes face off. The party that wins the first round with at least 40% of votes, or that wins in the second round, automatically receives 54% of seats in the Chamber of Deputies. This new electoral law is not subject to a referendum.

2. Territorial reform with the aim of simplifying territorial organisation, strengthening the executive level of government and recentralising some powers. Responsibility for energy, strategic infrastructure and civil protection will go to the State, and the Chamber of Deputies may legislate on the regions' authority.

3. Reform of the Senate to put an end to egalitarian bicameralism, or the equality of powers between the two chambers, which can both bring down the
government and vote on bills. Changes would be made to the composition, election method and authority of the Senate.

- The Senate would have no more than 100 members instead of 321, elected for five years in proportional voting by regional councillors, instead of via direct universal franchise.
- Senators would no longer be paid parliamentary compensation, as they would be compensated for their local duties, being regional councillors (74), mayors (21) or former presidents. In this way, the Senate would serve as the link between the State and the territorial authorities.
- The Government would no longer be liable before the Senate, and the Senate would no longer have a vote of confidence on the Government. It would no longer have equal legislative competence to the Chamber of Deputies, except in a restricted set of areas. In other cases, the Senate could decide to review the texts, but the Chamber of Deputies would have the last word.
- The Senate's authority would be refocused on the evaluation of public policies, the control of the application of laws, European affairs and issues relating to territorial authorities.


The date has been postponed several times, a period from november the 15th until december the 5th is now announced.

What's at stake?

- Italy's political stability in the short term: Matteo Renzi has made this referendum a test of the people's support for his leadership, declaring that he would resign if it failed.
- Italy's medium-to-long-term political stability, which the new constitution aims to achieve.
- Beyond political stability, the health of the Italian economy is at stake. After three years of recession, Italy finally rebounded with 0.8% growth in 2015, but it still lags behind other countries, notably Spain. Clearly, political instability is hindering the adoption of structural measures.

Is government instability a problem in Italy?

Since 1946, the average length of a government is just above one year, and the record is a mere three years and 10 months. No government has managed to achieve the "normal" duration of the legislature, which is five years. Since the Second World War, there have been 63 governments. In 2013, the elections produced no clear winner, only losers, with an 88-yearold President (Giorgio Napolitano) forced to stay in power despite the end of his term because of Parliament's inability to name his successor. He stepped down once the Renzi government was established.

What is this instability caused by? 

The powers given to the two assemblies weaken the executive branch (the government), which is accountable to both of them. In France and Germany, only the chamber of deputies can hold a vote of confidence in the government, and the high chamber has separate legislative powers. Proportional voting of the chambers means coalitions and compromise, which are unstable by nature. Proportional representation, which is, in addition, regional for the Senate, leads to fragmentation. As such, the reform is seen as necessary for strengthening the government's stability. In addition, the risk of political instability has grown, as in other parts of Europe, due to the public's increasing embrace of populist and eurosceptic parties. Today, Italy has five million people living in poverty (monthly income for two people under €1,050.95), and the Five Star Movement, which promises the introduction of a citizen's income of €780 per month, has seen its popularity rise. The young mayors of Rome and Turin, elected in June, belong to that political party.

What do the polls say?

Initially, the polls gave the "yes" side a victory, but since the end of June it has been clear things could go either way. There are still a great deal of undecided voters—about 35% of those polled. The referendum has become a campaign for or against Matteo Renzi, due to his statement on 12 March 2015 that he would resign if it were defeated. The problem for him is that his Democratic Party has been embroiled in several corruption scandals involving both regional representatives (such as the mayors of Rome and Lodi) and government figures (the Secretary of State for Culture, the Minister of Industrial Development), and that he no longer embodies political renewal as he did when he took power. For instance, the new mayors of Rome and Turin are younger than him in both age and political experience. An unnatural coalition between the opposition right, the Five-Star Movement, a populist party and the Lega Nord (“North League”), a regionalist party, has formed to defend the "no” side. The Lega Nord is in favour of "Italexit" (Italy leaving the European Union). Meanwhile, the Five-Star Movement is hostile to the euro. On 22 June, its leader, Beppe Grillo, said he wanted a referendum on the euro.

What can we expect?

Matteo Renzi has begun to refocus the debate on the fundamental questions in an attempt to depersonalise it. For instance, on 21 May, he declared, "Italians should know that this is not the reform of a single person, but a reform that will help Italy," and, more recently, on 21 August, "The general elections will take place in 2018, regardless of the outcome of the referendum." He also said that if the reform passed, the government could inject €500 million into an anti-poverty fund with the savings achieved by the reduction in lawmakers. At the same time, Renzi is trying to get European authorities to adopt an "anti-poverty and major works" plan. He may succeed in reversing public opinion, but the results of the vote remain highly uncertain.

Even a small victory for the "yes” side would be very positive for Matteo Renzi, because it would mean the adoption of a flagship reform of his programme and would influence Italian political life over the long term. In addition, a victory for the "yes” side would be very positive in terms of investor sentiment about Italy. In this case, it should have a positive impact on sovereign risk and spreads. If the "no” side wins, Renzi could step down. There are two possible scenarios: either the President of the Republic, Sergio Mattarella, refuses his resignation, or he proposes that a new member of the Democratic Party form a government. A replacement could be tempted to avoid holding new elections, which would be extremely perilous. Indeed, if general elections were held today, the Democratic Party and the Five-Star Movement would finish well in the lead, but without 40% of the vote. In a second round, the polls would give the victory to the Five-Star Movement. Interestingly, the Five-Star Movement saw a jump in the polls after the Brexit vote. It should also be noted that Silvio Berlusconi, a veteran of the Italian political scene, would have no interest in early elections, as only about 10% plan to vote for his party, whereas he won 29.5% of the vote in the 2013 general election.

In light of the polling on the upcoming general elections, the consequences of a "no" victory on the bond markets would be quite different depending on whether new elections are called:

- Without new elections (the most likely scenario), the impact on spreads would likely be short-lived and quickly offset by the power of the ECB's Public Sector Purchase Programme (PSPP). By the end of July, the Eurosystem had already purchased €156 billion in Italian debt under the programme, and will continue to buy up about €12 billion each month.

- With new elections, the prospect of a government led by the Five-Star Movement would certainly be viewed very negatively by the markets. After all, Italy is the eurozone country with the lowest public support for the common currency. The outcome of a referendum on euro membership would be very hard to predict.





The broadest constitutional
reform since the abolition
of the monarchy




Like other European
countries, Italy is facing
a rise in populist and
eurosceptic parties




Matteo Renzi has realised
his error of making the
referendum on the Italian
constitution a campaign
about his leadership.
Now, he is focusing the
debate on the fundamental


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DRUT Bastien , Fixed Income and FX Strategy
LETORT Valérie , Fixed Income Strategy
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Key elements of the Italian referendum
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