By Jeffrey Greenbaum, Partner
On 4 December 2016, a constitutional referendum will be held in Italy (the "Referendum"). Voters will be asked whether they approve the proposed amendments to the Italian Constitution, which are aimed at streamlining the legislative activity of the Italian Parliament as well as reviewing the allocation of powers between State, Regions, and administrative entities.
The constitutional reform proposed by Prime Minister Matteo Renzi (and already approved by the Parliament) would, among other things, provide for a Senate which will represent territorial institutions (whose members will not be directly elected but chosen by regional councils and mayors of major Italian cities). It also amends the procedures for enacting laws and modifies some constitutional provisions relating to the attribution of powers between the State and Regions, bringing some of them back to the center.
Recent polling results show that the reform is likely to be rejected. Many are interpreting the Referendum, in the context of both Brexit and the Trump victory, as a rejection of the political status quo. While there may be some element of truth to this, there would appear to be legitimate constitutional concerns about the content of the Referendum. A vote to the contrary may not only be a vote of protest but rather a vote about what some – among them, many constitutional experts - regard to be a poorly conceived and drafted Referendum.
While the political aspects of the Referendum are fascinating, the financial aspects of a vote against the proposed constitutional reform are somewhat daunting. Some months ago Renzi announced he would step down if the reform does not pass; it is not clear whether he has changed his mind since then. Uncertainty about the political future has raised concerns about Italian financial stability.
A few days ago, the Financial Times commented that if "no" wins then eight Italian banks (including Monte dei Paschi di Siena - the third largest Italian bank) would be at risk as the uncertainty on the financial markets will drive away potential investors which today are interested in recapitalising these troubled financial institutions. There is even the fear that this could have an impact on the 13 billion capital increase of Unicredit (the largest Italian bank) scheduled for the beginning of 2017.
On the other hand, the OECD has recently highlighted how the potential victory of the government, not only will ensure national GDP growth stability, but it will also make Italy "more governable" from a procedural perspective.
As for the impact on Brexit, for some observers a vote against the reform will be a vote against the status quo and a vote against Europe. Moreover, a victory of "no" might be viewed as a sign that Italy would consider a "Quitaly" scenario; or, perhaps, the damage done to the Italian financial system if the reform were to be rejected might force Italy to leave the Euro, further destabilising the EU. One would expect this to complicate even further the Brexit negotiations if the EU had to deal at the same time with the exit of Italy.
Moreover, Italy to this point has been a voice of moderation in the Brexit discussions. Indeed, Italy has announced that its position is that of benign neutrality. While this may be the Italian position, attention to the Referendum has distracted Italy from assuming a role of a moderating influence to the extent that it might otherwise have been able. Moreover, it is likely that a "no" vote would take Italy out of the picture for a significant part of the Brexit discussions. Sharpened positions might be facing off without the benefit of Italy's moderating voice. Well, the Chinese have a curse, "may you live in interesting times". There are reasons for hoping for boredom on December 4.