Italy referendum: Is the EU going to fall apart before Britain gets a chance to leave it?

Rejection of constitutional reform was latest in string of electoral tests to send shockwaves through Brussels' foundations

Lucy Pasha-Robinson
Monday 05 December 2016 13:48 GMT
Italy's Prime Minister Matteo Renzi announces his resignation
Italy's Prime Minister Matteo Renzi announces his resignation (Getty)

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Louise Thomas

Louise Thomas


Italy’s rejection of constitutional reform on Sunday was the latest in a string of electoral tests to send shockwaves through Europe’s increasingly fragile foundations.

With Austria narrowly escaping a ruling far-right president and Italian Prime Minister Matteo Renzi's resignation giving rise to fresh uncertainty over the bloc’s future, could this be the end of the European Union as we know it?

And could the EU dissolve before Britain has a chance to leave?

Brexit started disintegration of the EU says Italy's Europe minister

Why are we asking this now?

Europe was plunged into a fresh crisis last night as Prime Minister Matteo Renzi resigned following his resounding defeat in the country's referendum on constitutional reforms.

Analysts warned the result could derail plans to rescue Italy’s banks, exposing Italy and the eurozone to further financial crisis, without any clear indication that Europe would be willing or able to back a bailout.

Italy’s referendum was the latest vote to be seized upon by a populist tone, led by the Five Star movement and the Northern League.

Emboldened by Brexit and failing confidence in the European Union, the group called for snap elections, delivering further blows to Europe’s already weakened ruling elite.

If the eurosceptic group continues to ride the anti-establishment wave, some believe it could win should an election be called, leaving Italy teetering on the brink of a Brexit-style shock.

What is it about?

The reforms were described as the most important in Italy since the Second World War, aiming to reduce the size and powers of the Senate and centralise power from Italy’s 20 regional Governments.

“Yes” supporters said the vote would propel Italy into a new era of political stability and economic buoyancy, however critics called the reforms undemocratic and feared they would hand back too much power to the ruling Government.

Financial markets reacted immediately to the result, as the euro fell sharply in value against the dollar.

It continued to fall upon Mr Renzi's announcement, at one stage hitting $1.0507, its lowest level since March 2015, amid concerns the "No" vote could boost the prospects of eurosceptic opposition groups.

The “No” campaign was driven primarily by the far-right Northern League and the populist Five Star Movement (M5S). Both parties pledged to hold a referendum on the euro regardless of the result.

So why were Italians so angry?

Mr Renzi’s referendum was centred around constitutional reform, however, many Italians saw the vote as a way to push for radical economic reforms faced with the calamity of Italy’s banking crisis, a perennially sluggish economy, and unemployment among young people at 40 per cent.

Thousands of small investors lost life savings after four banks including, Banca Etruria, Cassa di Risparmio di Ferrara, Banca della Marche and CariChieti received Government bailouts last year and for many, the referendum became a vote of no confidence in Mr Renzi’s two-and-a-half year administration.

"It's not that this constitution doesn't need change, but this government has worked badly for us. If we win, then it will send out a strong message,” Giorgianni, who lost €100,000, told The Independent.

What is the rest of the EU so worried about?

On Sunday, Austria’s anti-immigration and eurosceptic Freedom Party narrowly conceded defeat in the country’s presidential election, that could have heralded the end of the EU as we know it.

Rejection of Mr Renzi’s reforms was also seen as a kicking to the establishment forces in Europe, as an increasingly nationalist political climate emerges in the wake of Brexit, Donald Trump’s victory and the rise of Europe's far-right including France’s Front National.

Europe’s supporters will also be looking to Russia as fears a divided Europe could bolster Vladimir Putin’s powers.

“Russia is actively chipping away at the West’s democratic heritage, by spreading misinformation and funding far right ideologies across Europe. Let’s confront this,” Belgium’s former prime minister Guy Verhofstadt and Poland’s opposition leader Ryszard Petru wrote in the Huffington Post.

“It is clear to us that if the EU is to survive; the people are going to have to fight for it.”

Was this a populist vote?

Opinion is divided as to whether this was a purist populist vote. Some believe the vote was the latest to be spearheaded by insurgent populism, however others believe "no" voters were exercising caution faced with an increasingly unstable financial climate.

The Five Star Movement championed the “no” vote in a grass-roots campaign that devastated Mr Renzi’s establishment position.

The group capitalised on Mr Renzi’s vulnerability after he vowed to step down if he lost the vote. It also exploited public discontent over Italy’s failing economy.

Experts warned the group’s success in positioning themselves as a more representative party for both left and right-wing voters, could bolster its chances of electoral success down the line, which could spell disaster for Europe’s stability.

The party, founded by Beppe Grillo, a stand-up comedian from Genoa, is the second biggest in parliament, and has repeatedly pledged to call a referendum on Italy’s use of the euro if it wins the next general election.

However, a Community Media Research and Intesa Sanpaolo SpA poll published in La Stampa, found that only 15.2 per cent of the population were in favour of leaving the single currency, with 67.4 per cent declaring themselves true single-currency believers.

What about the banks?

Analysts fear Mr Renzi’s resignation could set the wheels in motion for a total collapse of the Italian economy.

With some €4 trillion in assets, Italy’s banks are both too big to fail, and potentially too big to save.

Italy’s 14 largest banks have €286bn of bad debt however, for the debts to be written off, small investors may be forced into taking another hit, many of whom may already have been affected by last year’s Government bail out of four banks.

Monte dei Paschi, the country’s third largest bank needs a €5bn recapitalisation, which many fear will be scuppered by the country’s “no” vote.

In the absence of a government with a mandate and spiralling borrowing costs, the bailout is looking increasingly unlikely, which could have disastrous effects for the stability of the eurozone.

So what happens next?

In the face of Mr Renzi’s resignation, Italy’s president Sergio Mattarella is thought unlikely to call fresh elections but is instead expected to appoint a caretaker prime minister.

Finance minister Pier Carlo Padoan is seen as the favourite to succeed him, however culture minister Dario Franceschini and Senate president Pietro Grasso have also been pegged as potential candidates.

However, Italians have little appetite for another unrepresentative Government. Since Silvio Berlusconi resigned in 2011, Italy has experienced three “unelected” governments.

Many believe this rejection of the establishment could place the Five Star Movement in a favourable position if a snap election was to be called.

The next Government’s first task will be to shore a package of stability measures to avert Italy’s burgeoning financial crisis.

It will also have to brace itself for a period of profound instability in Europe, in the wake of seismic political change across the world.

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