After Trump and Brexit, All Eyes Are on Italy’s Constitutional Referendum

Source: Wall Street Journal, By Simon Nixon. Date: Nov. 16, 2016 2:44 p.m. ET

The Dec. 4 ballot is the next opportunity for voters in a major economy to give the establishment a good kicking, Simon Nixon writes

Clashes erupted between riot police and demonstrators protesting Prime Minister Matteo Renzi’s proposed constitutional overhauls in Florence this month. Photo: Alessandro Serrano/Zuma Press

After Brexit and Donald Trump, will Italy be next? Prime Minister Matteo Renzi’s Dec. 4 referendum on his proposed constitutional overhauls—designed to strengthen the power of the government by making it easier to pass laws—is the next opportunity for voters in a major economy to give the establishment another kicking.

Polls currently show the “No” vote narrowly ahead, albeit with up to a quarter of voters still to make up their minds. European policy makers have been privately warning for months that they see Italy as the biggest risk to the financial stability of the eurozone. The market is also starting to sniff trouble ahead: the spread between the yields on German and Italian government bonds has widened to more than 1.6 percentage points, the widest it has been since the European Central Bank started buying bonds in March 2015.

The worst-case scenario goes something like this: A defeat for Mr. Renzi would lead to a period of political instability. Mr. Renzi could follow through on a pledge to resign or be forced into a new coalition until elections are held in 2018. Either way, markets would interpret his defeat as proof that Rome is incapable of reform, raising doubts about Italy’s ability ever to deliver the kind of growth needed to put its debt burden of 135% of gross domestic product on a sustainable footing.