The impact on Europe of the UK’s vote to leave the European Union (EU) remains unclear, and other landmark events are now looming large on the political horizon. Italy’s major Constitutional referendum, scheduled for 4 December, could have a direct impact on the country’s political future. It could also have a broader impact on Europe and its ongoing process of reform.
The Italian Senate reform is a crucial part of this process of institutional renewal, but is also a political test for the government. A “Yes” victory—in favour of the reform— would underpin the existing coalition’s commitment to reform. Conversely, a “No” victory could trigger a period of political chaos in Italy, with some spillover effects into the rest of Europe, fuelling the rise of populist parties and slowing the process of reform in the EU as a whole.
Despite improving macro and micro fundamentals, political uncertainty has been a significant driver of the poor performance of European equities year to date.
On the fixed income side, the European Central Bank’s (ECB’s) bond purchases have supported eurozone bond markets, reducing the risk of high volatility in the European sovereign bond space, and attracting investor inflows in the process.
The implications of the constitutional referendum for Italy
The Senate reform is a key element of Italy’s wider programme of reform and is designed to reduce the budget, power and number of Senators. Such a move would mark the end of Europe’s only perfect bicameral system, where the Senate of the Republic (Senato della Repubblica) performs the same function as the Chamber of Deputies (Camera dei deputati), but does so separately.
Under the proposed reform, the new Senate would be a regional chamber with no power to bring a motion of no confidence in a government, while retaining the power to propose amendments and vote on constitutional issues.
The reform could make it easier to pass laws, improving political stability. That stability is an important—and elusive— commodity in a republic that was only formed in 1946. Over the past 70 years, Italy has experienced 63 different governments, with each one lasting an average of 13 months (Exhibit 1). Strikingly, over the same period, Germany has seen just 23 governments and the UK fewer than 20.
Italy has experienced 63 different governments, with each one lasting an average of 13 months
Exhibit 1: Governments since the birth of the Italian republic in 1946
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