This blog was written by Ilaria Maselli, Brian Schaitkin, and Klaas de Vries.
Asked whether they agree or not with a set of changes to the Constitution, 65 percent of Italians (almost 33 million voters) showed up to answer on Sunday December 4. The response was a loud no: 59.1 percent of the votes. How did this referendum become such a critical question not just in Italy but also for the global economy?
- In the past weeks some commentators made the connection between an eventual no win and the risk for Italy to leave the Euro Area. The initial reaction from the markets was quite mild and contradicted this argument. The spread between the interest rates on Italian and German government bond (a common measure of sovereign risk in Europe) did increase initially, albeit limitedly (on December 14 is 150 base points). This is because key economic agents anticipated the risk of a no vote.
- The no side was driven to victory by strong support from those under 35 years old, while those who were 55+ voted to support the referendum. Despite vast disparities in wealth among regions, the referendum was rejected everywhere except for Italians voting abroad. The share of no-votes was particularly high in southern regions.
- Urgent issues on the table of the resigning government are the Budget law for 2017 and the recapitalization of the banks. Monte dei Paschi is on the top of the list, but it is not the only bank that is suffering due to a combination of bad management and large amount of non-performing loans after years of stagnant growth. As many as 360 billion euros of credit are at risk of not being paid back to banks after years of economic stagnation.
- One way of thinking about this referendum is as “the anti-catennacio referendum,” named for the famously defensive style of generations of Italian national football teams. The aim of the referendum was to change the structure of government to make possible the more ambitious reforms former PM Matteo Renzi had in mind even when they conflicted with entrenched interests. Growth in Italy has been shallow for the past two decades. When Greece and Spain were experiencing a boom before the 2008/09 recession, Italy was struggling to achieve a 1.5 percent GDP growth. Since then, unemployment has remained stubbornly high, especially among the young.
- The rejection of the reform is a lost chance of modernizing the economy and making product market reforms easier. As our global economic outlook model shows, the problems with the Italian economy are mostly on the supply side. Since 1999, total factor productivity – that is efficiency with which production factors, labor and capital, are being used in the productivity process – contributed negatively to growth (see chart). In other words, talents, capital, ideas, credit started to match in a less efficient way compared to the past.
- There is no room for optimism down the road: the new Gentiloni government has a narrow mandate. This means that the lack of further reforms risks making Italy a less and less attractive place for business. This will eventually translate into even slower growth.
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