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A Tough Start to Italy's Year as G7 Host

Chiara Oldani, University of Viterbo and G7 Research Group
December 5, 2016

More than 59% of Italians voted no in the constitutional referendum on December 4, 2016. The constitution will not be modified, the federal reform of the state is incomplete and the election law will not be updated. Prime Minister Matteo Renzi has suddenly resigned to confirm his strong belief in these reforms, but this causes instability and a certain loss of political power in Europe. Italy will face very tough weeks before Christmas.

Former prime minister Silvio Berlusconi, who survived a heart surgery in June 2016, has been back in the political debate in the very last days leading up to the referendum, although never in person and with no contribution from his party's members. He supported the no since the new electoral law would have dramatically reduced his personal influence.

After Renzi's defeat, Sergio Mattarella, President of the Republic, has at least two options: he can give back to Renzi the mandate to form a new government or he can find a new leader (and majority), probably someone who is already in the government, such as Treasury Minister Pier Carlo Padoan, who is well connected with international institutions including the International Monetary Fund and the Organisation for Economic Co-operation and Development. Italy will chair the G7 as of January 1, 2017, but this is the very last problem on its political agenda.

The situation in parliament is difficult; in the Camera dei Deputati no party prevails; in the Senate it is even worse and Renzi's government had the support of 29 members who had been elected under Berlusconi's leadership.

What freezes the situation is the fact that one party, the Five Star movement (M5S), which has around 14% of parliament, does not want to participate to any government whatsoever. It is not possible to say whether this is good or not. The M5S won the municipal election in Rome in June 2016 with a large majority, and in six months has achieved almost nothing in terms of reducing spending, improving debt management, improving services to citizens or reducing the tax burden.

Without the M5S, the left and right need to form some kind of coalition to rule. The alternative is to call elections, which will take at least three months, and more likely five. Financial volatility created by the political instability will have an impact on treasury bonds and the already troubled banks. Monte dei Paschi di Siena, the fourth largest Italian bank, needs a massive capital injection, a part of which was secured on December 2, but the lack of political power will probably allow the European Central Bank to implement an (extraordinary) rescue program for the oldest bank in the western world.

The spread between Italian and German sovereign bonds will widen, until the situation stabilises. The extra burden of interest on Italy's public debt will be paid also by those Italians who voted no, wishing for an epiphany to wash away the economic crisis, the immigration problems, the reduction of services, the excessive tax burden and unemployment.


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Chiara OldaniChiara Oldani is professor of monetary economics at the University of Viterbo and director of the G7 Research Group's Rome office. She is a member of the scientific committee of the Fondazione Ugo La Malfa, a research associate at the Centre for Applied Macroeconomic Analysis at Australian National University and the director of research at the Rome-based Assonebb. She was a visiting scholar at CIGI in 2014, the Cambridge Endowment for Research in Finance at the University of Cambridge in 2007 and the Wharton School at the University of Pennsylvania in 2005. She has taught at Luiss Guido Carli University and the Italian Society for International Organization in Rome. Chiara's research currently focuses on over-the-counter financial derivatives and the complex web of counterparty risk, widely considered a major precipitating factor of the global financial crisis. She has published dozens of academic papers and book chapters, both in English and Italian, on topics including Greek sovereign risk, derivatives and fiscal policy, and the global financial crisis. She has a Ph.D. in monetary and financial economics from Tor Vergata University and an M.Sc. in economics from the University of Warwick


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