What has already changed? Before this referendum, a new electoral law was approved, but it is still awaiting a final ruling from the Constitutional Court (expected before the end of the year).

In the last 70 years, Italy has had close to 70 governments! The new electoral law for the Lower House is meant to ensure that one party is able to secure a significant and lasting majority for the five years of the legislature.

  • First round of voting: if a party passes a 40% threshold, it is attributed a minimum of 340 seats out of 630 (54%), i.e. an absolute majority.
  • Second round: if no party has been able to pass the 40% threshold, voters choose between the two parties that got most votes in the first round. The party winning the second round is then attributed 340 seats.

What is the Constitutional referendum about? Putting an end to the ceaseless parliamentary back-and-forth!

The constitutional reform is about abolishing “perfect bicameralism”, a situation whereby the Lower and Upper Houses enjoy equal status and legislative competences: the reform aims at simplifying the system in order to reduce significantly the approval time for new laws and avoid political paralysis.

More precisely, the Constitutional reform proposes:

  • To remove from the Senate a generous part of its legislative power: under the new procedure, the Lower House will have the final say on the bill, as approval from the Senate will no longer be required. The Senate will still be able to propose amendments, though the Chamber of Deputies will be allowed to make the final decision without further Senate approval (currently, before a law can be passed, both the Senate and the Chamber of Deputies have to agree on exactly the same text). Certain laws will still require Senate approval: ratification of Treaties (for example, Italy’s membership of the European Union), referenda and other forms of popular consultation….
  • To exclude the Senate from triggering a no-confidence vote.
  • To reduce the number of Senators from the current 315 to 100, 95 of whom will be elected by the regional council, with the remaining 5 appointed by the President.

What if the referendum is rejected?

Approval for the referendum would clearly be a positive for the markets and would help give Italy a more stable government, which could facilitate the implementation of further reforms in the coming years.

However, it seems more likely right now that the Italian electorate will answer No, and that Renzi will then resign. The key question is thus whether or not this resignation will trigger a new election.

Two scenarios are possible if Renzi steps down:

  • the next election could simply take place, as currently scheduled, in 2018 (in the meantime, a new government will be formed by a member of the present coalition);
  • a snap election could take place in 2017.

For the time being, we believe the likelihood of an early election is low, but that it could take some time for a new government to be formed.

Note that, if, after the referendum, Italy’s government bond spreads were to widen worryingly, the ECB is now better equipped to respond than a few years ago. The OMT has been approved by the German Constitutional Court and is now available as a conditional source of support for individual countries. The European Stability Mechanism is also available to finance both sovereigns and banks, although, again, on a conditional basis. TLTRO II liquidity is widely accessible for all banks. Moreover, the ongoing ECB Asset Purchase Programme could easily be twisted for a few months and used to curb any instance of disorderly spread-widening.

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