The recovery of global financial markets after they digested the results of Sunday’s referendum in Italy may be misleading. True, the referendum was not an immediate vote on the European Union (EU) and the Euro zone, as some right-wing parties have suggested. But, this is precisely where Italy could be headed as Matteo Renzi, the centre-left prime minister of the country and considered to be one of Europe’s more credible leaders, steps down after a resounding “no” verdict by voters to his proposal to institute sweeping constitutional reforms to streamline the country’s parliamentary and administrative systems. With Italy, Europe’s fourth-largest economy, drowning in debt at 131 per cent of the gross domestic product and unemployment running at over 12 per cent, Mr Renzi had instituted several reforms to spur growth. His constitutional reforms were part of this matrix, aimed at removing some of the frustrating procedural blocks that made speedy decision-making difficult.
Mr Renzi’s biggest failure, however, was his inability to solve the crisis in Italy’s banks staggering under bad debts worth some $385 billion, constrained by EU rules that limited his ability to spend his way to growth, which remained anaemic during his two years in charge. How far a caretaker government will be able to negotiate a taxpayer bailout of Italian banks remains an open question. Of equal concern is the fact that Mr Renzi’s defeat opens the way for the rise of the populist Five Star Party, led by a former comedian Beppe Grillo, which scored significant successes in local elections earlier this year with its unabashed agenda of an EU exit.
Indeed, the Italian referendum, coming just months after the British exercise to leave the EU and the election of Donald Trump in the United States, raises broader concerns about the future of the world’s two largest economies. With elections looming within a year in the Netherlands, France and Germany, the signals from these developments, of a shift to anti-establishment populism as represented by the Five Star Party, are disquieting. Though the far-right leader Norbert Hofer was recently defeated in a re-run of the Austrian presidential elections by a left-leaning rival, this can scarcely be considered a trend, chiefly because the president’s role is largely ceremonial. In the Netherlands and France, far right candidates Geert Wilders and Marine Le Pen are drawing large crowds with their xenophobic campaigns against the EU and immigrants. In Germany, Angela Merkel’s open-door policy towards refugees and immigrants is under pressure from a restive opposition.
Perhaps most worrying of all is that these developments will turn Europe inward-looking just as the bloc urgently needs to shape a united response to Mr Trump’s aversion to America’s NATO (the North Atlantic Treaty Organization) obligations and his decided partiality for Vladimir Putin. No surprise, then, that Mr Renzi’s compatriot Mario Draghi, president of the European Central Bank (ECB), has found that his job just got a lot tougher as the ECB meets to discuss whether to extend its quantitative easing programme this Thursday, a task that would have been easier had Italy stayed committed to Mr Renzi’s reform programme. With the European project increasingly under threat, turmoil will be the only constant for global financial markets going forward.
