Thursday 27 October 2016

Italy's referendum on reforms could be salt in the EU's Brexit wounds

Published 10/08/2016 | 02:30

Migrants receive food from volunteers at a makeshift camp in Via Cupa in Rome, Italy. Photo: Max Rossi/Reuters
Migrants receive food from volunteers at a makeshift camp in Via Cupa in Rome, Italy. Photo: Max Rossi/Reuters

Now that the UK has decided to leave, the next big problem facing the EU is the constitutional reform referendum in Italy later this year.

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In April, the Italian parliament passed a package of constitutional reforms. They were designed to improve the efficiency and stability of the Italian state, and also to reduce the powers of the Italian senate and its ability to bring the government down.

Although the package passed, it did not get the required 66pc majority in both houses to come into immediate effect.

The only way the package can come into effect now is if it is approved by the Italian people in a referendum.

Prime Minister Matteo Renzi decided that this referendum will take place this autumn. He has even gone further and said that, unless the people approve the proposals, he will resign.

Given the outcome of David Cameron's recent failed referendum gamble, this now looks to be a more risky proposition than when the decision was first taken. The proposed constitutional reforms include:

■ Reducing the size of the senate;

■ Reducing the power of the senate both to block legislation that has been passed by the chamber of deputies, and to bring down the government; and

■ Reducing the power of Italian regional governments.

Massive reform is essential in Italy because the debt of the Italian state is 130pc of GDP, and the country must find resources for an ageing population, an influx of refugees and a bank rescue. The senate has proved to be an obstacle to some reforms.

Reforms are needed to increase the overall productivity of the Italian economy. This will require:

■ A simplification of the tax code;

■ Lower taxation on workers and more on property;

■ Simplified public administration; and

■ A simpler and more efficient courts system.

State-owned enterprises also need to face more competition, as do some professions and retailers.

Before it joined the euro, Italy was able to devalue its way out of short-term problems, as the UK is doing now.

But devaluation enabled it to avoid making big and difficult reforms.

Since then, Italy has reformed its previously unsustainable public pension system, a task Ireland and the UK have yet even to discuss seriously. So Italy's underlying ability to make big reforms should not be underestimated.

The polls on how Italians will vote in the referendum are very volatile.

The proportion in the 'don't know' category ranged from 19pc to 42pc in the two most recent polls.

Furthermore, Mr Renzi's party lost ground in recent city elections, including in Rome.

Mr Renzi's main opponents are the Five Star Movement, which makes its policies, and selects its candidates, through online polls.

Supporters of the populist movement reject the idea of career politicians and prefer politicians to be amateurs, who do the work on a short-term basis.

This sentiment is similar to the rejection of the opinion of "experts" and "elites" in the recent UK referendum.

The trouble with amateur politicians is that, while they may have good ideas, they often lack the necessary technical ability, and staying power, to see their ideas through to full and effective implementation.

Italy is the eighth-largest economy in the world. It has an excellent quality of life, and a great reputation.

Unfortunately, its state system does not work well and there is not enough political consensus to put things right. This is not something that can go unaddressed.

Reform is necessary for it to remain a strong and effective state into the future.

A rise in the price of fuel, or in international interest rates, could cause a big crisis for the country, unless it proves itself capable of facing up to some very difficult decisions.

Failure to do so has the potential to undermine Italy's position in the euro and its banking system, which could then affect all of Europe.

That is why Mr Renzi's referendum is so important for Italy, and for Europe as a whole.

David McWilliams is away this week

Irish Independent

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