Italy at Risk of Breaking EU Budget Rules as Referendum Looms

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Italy is among eight Eurozone member states at risk of breaking EU budget rules, raising fresh criticisms of Rome ahead of next month’s referendum on constitutional reform.

The European Union’s executive arm has warned Italy, Spain, Portugal Cyprus, Finland, Belgium, Slovenia and Lithuania that their annual draft budgets are at risk of violating the Growth and Stability Pact (SGP), which governs fiscal spending among EU member states. Italy has threatened to veto the EU’s budget, criticizing Brussels’ “ambiguities and contradictions.”

“We are very tired of a Europe that says things and does not do them,” Italian EU minister Sandro Gozi said. “We are convinced that if Europe does not change this will mark the beginning of European disintegration.

Italy’s proposed budget aims to stimulate employment and support migration efforts. Italy’s economy returned to growth in the third quarter, but faces one of the highest unemployment rates in the euro area. The country is also teetering on the brink of a major financial crisis, with Italian banks shouldering about one-third of the Eurozone’s bad debts.

The economic and financial malaise is fueling support for the Five Star Movement, Italy’s main populist opposition party that could form the next government should Prime Minister Matteo Renzi fail to secure a “Yes” vote in the upcoming referendum. Renzi is staking his political future on an outcome that will allow him to reform the Italian Senate.

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Is Italy’s Referendum Likely to Be a Game-Changer for Europe?

The accepted wisdom is that Italy’s referendum on the 4th of December is a major political challenge to the integrity of the Eurozone, but do all analysts agree as some appear to be downplaying its importance.

Italy’s referendum on December 4 has been seen as a major event not just for Italy but for the future of the European Project.

Writing in the Financial Times, columnist Wolfgang Munchau entitled his recent piece on the referendum, “Italy’s Referendum holds the Key to the Future of the Euro,” with the subtitle, “On December 5, Europe could wake to an immediate threat of disintegration.”

Yet are such fears warranted?

On the face of it they are not.

The Italian referendum is not even about membership of the EU, it is about reforming the Senate, or upper house of the Italian parliament.

The government wants to reduce the power of the upper house so that legislation can be passed more speedily.

If they win the Senate’s elected representatives will be replaced by local government representatives, whose mandate will be local issues with a central focus, constitutional affairs and EU matters.

It is hoped by reformists that these changes will speed the progress of legislation from drafting to implementation.

Currently, the reforms are unlikely to be passed as the majority of voters do not want a change (42%).

Those who do currently stands at 37%, whilst 21% remain undecided.

Renzi’s Promise to Resign

Polls at the start of the campaign told a different story with the majority saying they would vote “Yes” for reform.

It seems this changed, however, when Prime Minister Matteo Renzi staked his job on the referendum, saying he would resign if he lost, and the “No” vote won.

If anything this turned the tide against him and in favour of the “No” campaign.

Although he has backtracked since making the pledge and has now said he will stay even if the referendum fails, most analysts expect him to resign, and it is the threat of his early resignation which is the main risk to triggering a series of steps leading to the possibility of a majority win for an anti-EU party like the Five Star Movement.

“It seems very likely that Matteo Renzi will step down as Prime Minister if the resulting vote is a "No", meaning President Mattarella will grant someone else the right to form a government,“ said Handelsbanken’s Lars Henriksson.

If everyone is happy with the new coalition leader then nothing will change and things will go on as usual, however, if there is a problem recruiting a new leader then that could raise problems.

“If no new PM is supported inside the coalition, there will probably be efforts to form a government based on a new coalition.

“The problem with both alternatives is that Matteo Renzi will probably still be the leader of the biggest party, meaning any new prime minister will have his/hers credibility heavily undermined,” adds Henriksson.  

The reason Renzi threatened to resign if the referendum failed may have been because he thought Italians would want to avoid the chaos caused by his resignation and the vacuum thereby left, however, he may have misjudged things according to Henriksson.

“This is a fact that Renzi has been trying to capitalize on, but instead he is now confronted with the fact that the prospect of political instability does not necessarily frighten Italians.”

In short, his plan appears to have backfired.

But the risk of instability caused by a Renzi resignation is that a snap election will be called a few months after the referendum to decide a new government and it is during that election that a party such as Five Star might win.

“The Five Star Movement and the governing Democratic Party seem to be neck to neck in recent polls. The FSM are pushing for a referendum on the euro membership and once that comes into play, we all know that anything can happen.”

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