Italy's voters have spoken loud and clear. During Sunday's referendum on constitutional reforms, more than 65 percent of the country's electorate turned out. Nearly 60 percent of voters rejected the measures, prompting Prime Minister Matteo Renzi to resign immediately after the results were announced, as promised. Renzi's quick resignation, coupled with the international market's staid response to the vote's outcome, suggests that the immediate repercussions will not be as dramatic as some in Italy and abroad had expected. Nevertheless, Italy's political and financial troubles will endure, as will its threat to the eurozone.
Though it is obvious which side lost in the referendum, it is hard to point to a clear winner. A majority of voters in nearly all regions — except for a few areas in northern Italy — rejected Renzi's plans, but they did so for different reasons. Some were genuinely concerned about the effect that the constitutional changes, which proposed to reduce the Senate's size and power in favor of the legislature's lower chamber, would have on Italy's government. Others saw it as an opportunity to get rid of the prime minister, who had predicated his political future on the measure's success. The "no" camp drew citizens who are against austerity measure and concerned about Italy's economy, as well as those who are opposed to immigration and weary of professional politicians. Its constituent voters do not have a clear leader, and outside the context of the referendum, the parties that campaigned against the reforms are competitors.
Unlike the Brexit referendum, the issues at stake in Italy's vote had no direct link to the European Union. Even so, the referendum raised questions about the future of the eurozone and fueled fears in the country over what the next general election could bring. Two of the main parties that opposed Renzi's reforms — the anti-establishment Five Star Movement and the anti-immigration Northern League — hope to organize a referendum on Italy's membership in the currency bloc. If either party, or another Euroskeptic force, managed to gain power during the next general election and hold such a vote, Italian voters may well choose to withdraw from the eurozone. In fact, the vote itself might not even be necessary since merely announcing the referendum could trigger a run on Southern European banks, precipitating the demise of the eurozone. Though that scenario is unlikely, it is possible nonetheless.
To ease concerns about a potential Euroskeptic victory in early elections, the Italian Parliament will probably appoint a new government in the coming days. The government's main goal will be to reform Italy's current electoral law, known as "Italicum." Under the law, which has not been applied since it passed in 2015 and has faced legal challenges, general elections take place in two rounds of voting, and the winning party receives bonus seats in Parliament. Renzi's successor will probably replace the existing procedure with some kind of proportional system that forces parties to form coalitions, thereby reducing the Five Star Movement's chances of accessing power. (The party refuses to forge alliances with other groups.)
But even if it defuses the threat of early elections, a new government will not solve Italy's problems. Meager growth rates, high levels of unemployment and general skepticism toward the country's traditional institutions could give rise to populist and protest movements, whether an established party such as the Five Star Movement or an emerging political force. Low growth rates and political uncertainty will also put a damper on Italy's banks, which are struggling to find new capital and free themselves from the heavy burden of their nonperforming loans. Unless the country can implement structural reforms, private companies may be loath to lend a hand to Italy's banks. At the same time, if Italy were forced to bail them out on its own, it would likely invite a confrontation with the European Union, and with Germany in particular. Rome would then have to choose between rescuing its banks at the expense of investors, in keeping with EU rules, or diverging from Brussels' regulations at the risk of damaging the credibility of the entire system.
Furthermore, the rocky outlook for Italy's economy, and especially its high levels of government debt, could be an important consideration in the European Central Bank's policy meeting on Thursday. Recently, a case has been building for the ECB to consider tapering its quantitative easing program in 2017 to keep inflation in check and prevent asset bubbles from forming. Scaling back quantitative easing, however, would expose Italy's bond yields — which have risen over the past few weeks — to market forces that could drive them too high. In the months to come, the issue will likely emerge as a battleground between EU members, such as Germany, lobbying for tighter monetary policy and ECB factions trying to preserve overall stability by protecting the eurozone's peripheral members.
Still, the immediate fallout of Italy's referendum was not as dramatic as many in the country and around the world expected. Financial markets reacted with relative calm on Monday: Shares in Italian banks took a hit, but the euro recovered ground after an initial drop. To a certain extent, investors had already anticipated the cost of the referendum, based on opinion polls (which by and large correctly predicted the results of Italy's vote, unlike those of the Brexit referendum). Markets seem to be betting against snap elections in Italy, and Renzi's prompt resignation will enable Parliament to appoint a new government instead. But Italy's political and economic troubles — as well as its brush with Euroskepticism — are far from behind it.