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Italy and the Eurozone

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Italy recently (December 4) voted against certain constitutional changes in a referendum. This is thought to have great repercussions for the Eurozone, the group of countries sharing a common currency and a central bank.

Marine Le Pen, the leader of a right-wing nationalist party in France, has tweeted thus (I rely on the BBC's translation): "The Italians have disavowed the EU and Renzi. We must listen to this thirst for freedom of nations."

The reference there was to Italy's prime minister, Matteo Renzi, who announced his resignation the day after the vote.

So, what were the key constitutional provisions involved? First, the role of the Senate was to be reduced, making the Chamber of Deputies the supreme legislative body. Second, the role of the regions of the country in national legislation was to be eliminated. Under the existing constitutions, the nation state and the regions have "concurrent competence" in some matters.Essentially this has allowed for region-by-region nullification of affected laws. That was to end.

Finally, the CNEL (a consultative body of economists, lawyers, and labor union representatives created in 1958) was to be abolished.

None of this has happened. The people voted "no," by a 60/40 split.

Why do the particulars of Italy's constitution matter outside of Italy? Well, first, there is the figure of Renzi himself, who was highly regarded by the other heads of state in Europe, and whose disappearance from the scene leaves them, naturally, wondering both who and what come next.

Second, and related, the reason Renzi asked for those changes was his own pro-Europe political premise. The changes would have made it easier for him to push through legislation that would bring Italy in accord with what the rest of the Eurozone wants, even when that means budgetary austerity.

Finally, (a more specific concern within that one, if you will) there are the banks. Italy's banking sector is a shambles. Both the rest of Europe and the Renzi government has an ambitious program for re-structuring the industry: that won't happen now, at least not for some time, while the shaken-up politics of the country play themselves out.  And that not happening could have broader consequences.

Polls show a majority of Italians supporting continued membership in the Eurozone. Nonetheless, various dominoes are falling and its easy to imagine the line continuing. The parties who pressed for a "no" vote may now turn to making the case that a return of the lira is the best way to address Italy's economic problems, inclusive of those of its banks.

I quoted Le Pen's tweet above. Here's a tweet on the same subject from a very different source, US Keynesian economist Paul Krugman. 
 
"Hoo boy. Time to game out possible euro crises. https://t.co/4PhHPI8i5Y"
 
Indeed.

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