With Brexit and the U.S. presidential election, 2016 has already contributed its share of major political upsets. Yet another upset may be in the making. The upcoming Italian referendum on constitutional reform could possibly have disastrous consequences for Europe and the world. It may seem strange that a national constitutional referendum could have global consequences. The reason it may have larger implications has to do with the euro zone — the club of European Union members that share a common currency. As political scientists like Mark Blyth have noted, the euro zone is badly designed. Although it has a common currency, it does not have a central fiscal authority to make financial transfers across states to balance out shocks and assure shared economic growth and prosperity. This means that over the past eight years of economic crisis, it has destabilized European politics, driving a political wedge between poor southern European states and richer northern European states. This, together with the refugee crisis, has encouraged nationalist parties to mobilize against E.U. institutions across the continent and pro-integration mainstream parties to try to fight back. It also means that a shock in one country can possibly have broader reverberations for Europe and the world.
On Dec. 4, Italy is holding a closely watched referendum on constitutional change which would change the balance of power between Italy’s parliamentary institutions. Prime Minister Matteo Renzi has repeatedly said that he will resign if the voters reject his proposal. The populist Five Star Movement led by Beppe Grillo, former prime minister Silvio Berlusconi’s Forza Italia, and Matteo Salvini’s nationalist Lega Nord are campaigning against the proposed change — and so are prominent personalities of the governing Democratic Party. Surveys show a strong lead in favor of “No.”
Italy’s economic outlook is poor. Forty percent of the debt held by Italy’s banks is troubled, while Italy’s central bank has liabilities of more than €350 billion, and Italy’s debt-to-GDP ratio will hit 133 percent by the end of this year. International markets are nervous — the difference between the price that Italy and Germany have to pay to raise money has risen significantly in recent weeks, although the difference is lower than it was at the height of the crisis. A “No” vote is likely to increase financial instability.