Political instability, fragile institutions leave Italy vulnerable ahead of key referendum

Italy's troubles might seem vague, remote and chronic from afar, but Lidia D'Angelo's story of losing everything will knock the wind out of anyone anywhere who's ever made a life plan.

One morning, just a year ago, D'Angelo was a married senior with a house and well-maintained garden, and with the plans and the savings to see the world from the comfort of a colossal cruise ship.

Later that day, almost all of it — the plans, the money as well as her husband — were gone.

Her husband, Luigino D'Angelo, committed suicide on Nov. 28, 2015, after learning a government rescue of a small failing bank wiped out all their retirement savings. His tragedy, described as a "state suicide" by government critics, made headlines in Italy and across the world.

Now, a year after his death, and less than a week ahead of a crucial referendum on constitutional reform, the Financial Times has ominously raised the spectre of multiple bank failures that it said could be triggered by Sunday's vote.

The warning comes as others fret about the prospect that the referendum could also make Italy's prime minister the latest casualty of the anti-establishment mood that seems to be spreading in the West.

Perfect storm of near-crises

Up to eight banks, says the FT, quoting officials, are in a precarious position because of bad loans, and they could fail in the aftermath of a No vote in the referendum because investors may be reluctant to bail them out, deterred by market jitters.

If that happens, they would drag with them the fortunes of the eurozone, as well as the fragile dreams and life plans of an untold number of ordinary Italians.

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That thought could knock the wind out of the already nervous markets, and EU leaders watching nervously from afar.

"The people who govern us should be very well aware of the way in which us poorer people live," D'Angelo said in a CBC interview this fall at her home in Civitavecchia, a port town on the Mediterranean.

"I was looking forward to a tranquil old age, but I'm completely alone now, and they have to know that. No one can ever repay me for the loss of my husband."

For all the alarming headlines portending doom after Sunday's referendum, there have been a rival number playing down its significance. That's because the referendum fallout, like other tranches of Italy's many near-crises, can, in isolation, seem containable.

But the teetering banks — stuck with millions of dollars in so-called non performing loans after an economic slowdown brought on too many bankruptcies — along with the possibility that Prime Minister Matteo Renzi will resign in the event of a No win, can be a potent, destabilizing combination.

The danger lies in a number of Italy's near-crises coalescing into a perfect storm.

Just ask those who live here and are in the know.

"Listen, Italy has a fragility," says Marcello Messori, a professor of economics at LUISS University in Rome.

Troubled banking sector, dysfunctional institutions

One of Italy's vulnerabilities is its troubled banking sector — often described as the eurozone's weakest link. Also a problem is the huge amount of public debt — its ratio to GDP is the worst in the eurozone after Greece. Another is its slow-moving political system, which is the subject of the referendum on Sunday.

The combination between political instability and fragile institutions is a real mess, and it's quite dangerous.- Marcello Messori, economist

"The combination between political instability and fragile institutions is a real mess, and it's quite dangerous," said Messori.

The referendum also took on a riskier dimension when Renzi made it personal: he promised to resign if the people reject the constitutional reforms he has proposed.

The changes would make it easier to pass laws by diminishing the role of the senate, which currently has equal weight in determining legislation, often creating political gridlock.

Other proposals include:

• Reducing the number of senators from 315 to 100;
• Eliminating the direct election of senators. Members will instead come from regional assemblies;
• Disallowing confidence votes in the senate;
• Preserving equal power for both houses on constitutional questions and the choosing of the president.

No vote could compound existing problems

Polls (if they're still to be believed) suggest the majority will vote No, egged on by a diverse group of opponents brought together mostly out of a desire to oust Renzi (and, for many, to leave the eurozone).

The debate has been bitter, especially of late. Away from the gaze of the international media, the debate became at times so divisive that even tranquil Florence, where Renzi was once mayor, erupted in tear gas and clashes between protesters opposed to the referendum and police.

If his opponents succeed, Renzi's removal could also mark the start of a period of political instability that might deepen the economic malaise, not just in Italy but in the whole European Union — which is still grappling with the blowback of Brexit.

Renzi's removal alone isn't the end of the world. A caretaker government could be brought together to get Italy to the next election.

But added to the country's near 40 per cent youth unemployment rate, blindingly rampant corruption, a sluggish economy that the IMF predicts will struggle to grow, and the potential consequences of a No vote multiply.

This would not be a cataclysmic event, but, certainly, it would introduce quite an element of instability.- Franco Pavoncello, political scientist

"I believe that this would not be a cataclysmic event, but, certainly, it would introduce quite an element of instability in this country," said Franco Pavoncello, a professor of political science and president of John Cabot University in Rome.

In the final stretch of campaigning, Renzi still sounded optimistic, pointing to the undecided voters — as many as 20 per cent in some polls — as his possible salvation.

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"I continue to think that in the deep belly of this country, there is a great desire for change," he said at a rally recently.

A failure, however, would bring Italy back to the drawing board where badly needed institutional and political reforms are concerned.

"One can argue let's not change anything because this reform is not perfect," says Pavoncello. That is a "worrisome idea, too, because at the end of the day, best is enemy of the good."