Kevin Lamarque / Reuters U.S. President Barack Obama and Italian Prime Minister Matteo Renzi at the White House, October 2016.

A Friend in Need

Obama, Renzi, and Italy's Referendum

On Tuesday, October 18, Italian Prime Minister Matteo Renzi dined at the White House for what may turn out to be Barack Obama’s last state dinner as U.S. president. This honor was the Obama administration’s way of showing gratitude. Renzi has supported the administration in Europe and the Mediterranean, agreed to sanctions on Russia that go against Italy’s material interests, and advocated for a macroeconomic policy position—in favor of fiscal stimulus—that is more consistent with the one taken by the U.S. Treasury than with those advocated by the European Commission, the Council of the European Union, and the European Central Bank.

The invitation, though, was more than a show of gratitude: it was also a signal of support. In less than two months, on December 4, Renzi will face an important popular referendum on his constitutional reform agenda, upon which he has staked his political career. If he wins, he will be able to pursue his economic reform agenda at home and European integration abroad. If he loses, however, he will most likely resign from office and Italy will turn inward, as its politicians become embroiled in a protracted fight over reforming the country’s political institutions. Speaking at their joint press conference last night, Obama admitted that although he is “rooting for success" in the referendum, he hopes that the Italian leader will “hang around for a while no matter what.”

L'AVVENTURA

Renzi is attempting to transform the Italian political system, which is in dire need of fixing. The country’s constitution requires that the government have majorities in both chambers of parliament to pass legislation. Since the two chambers are elected using different formulas of proportional representation, the Italian parliament has traditionally been a patchwork of parties, with governments required to juggle numerous particular interests in order to put together a large enough coalition to pass laws. Perhaps unsurprisingly, Italy had 49 governments from 1946 to 1992, a period referred to colloquially as the “First Republic.” As governments rose and fell, the personnel rarely changed—the same group of political leaders survived by moving in and out of successive coalitions. When the First Republic collapsed amid a widespread bribery investigation, Italy’s politicians tried to refashion their political institutions. The results, however, were only partly successful, and since then Italy's "Second Republic" has been plagued by political instability.

Today, maintaining governing coalitions is too complex a task for Italian politicians to manage. Indeed, most politicians recognize that some sort of constitutional reform is required if Italy is ever going to pursue other pressing reform agendas. That is why Renzi has proposed decreasing the importance of the upper chamber, the Senate, by reducing the number of senators and having them appointed by the regions rather than directly elected. Within this new arrangement, the government will only need a majority in the lower chamber, the Chamber of Deputies, in order to remain in office and pass legislation. Renzi is attempting to transform the Italian political system, which is in dire need of fixing.

This reform of the Senate is part of a larger package of measures recommended by a committee of so-called “wise men” in 2013, and which Renzi has made the centerpiece of his agenda since taking office in 2014. That package includes a number of other proposed changes to the constitution, such as abolishing the provincial level of government—widely considered to be wasteful and superfluous—and a new electoral law for the Chamber of Deputies, which awards a majority bonus to the largest political party. Both chambers of parliament have voted twice to approve the reform package. Now it must be approved in a popular referendum.

The last parliamentary vote, however, was held in April of this year, and popular support for the reforms has decreased since then. If he is to win the referendum contest, Renzi will need to overcome divisions within his own center–left Democratic Party (PD) and face down a multiparty opposition that stretches from the populist left to the anti-immigrant right. Last winter, polls were tilted enough in favor of “Yes” that Renzi threatened to resign from office if the vote didn’t go his way—a typical expression of his combative and self-confident leadership style. But by personalizing the referendum, that threat presented a two-fold problem. The first was that Renzi made the vote as much about him as it is about the constitutional changes. Now that the opposition Five Star Movement (M5S) has overtaken Renzi’s PD in the polls, the threat looks like a miscalculation.

The deeper problem with Renzi’s threat to resign was that it played directly into the favored narrative of the “No” campaign, which holds that the purpose of Renzi’s reform agenda is to concentrate power into the hands of a few individuals. For those who oppose the reform, the question is not whether Italy needs to strike a new balance in the way its government functions, which most agree it does. It is instead whether the kind of decisive government action enabled by the Renzi reforms would give too much power to the leadership of the largest political parties. Renzi, by emphasizing his personal importance as a political leader, inadvertently validated his skeptics’ criticism.

HARD TIMES

Unfortunately for Renzi, he is trying to rally support for contentious changes at a time when Italy is facing a number of major challenges that are pushing voters away from the government and into the arms of the populist M5S. The first is migration. Although, thanks to the EU deal with Turkey, the burden of migration has lightened for Europe as a whole, for Italy, it has gotten heavier. According to data from the United Nations High Commissioner for Refugees (UNHCR), more than 144,000 migrants crossed the Mediterranean into Italy between January 1 and mid-October of 2016—just 10,000 short of the total for the whole of 2015. Since most of these migrants travel in boats from Tunisia and Libya, the agreement with Turkey can do little to stem the flow. Meanwhile, Italy’s northern neighbors are no longer as open with their borders as they were previously, and as a consequence, an increasing number of migrants are finding themselves trapped in Italy. The Renzi government has tried distributing the migrants to communities throughout the country. But now that the reception centers are filling up, local politicians are complaining that they lack the resources to cope.

Obama and Renzi greet one another at an arrival ceremony on the White House lawn, October 2016.

Obama and Renzi greet one another at an arrival ceremony on the White House lawn, October 2016.

Italian banks present another problem. Italy has a relatively small and conservative banking system that focuses primarily on the domestic market. Its clients are Italy’s many small- and medium-sized enterprises. This was an advantage during the 2008 financial crisis, when other European banks faced huge losses on toxic mortgage-backed securities that they had purchased in the United States; Italy’s banks were largely unexposed. But today, eight years of painfully slow growth have led to record-breaking bankruptcy rates among Italian businesses and little demand for new investment. In this climate, the domestic focus of Italian banks has become a major source of weakness: when local business fail, banks not only lose vital customers, but also end up with non-performing loans. The entanglement of politics and banking is another source of trouble. As Renzi learned last December when he tried to reorganize four small regional banks, a bailout looks like political favoritism and risks producing a backlash. Thus the Renzi government not only has to find a way to liberate the banking system from a mountain of bad loans, but also generate enough confidence among investors for them to be willing to put their capital at risk.

If anything, Italy’s European partners have so far made both problems worse. Prior to last year’s large wave of migration to the rest of Europe, the EU was already engaged in ineffective efforts to slow migration into Italy, mostly by restricting open-water rescue operations. These restrictions, however, only increased the number and size of tragedies without effectively deterring new migrants. The situation worsened as migration increased in late 2015. Italy’s neighbors not only tightened their borders, but also turned on the Italians, who, along with the Greeks, were accused of not doing enough to control their borders. According to recent private polling, more than half of all Italians believe that Europe is making Italy’s migration problem worse, and the same number say that Europe’s migration policy disadvantages Italy.

The EU has been no better on the banking front. Most European leaders learned the lesson from the crisis that banks take on too much risk when they know that they will get bailed out by taxpayers. They have therefore passed legislation, the EU Recovery and Resolution Directive, to ensure that investors will also be at risk in the event of a crisis. That makes sense when regulating large banks that speculate with complex assets in foreign countries; it makes less sense for provincial banks with a very parochial client and investor base, as is generally the case in Italy.  The Renzi government would thus prefer to first restructure the banks by cleaning up their balance sheets and merging weaker institutions, and only then apply the new European regulations. Other European leaders, in Germany and elsewhere, worry that this would set a bad precedent, and so they are insisting that Renzi restructure Italy’s banks within the new framework of constraints. If there is no “bail-in” of private investors, they argue, then Italian banks will only continue to put themselves at risk.

LENDING A HAND

The constitutional referendum thus comes at a critical time for Italy, and securing public support from foreign leaders, such as Obama, could help Renzi see his reforms through. Yet supporting an Italian leader is a delicate task for a U.S. president. Italians, especially those on the left, have painful memories regarding U.S. interference in Italian politics. For much of the Cold War, successive U.S. administrations lobbied to keep the Italian Communist Party out of government, but they have also made more recent interventions. In 2006, U.S. President George W. Bush invited center–right Italian Prime Minister Silvio Berlusconi to address Congress just before the start of the Italian elections, prompting loud protests from the Italian center–left. And just last month, John Phillips, the U.S. ambassador to Italy, provoked blowback by suggesting that the global investment community would react badly to a “No” vote in the upcoming referendum. Left-wing politicians were quick to criticize what they perceived as foreign meddling in domestic Italian affairs. The Italian president, Sergio Mattarella, had to reassure voters that the Italian people remained sovereign.

Renzi therefore faces a dual challenge in marketing himself and his agenda. On the one hand, he must convince Italians that his proposals for constitutional reform will retain Italian traditions of consensus-building, and will not be a means for a small group of elites to hijack control of the country. On the other hand, he must show that he, personally, can be trusted; that he can admit to mistakes, defend Italy’s interests, and respond to the country’s many challenges. Sitting down with a popular U.S. president at a formal state dinner provides important symbolic support for that message, by highlighting Renzi’s qualities as a statesman. If the two leaders can avoid giving the impression that the United States is officially backing the “Yes” campaign, the dinner may even provide a much-needed boost to Renzi’s domestic legitimacy, and begin to reassure those still-wavering members of the Italian electorate that he is not as dangerous for Italian democracy as his opponents paint him to be. 

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