Tony Gentile / Reuters Italian Prime Minister Matteo Renzi speaks at a press conference in Rome following the December 4 constitutional referendum, December 2016.

After the Italian Referendum

What Comes Next

Sometimes the polls are right. In Italy, the last polls published before Sunday’s referendum showed a widening opposition to Prime Minister Matteo Renzi’s proposed constitutional reform package. Although there were rumors that the contest had tightened up in the last two weeks, when polls could not legally be published, the government ultimately lost by a wide margin. Just under 60 percent of the Italian electorate voted against Renzi’s package, whereas just over 40 percent supported it (turnout was a historically high 65.5 percent.) Renzi, speaking just after midnight on Monday morning, acknowledged defeat. He thanked the country for its involvement in the debate and for the high level of participation. He also made it clear that he would tender his resignation.

Yet while Renzi’s resignation will attract headlines, it is hardly the end of the story. Italy now needs a new government and likely some electoral reform, but there are also some more pressing and complicated issues. Now that the referendum has failed, the next Italian government—which will have to draw support from Renzi’s Democratic Party to governwill need to address five challenges in particular: a worsening sovereign debt problem, an unstable banking system, tangled public finances, immigration, and the disillusionment of the country’s youth.

A TANGLED WEB

The most pressing cause for concern is Italy’s sovereign debt. Over the course of the referendum campaign, especially between September and November, political uncertainty contributed to a widening spread between long-term Italian and German bond yields, suggesting that investors were seeing Italian bonds as an increasingly risky bet. But yields have also been rising because of the European Central Bank’s limited capacity to act as Italy’s purchaser of last resort. The ECB’s large-scale asset purchase program, which began in January 2015, has ensured for the last two years that there would be a steady demand for Italian bonds. Yet that program is set to end in March 2017, at which point the demand for Italian bonds

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