Renzi’s Gamble Proved Disastrous for Italy’s Economy

By, Desmond Molloy SAR ’19

Designed to prevent a resurgence in fascism, the Italian constitution has frequently paralyzed the national government. Like the United States Congress, but unlike the majority of world governments, the Italian Parliament is bicameral; any legislation must pass the body’s two chambers, the Senate and the Chamber of Deputies, in identical form. Because different parties may control the two bodies, the legislative process is often slow and tortuous, making significant political change difficult in the extreme. Upon taking office in 2014, Matteo Renzi often found himself frustrated by Parliament’s glacial progress. Despite passing significant labor law reforms and speeding up massive infrastructure projects, Renzi decided to stake his political career on a controversial constitutional referendum, which would have drastically decreased the Senate’s power. It backfired; opposition parties seized on an opportunity to sabotage a leader they have dubbed il rottomatore (the demolition man). Needing two thirds of the vote to pass, the referendum collected just over 40% of the electorate. Renzi promptly resigned, ending a promising prime ministry.

While Italy has long suffered from political malaise, the collapse of the Renzi government came at an especially bad time. No European country besides Greece was affected as heavily by the financial crisis of 2008; Italian GDP is 10% lower than it was in 2007, and unemployment hovers around 11%.(1) Macroeconomic conditions do not favor recovery. Monte dei Paschi di Siena, the country’s third-largest bank, is trapped in a financial half-life; it holds enough assets to force Rome to keep it solvent with public money, but lacks the capital to lend to businesses and households.(2) Little money remains available for investment, hamstringing growth.(3) And like Greece before it, Italy is plagued with astronomically high public debt. After decades of lavish public sector spending, the country currently owes debtors 130% of its GDP.(4) Observers fear a Greek-style loss of solvency, which would put Rome at the mercy of the embattled European Union.

Renzi left the Italian government in a steady pair of hands; his successor, former Foreign Minister Paolo Gentiloni, had a distinguished career in public service. But Italian politics may be the greatest threat to the country’s economic stability. Former Prime Minister Silvio Berlusconi, who sided with Renzi to introduce the constitutional referendum only to turn on him during the campaign, remains influential.(5) His center-right Forza Italia party has lost much of its strength since Berlusconi was forced to resign in 2013, but can still command a sizeable share of parliamentary seats. But while Forza Italia and Renzi’s Democratic Party (PD) are relatively conventional, the rest of the Italian political scene is dominated by populists. On the right, the Northern League, a regional party seen by many as an Italian counterpart to France’s Front Nationale or the British UK Independence Party, has broadened its appeal in recent years, playing on concerns about refugees crossing the Mediterranean. And on the left, the Five Star Movement (M5S), founded and still led by former comedian Beppe Grillo, saw its star rise through the referendum (6). Of these four parties, only the PD supports Italian membership in the European Union, long a mainstay of the country’s politics. If the prospect of Brexit frightened EU proponents, the loss of Italy, a eurozone member long integrated with the rest of the continent, would send them into hysterics (7).

Italy’s current predicament was never inevitable. Europe’s third most populous country has strong manufacturing and farming sectors, a rich cultural heritage ripe for tourism and an enviable location. From the 1950s to the late 1980s, Italy grew rapidly, overtaking even the United Kingdom and reducing poverty in its historically underdeveloped south. But in recent years, poor governance has squandered more opportunities for economic growth than in any other EU member state. The demise of the Renzi government, and the patchwork of populists hoping to replace him, make it unlikely that this trend will be reversed any time soon. The IMF currently estimates that without major shifts, Italy will not regain its full economic strength until 2025. Given the European Union’s current instability, it is far from certain that Rome can wait that long. Matteo Renzi’s economic reforms could still lead to growth; they were only implemented a few years ago, and the full effects have not unfolded. Prime Minister Gentiloni could emerge as a dynamic leader. But even this would be a silver bullet for Italy’s woes. The country has enjoyed a strong bond rating for much of the recession, but was unable to leverage it into meaningful growth. (8) For the forseeable future, a return to Italy’s postwar economic vitality is a farfetched prospect.

  1. Dempsey, Judy. “Italy Rocks Europe’s Core.” Carnegie Endowment for International Peace. December 6, 2016. Accessed March 13, 2017.
  2. Reinhart, Carmen. “Fleeing From Italy.” Project Syndicate. December 23, 2016. Accessed March 13, 2017.
  3. Ibid.
  4. Lachlan, Desmond. “Italy’s lost decade.” American Enterprise Institute. December 29, 2016. Accessed March 13, 2017.
  5. Dempsey, Judy. “Italy Rocks Europe’s Core.” Carnegie Endowment for International Peace. December 6, 2016. Accessed March 13, 2017.
  6. Legraine, Philippe. “Italy on the Brink.” Project Syndicate. December 8, 2016. Accessed March 13, 2017.
  7. Ibid.
  8. Lachlan, Desmond. “Italy’s lost decade.”

Photo credit: Getty Images, Franco O.