ADAM KUBINA

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SNAPSHOT October 19, 2016

A Friend in Need
Obama, Renzi, and Italy's Referendum

By Erik Jones

On Tuesday, October 18, Italian Prime Minister Matteo Renzi dined at the White
House for what may turn out to be Barack Obamas last state dinner as U.S.
president. This honor was the Obama administrations way of showing gratitude.
Renzi has supported the administration in Europe and the Mediterranean, agreed
to sanctions on Russia that go against Italys material interests, and advocated for a
macroeconomic policy positionin favor of scal stimulusthat 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 oce and Italy will turn inward, as its politicians become embroiled in
a protracted ght over reforming the countrys 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 xing. The countrys constitution requires that the government have majorities
in both chambers of parliament to pass legislation. Since the two chambers are
elected using dierent 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 changedthe same group of political leaders
survived by moving in and out of successive coalitions. When the First Republic
collapsed amid a widespread bribery investigation, Italys 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 oce and pass legislation.

Renzi is attempting to transform the Italian political system, which is in

dire need of xing.

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 oce in 2014. That package includes a
number of other proposed changes to the constitution, such as abolishing the
provincial level of governmentwidely considered to be wasteful and superuous
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 centerleft
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 oce if the vote didnt go his
waya typical expression of his combative and self-condent leadership style. But
by personalizing the referendum, that threat presented a two-fold problem. The
rst 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 Renzis PD in the polls, the threat looks like a miscalculation.

The deeper problem with Renzis threat to resign was that it played directly into
the favored narrative of the No campaign, which holds that the purpose of Renzis
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 rst 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 2016just 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 ow. Meanwhile, Italys northern neighbors are no
longer as open with their borders as they were previously, and as a consequence, an
increasing number of migrants are nding themselves trapped in Italy. The Renzi
government has tried distributing the migrants to communities throughout the
country. But now that the reception centers are lling 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.
Italian banks present another problem. Italy has a relatively small and conservative
banking system that focuses primarily on the domestic market. Its clients are Italys
many small- and medium-sized enterprises. This was an advantage during the 2008
nancial crisis, when other European banks faced huge losses on toxic mortgage-
backed securities that they had purchased in the United States; Italys 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 nd a way to liberate the banking system from a mountain of bad loans, but also
generate enough condence among investors for them to be willing to put their
capital at risk.

If anything, Italys European partners have so far made both problems worse. Prior
to last years large wave of migration to the rest of Europe, the EU was already
engaged in ineective eorts to slow migration into Italy, mostly by restricting
open-water rescue operations. These restrictions, however, only increased the
number and size of tragedies without eectively deterring new migrants. The
situation worsened as migration increased in late 2015. Italys 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 Italys
migration problem worse, and the same number say that Europes 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 rst 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 Italys 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 centerright Italian Prime Minister Silvio Berlusconi to address
Congress just before the start of the Italian elections, prompting loud protests from
the Italian centerleft. 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 aairs. 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 Italys
interests, and respond to the countrys many challenges. Sitting down with a
popular U.S. president at a formal state dinner provides important symbolic
support for that message, by highlighting Renzis qualities as a statesman. If the two
leaders can avoid giving the impression that the United States is ocially backing
the Yes campaign, the dinner may even provide a much-needed boost to Renzis
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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