Everything Europeans need to know about Italy’s referendum

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Investor concern about European political risk has sharpened further following the surprise outcome in the US presidential elections. That result, following Brexit, is seen as confirming the surge of an anti-establishment movement fuelled by discontent at the impact of globalisation. There are a number of polls coming up, but the Italian referendum on 4 December and its potential ramifications have been in the spotlight recently.

What is the referendum about?

The referendum is on a proposal to change the electoral system of the Senate, which has been already approved by parliament. Italy’s political system would become a single-house system, where only the lower house ratifies a government and approves most ordinary legislation. The current elected Senate would become a House of Regions and Municipalities, with limited and specific legislative powers and no right of veto. The number of MPs in the Senate would fall from 315 to 100.

The reform to the Senate is part of a broader reform to the electoral system that has been on the agenda since Matteo Renzi took office in 2014. Italy has a perfectly symmetrical parliamentary system (a bicameral system), in which the Lower House and the Senate effectively have the same powers. This tends to result in laws bouncing back from one House to the other, often blocking the legislative process and hindering policy making. A reform to the lower house (the Italicum) was already agreed by parliament but a number of appeals have been filed against it at Italy’s Constitutional Court (see box below). If both reforms of the lower house and Senate are passed, it would make government formation easier in the future and make it easier for future governments to implement their policy agenda.

What is the likely result?

The last opinion polls suggest that the No camp has a slight lead. Our running average of the last five polls stands at 40% for No and 37% for Yes. This essentially means that the outcome is too close to call. The gap is within the margins of statistical error. This is especially the case given the recent poor performance of opinion polls in predicting actual outcomes. In addition, there is a large proportion of the population (23%) that is undecided. The way these voters turn will have big implications for the outcome and increase the uncertainty.

What happens in case of a No vote?