Italy could have another referendum in 2017 - and it will make things even more complicated
Writing in a piece of research circulated to clients on Wednesday, Barclays analyst Fabio Fois notes that Italy's Constitutional Court said that it will consider approving a referendum on reforms to the country's labour markets, first proposed during the premiership of Matteo Renzi.
Fois writes (emphasis ours):
"As if the schedule of the Constitutional Court (CC) were not enough busy in January, with the ruling on the Italicum voting system expected on the 24th, the court announced today it will review (on the 11th) a request submitted by the largest union, CGIL, to hold an abrogative referendum on some parts of the labour market reform (Jobs Act) approved under the Renzi government."
"The Referendum would entail three specific questions on different aspects of the reform, of which the most important from an economic perspective concerns the decision not to apply Article 18 (of the Labour Treaty) to the newly introduced 'single' open-ended contract, in which job protection increases with seniority. Article 18 protects workers employed by firms with more than 15 employees against unfair dismissal."
That would be bad news in several ways for Italy, Fois argues. "If the Referendum on Article 18 were to go through, it would be extremely negative, in our view."
Firstly, the impact of a cancelling a major set of reforms designed to improve Italy's competitiveness by enabling job creation, increasing productivity and flexibility could have a significant negative impact on Italy's economic growth.
"Since the reform was enacted (March 2015), hiring in permanent positions has increased remarkably, supporting consumer confidence and, with that, household spending. Indeed, private consumption has been the most important driver of the modest economic recovery, which gained some momentum in 2015," Fois argues.
Earlier in December, the country voted overwhelmingly, almost 60/40, against a series of proposed changes to the Italian constitution, which would have taken power away from the Italian senate, and place more in the hands of the lower chamber of parliament.
While the vote was officially held on the reforms, it was broadly seen as vote on the leadership of Matteo Renzi, who resigned after he lost.
As Fois puts it, a rejection of labour market reforms "would be a very negative indication about the country's willingness to press ahead with reforms. Indeed, the signal would be much more indicative than the one delivered with the Referendum on Constitutional reforms, which was largely charged by short-term political meaning, in our view."
Finally, Fois argues that the rejection of these reforms would make snap elections in the second quarter of 2017 more likely, further muddying an already difficult climate. Snap elections would likely see the populist Five Star Movement - which does not identify itself within the traditional right/left political spectrum, and is highly eurosceptic - gain further traction in the country.