What’s next for Italy after Renzi’s resignation

The emphatic rejection of Prime Minister Matteo Renzi’s proposed constitutional reform returns Italy to a state of political and economic uncertainty. As Renzi prepares to hand in his resignation, President Sergio Mattarella must establish whether the governing Democratic Party is stable enough to support another prime minister as he seeks to avoid the early election that could open the door to the anti-establishment Five Star Movement.

1. What’s the Five Star Movement?
Founded as a maverick web-based movement in 2009, and led by a former comedian, Beppe Grillo, Five Star has risen to become an insurgent force mixing the EU-skeptic stance of populist parties like France’s National Front with more progressive environmental proposals. It won control of city halls in Rome and Turin in June and has pledged to carry out another referendum, on whether Italy should stay in the euro area. It led the opposition to Renzi’s attempt to limit the power of the Senate, the upper house of Italy’s parliament.

2. What’s the establishment solution?
The best option for the president would be to find another prime minister supported by the Democratic Party, which still has a majority in the lower house. Finance Minister Pier Carlo Padoan, Senate Speaker Pietro Grasso and Culture Minister Dario Franceschini have been touted as possible successors, though Renzi will remain nominally in power until the new prime minister has been sworn in.

3. Will the Democratic Party accept that?
That’s the big question. The margin of Renzi’s defeat is so big that he could also be forced out as leader of his party. His office declined to comment on a report in newspaper Corriere della Sera on Monday that he might resign as party leader. Either scenario would significantly complicate and delay any attempt to form a new government.

4. What does President Mattarella want?
Stability. Mattarella never thought that Renzi needed to make the referendum a resigning issue, as the vote, on paper at least, was about reform and not the government’s performance. The president’s preference would be for a new government to last until early 2018 when the next elections are due — but how long a caretaker administration can survive will depend on party
leaders.

5. What do Renzi’s rivals want?
Five Star wants immediate elections. It’s running neck-and-neck with Renzi’s Democratic Party in opinion polls for the first round of a general election and would win a runoff by 53 percent to 47 percent, a survey by EMG released Sunday showed. Ex-premier Silvio Berlusconi, leader of the center-right party Forza Italia, is eyeing a possible comeback, potentially as part of a new ruling coalition.

6. What is Italy’s next priority?
Apart from forming a new government, the priority for mainstream political parties is reform of the electoral law. They are anxious to change the election system for the lower house, because the current system would automatically give a majority of seats to the leading party — and that might turn out to be Five Star.

7. How are markets
responding?
The euro fell to the lowest level since March 2015 as Renzi announced he would resign, though it pared losses by the end of his speech. The euro was 0.5 percent lower at $1.0616 as of 9:15 a.m. local time. Italy’s bonds also slid amid concern the nation’s vote against constitutional reform will embolden nationalist movements, with the yield on Italian notes maturing in a decade surging above 2 percent after the outcome.

8. What does this mean for Italy’s banks?
The political uncertainty could further complicate Monte dei Paschi di Siena SpA’s efforts to raise 5 billion euros as it looks to dispose of 27.7 billion euros in bad debt. Investors may balk at taking part in the offering, which could prompt the state to step in or force the bank to delay its cleanup. This scenario could have a knock-on effect for other lenders such as Banca Carige SpA, a Genoa-based lender under pressure from the European Central Bank to strengthen its balance sheet. Sandro Gozi, Italy’s junior minister for European Affairs, told France’s Europe1 radio that the “No” vote is a return to the “political past” but isn’t a risk for Italian banks or euro membership.
—Bloomberg