Peter S. Goodman
The widening spread between lower-yielding German bonds and those issued by debt-saturated European countries amounts to a flashing indicator that investors see risks for the southern periphery. These market moves were muted because the results had been anticipated.
Indeed, for Europe and the rest of the world, this dynamic was uncomfortably familiar. For nearly a decade, the 19 nations sharing the euro have lurched from one crisis to the next, with no effective fix. A currency designed to unite the adversaries of World War II has instead generated fresh divisions — between creditor and borrower; Northern Europe and the Mediterranean.
In a year in which Britain voted to abandon the European Union and the American electorate selected Donald J. Trump as the next president, Italy offered its own contribution to the global populist insurrection. Against this backdrop, the basic contours of the world economy are now uncertain.
The British vote to exit Europe — Brexit, in common parlance — threatens to cleave the geography of the world’s largest single marketplace. The American elevation of Mr. Trump hands authority over the world’s largest economy to a man who has threatened a trade war with the second-largest, China. The fall of Mr. Renzi creates an opening for the populist Five Star Movement, a party that seeks to free Italy of the euro and its strictures on government spending.
Even that possibility threatens Europe with trouble. If investors worry that Italy may leave the euro, they will demand greater rewards for continued lending. Those with the greatest debt burdens — Greece, Spain and Portugal — could see their borrowing costs rise beyond their ability to pay.
For now, such grim scenarios appear remote. The referendum maintains the power of the Italian legislature’s upper chamber, a potent check on the Five Star Movement, or any government pursuing radical change.
The most immediate consequences fall on the Italian banking system, now choked with some 360 billion euro, or about $385 billion, in suspect debts.
Mr. Renzi tried and failed to inject public funds into Monte dei Paschi, the perpetual locus of fears about an Italian-bred financial conflagration. The European Union, led by Germany, effectively forbade that step, citing new rules barring taxpayer bailouts to limit the temptation of bankers to engage in reckless lending.
Mr. Renzi instead forged a plan that has Monte dei Paschi scrambling to secure €5 billion from private investors.
“For Monte dei Paschi, it’s going to be extremely hard to close the capital raise by end of the year,” said Nicola Borri, a finance professor at Luiss Guido Carli University in Rome. “The political future is so uncertain.”
Most experts assume a caretaker Italian government will wind up seeking permission from European authorities for some form of a taxpayer-financed rescue of Monte dei Paschi, while agreeing to wipe out the investments of a thin slice of bondholders.
The consensus is that Italy can patch immediate holes in the banking system. But the referendum has destroyed what momentum existed to address the condition that is both cause and effect of the banking problem — a dire lack of economic growth.
Italy’s banks are stuffed with uncollectable debts in part because the country’s economy is smaller than it was a decade ago. Bad loans on bank balance sheets reflect that millions of people have lost jobs, eliminating spending power, while companies have seen sales evaporate.
Mr. Renzi pursued reforms aimed at spurring companies to invest. He made it easier for companies to terminate low-performing workers to eliminate a chief impediment to hiring them in the first place — the fear that giving someone a job was akin to adopting them as a dependent forever.
He sought to speed civil processes in the notoriously inefficient court system to make it easier for banks to recoup bad debts by collecting collateral.
The constitutional changes he sought were aimed at clearing another blockage to reform. They would have trimmed the powers of the upper chamber of the legislature, a place where proposals die.
Voters clearly did not trust Mr. Renzi to wield greater power. Now, they will be represented by someone with less power where it matters a great deal: Brussels and Berlin.
Debt-saturated nations in Europe have long argued that their burdens would be lighter if they could spend more money to spur faster economic growth.
But the European Union — anchored by Germany — has cited rules limiting the spending of member governments with big debts. Instead, Brussels and Berlin argue, such countries must deliver so-called structural reforms, stripping away labor protections and trimming pension benefits.
In a testament to the severity of this creed, German Finance Minister Wolfgang Schäuble effectively threatened to banish Greece from the euro if Athens did not deliver on reforms it promised as a condition of successive European bailouts.
“Athens must finally implement the needed reforms,” Mr. Schäuble told the Bild am Sonntag newspaper in an interview published on Sunday, a day before eurozone finance ministers convened to court the participation of the International Monetary Fund in the Greek bailout. “If Greece wants to stay in the euro, there is no way around it.”
Mr. Renzi was a rare leader who carried credibility in such quarters. He gained modest relief from European spending strictures in part by pointing at his reforms.
“Renzi is the only leader in recent history who has advanced a structural reform agenda,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a risk consultancy.
Now, Mr. Renzi is gone, along with his reform trajectory. What is most palpably still here is an Italian economy that is growing anemically, soon to be presided over by a caretaker government with a limited mandate.
“What chance does a less effective prime minister overseeing a caretaker government have of getting a hearing in Brussels and Berlin?” Mr. Rahman said. “It’s just not possible.”
Italy has no fuel for growth. It has no clear way to extricate itself — or the other parts of the planet connected to money — from the perils of its grinding banking crisis. And the one reinforces the other.