Yearender: Italian referendum's eurozone consequences still up for grabs

It remains to be seen whether the outcome of Italy's Dec. 4 referendum that brought about the demise of former prime minister Matteo Renzi will spell doom for the eurozone as some political observers have forecast.

Renzi quit as prime minister after almost three years on the job when close to 60 percent of voters turned down his government's flagship constitutional reform, which would have cut the senate down by two thirds and concentrated some powers from Italy's 20 regions into the hands of central government, among other measures.

The vote, however, was also seen as a judgment on the young reformist premier and his pro-European, pro-immigration policies in times of sluggish economic recovery, in which the euro is being widely blamed for continued unemployment and a lack of prospects for Italy's youth. The result of the referendum was widely hailed by populist, rightwing and euroskeptic parties.

These include the anti-establishment Five Star Movement (M5S) led by comedian Beppe Grillo and the rightwing, anti-immigrant party Northern League, both of which have pledged to call a referendum on continued eurozone membership if they come to power.

London School of Economics visiting fellow Philippe Legrain, a former economic adviser to the president of the European Commission, wrote in an article that the post-referendum fall of the Renzi government "has dealt another blow to a crisis-ridden European Union" and that "the mere possibility of Italy leaving the eurozone -- which would entail the redenomination of 2.2 trillion euros of Italian government bonds in devalued lira -- could spark financial panic."

However, forecasts of market turbulence in case of a Renzi defeat failed to materialize. On Dec. 5, Fitch ratings agency said the "No" referendum victory would not spark immediate change in Italy's sovereign debt rating. In October, the agency revised downward its Italian outlook (BBB+) from stable to negative, citing the country's political risks, troubled banking sector, weak growth and high public debt. That rating will be reviewed by the end of April 2017, the agency said.

While Renzi's demise threw the country into political disarray, the crisis was short-lived and a caretaker government led by former foreign minister Paolo Gentiloni -- also of the center-left Democratic Party (PD) of which Renzi is national secretary -- was in place a week later. Since then, the government has rolled out a 20-billion-euro bank rescue plan and stepped in to nationalize the country's weakest lender -- its third-largest bank, Monte dei Paschi di Siena (MPS).

Just before Christmas, polls showed that the ruling PD was still Italy's number one party at 31 percent in spite of the referendum defeat. The M5S followed with 28.5 percent, while the Northern League polled at 13.5 percent, followed by ex-premier Silvio Berlusconi's center-right Forza Italia (FI) at 12 percent. The small rightwing Brothers of Italy (FdI), the small left-wing Italian Left (SI) and the center-right Area Popolare (AP) came in at under 5 percent.

The outcome of a snap general election, which will likely be held in spring 2017, largely depends on which electoral rules Italy's lawmakers end up agreeing on. For now, most parties appear to be following Renzi's lead with a call for a return to the so-called Mattarellum, the electoral law Italy drafted by the current head of state, President Sergio Mattarella, and used from 1993 until 2005.

Under the law, 75 percent of seats in parliament are assigned via the first-past-the-post system and the other 25 percent on the basis of proportional representation.

The anti-euro M5S, however, is pushing for the so-called Italicum, which was approved into law under the previous Renzi administration and awards a big bonus to the party that comes top, thus giving it a solid ruling majority.

While the M5S benefited greatly from the referendum result, its approval ratings dropped in the wake of a series of fake signature scandals involving several of its MPs, as well as the arrest on suspicion of corruption of the former right-hand man of M5S Rome Mayor Virginia Raggi. Her administration, seen as a test case for the M5S's ability to govern the country, has been plagued by a series of scandals and high-ranking resignations.

While the fortunes of Italy's most euroskeptic parties still hang in the balance, some analysts see the victory of Donald Trump as U.S. president as a harbinger of a much-needed economic boost for the eurozone.

The U.S. dollar's rise in the wake of Trump's victory will likely make European exports more competitive. Coupled with the U.S. president-elect's pledge to cut corporate taxes from 35 percent to 15 percent and his plans for massive infrastructure investment and military spending, Europe -- and Italy -- can look forward to a rapid increase in U.S. demand, according to Daniel Gros, director of the Brussels-based Center for European Policy Studies and a former economic adviser to the European Commission and the European Parliament.

While Renzi's referendum defeat may have been a sign that Italy would be the next euro domino to fall after Brexit, the game is still wide open. Endi