On June 2, 1946, just a year after the end of World War II, Italians went to the polls to make a fateful choice: whether to remain a monarchy or to become a republic. The republicans won and swiftly moved to set up a constituent assembly, which gave Italy its fundamental law. Aside from a number of changes introduced through the post-war years, the Italian Constitution has governed the country ever since.

On Sunday, Italians headed to the polls to make a choice again, and if the stakes aren’t quite as high as they were 70 years ago, they are nonetheless higher than they might seem at first glance. Matteo Renzi, who began his term in 2014 as the country’s youngest-ever prime minister, is asking voters to confirm the sweeping changes to the national government’s constitutional setup that he has already pushed through Parliament.

This isn’t a vote simply about institutional infrastructure, however. Renzi has staked his political career on the reform; a defeat would almost certainly deal a mortal blow to his cabinet. A government crisis could hurt Italy’s fragile recovery and make it harder to find investors willing to prop up the country’s ailing banking sector. An Italian crisis could hit the EU, where Renzi is still seen as an important bulwark against the rising wave of populism. And right now, Renzi looks poised to lose his bet.

With the vote coming only weeks after Donald Trump stormed to victory in the US presidential election on an anti-establishment platform, Italy’s populists are increasingly confident of a win. Not least, that’s because the prime minister made a decision, unusual for a head of government, to thoroughly embrace one side in a foreign election — the side that ultimately lost.

If the stakes aren’t quite as high as they were 70 years ago, they are nonetheless higher than they might seem at first glance

The particulars of what Italy’s referendum vote is actually about have, to some extent, been lost in the discussion over its larger implications. Renzi’s constitutional reform aims to streamline decision-making in Italy and strengthen the powers of the executive. At the moment, Italy’s notoriously unwieldy Parliament is made up of two branches: the Chamber of Deputies and the Senate, each with equal powers. To become law, a bill needs to be approved by the two chambers. Both can suggest changes, slowing the process down still further.

The proposed reform would transform the Senate into a smaller, unelected chamber and strip it of most of its powers. It would also bring back to the central administration many functions that have been given to the regions, eliminating a host of overlaps. The reforms, supporters say, will help overcome Italy’s chronic political instability, which has produced 63 governments in 70 years, and will also make it easier to pass the reforms that are needed to boost the economy. The country’s business and banking communities — including Confindustria, the entrepreneurs’ federation — have spoken out in favour of the changes.

There are real reasons to oppose the proposal. Opponents, who include constitutional experts like Gustavo Zagrebelsky, a former president of Italy’s Constitutional Court, fear that the law would give excessive powers to the prime minister. Others say the reform itself would do little to reduce the fragmentation across and within parties, which is arguably the biggest source of political instability in postwar Italy. The Economist magazine, for instance, advised Italians to vote no, as did Mario Monti, the economics professor who led a technocratic administration during Italy’s sovereign debt crisis and who has accused Renzi of passing a budget law full of irresponsible giveaways in order to buy consensus ahead of the vote. Such opposition complicates the idea that a ‘No’ victory would simply be another win for populist forces.

The last public polls on the referendum consistently showed the ‘No’ camp ahead, having built a 6 to 7 percentage point lead. The ‘Yes’ camp has resorted to pointing to the significant share of the electorate (around 30 to 40pc) that has not yet decided how to vote and is hopeful that a majority will back the reform to prevent a crisis. And yet the situation appears dire.

Italy’s economy remains fragile. Oxford Economics, a consultancy, expects investment would grind to a halt in the aftermath of a ‘No’ vote and predicts growth could halve in 2017 from an already sluggish 0.9pc to 0.4pc. The country’s banking system, which has suffered from a collapse in stock market valuations since the start of the year, remains saddled with around $370bn in nonperforming loans on their balance sheets; investors are concerned about their future stability. Most market analysts fear that the event of a ‘No’ vote would make it impossible for some of the banks that need capital to raise funds, forcing the Italian government to step in, which would come with its own costs to fiscal and political stability.

Foreign Policy/The Washington Post Service

Published in Dawn, Business & Finance weekly, December 5th, 2016