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Here's why you should care about the Italian referendum

Italians will vote on major referendum Sunday night. There's a lot at stake. Here's why you should care.

This is a referendum on political and economic change. The Italian political system is a mess and one of the main reasons the economy is weak. It's a mess because there is a fatal flaw at the heart of the system. After the disaster of World War II and the Italian experience under the Mussolini dictatorship, the Italian Constitution came into force in 1948.

The objective was to make it very difficult for any one party to control the government. Good in theory, but they went so far in the other direction that nothing can get done.

That's because there are two houses — a lower house (a Chamber of Deputies) and an upper house (a Senate of the Republic). They have the same purpose and are elected at the same time for the same five-year terms. The government must have the support of both houses to survive. All legislation must be passed by both houses. If there are any changes in a bill in one house, it must be approved in the other.

The upshot: because the prime minister is in an inherently weak position, the government is inherently unstable and nothing gets done. And I mean nothing: 61 governments since World War II.

Think about that. Sixty one governments in 70 years.

Here's the good news: Matteo Renzi became prime minister in February 2014 specifically on a platform of change. He pushed through bills that would make the Italian system more responsive and make it easier for a party to govern. He is now submitting those changes to the Italian people in the form of a referendum this Sunday.

The changes would:

1) Greatly weaken the power of the Senate. Italy would effectively become a single-house system, where only the lower house (the Chamber of Deputies) would ratify a government and approve most legislation. The Senate would have much more restricted powers and no right of a veto.

2) Make it easier to govern by reforming the lower house. Any party that wins 40 percent of the votes in either the first or second round of voting will get a "bonus" of 15 percent additional votes, bringing the controlling votes to 55 percent. This will make it much easier to pass legislation. These changes have already been approved but are being challenged in court.

Here's the bad news: Renzi made a mistake by implying he might resign if the electorate did not pass the referendum. The referendum has enemies because many of the existing political parties think — correctly — that they would lose power if the referendum passed. The opposition has launched a campaign to portray Renzi as an autocratic leader, and implied that if the referendum is passed some future Mussolini will seize control of the government with disastrous consequences.

Here's how topsy-turvy the world has become: Renzi was elected as an anti-establishment reformer two years ago, but he is now seen as representing the "establishment."

This turnaround has important implications for the referendum. This is the year of voting against anyone seen to be the establishment. More importantly, it could broadly be deemed "the year of No."

In the U.K. with Brexit. In the U.S. with Trump. In Colombia with the peace agreement with the FARC guerrillas. And now, possibly, with the Italian referendum.

Except that with the Italian referendum, voting "Yes" is a vote against the establishment, voting "No" is a vote in favor of the status quo.

Right now, the poll odds indicate that voters will vote "No" on the referendum.

Strange, no?

What happens with a "No" vote? Regardless of whether Renzi resigns, it would certainly make it more difficult for him to govern. His ability to pass any further reforms would certainly be in doubt. More political instability. More caretaker governments. More paralysis. More young people leaving the country because it's impossible to open even an espresso stand due to red tape and absurdly high taxes. More tax evasion. Less growth. Weaker markets.

There's also speculation that the Eurosceptic Five Star Movement would take control of the government in some future election.

Many Italians simply shrug and insist they will muddle through. But the country is slowly fading away.

I'm not joking: no one is having kids because it's too expensive to raise them. The Italian birth rate is below 1.4 babies per household. For most countries, you need roughly 2.1 babies per household to have a stable population.

Italy, like Japan, has a choice: find some way to push the economy into a higher gear or start liberalizing its immigration laws in a big way.

Voting for the status quo is not the way to do that.


  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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