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Italy could be heading for another risky referendum on reforms

Continuing the battle on the referendum next December 4th, the 'Vote No' supporters parade through the streets of various cities.
Andrea Ronchini | Pacific Press | LightRocket

Italian voters might have to head to the polls sooner than expected and not to elect a new government.

The Italian constitutional court said Wednesday that it will assess the request of the country's largest trade union for a referendum on labor market reform. Its decision will be announced on January 11, but expectations are that there are enough signatures to trigger a new referendum vote in the country.

The likelihood of another popular vote – Italy voted and rejected a package of constitutional reforms on December 4 - has sparked further concerns over the country's political and economic stability.

"The likely decision to hold a referendum on the labor market reform approved under the (former PM Matteo) Renzi government is negative news, as it puts at risk one of the most important bills Italy has approved over the past few years," Barclays said in a note on Wednesday.

Labor market reform was one of the flagship events of the mandate of former Prime Minister Matteo Renzi. According to Barclays, repealing the jobs act would mean that there would be renewed uncertainty about firing costs, which would make Italian companies less willing to hire workers on permanent contracts.

Erik Jones, professor of European studies and international political economy at Johns Hopkins University, told CNBC via email that putting labor market reform to a referendum is questioning the legacy of Renzi's government.

"A good comparison would be what Donald Trump is planning to do to Obamacare," he said.

"The jobs act was an important reform insofar as it helped to shift people from precarious to full-time employment," Jones said.

The reason why trade unions want to put the reform to a referendum is because they believe the new laws question the protection of employees, Jones added.

Then-Prime Minister Matteo Renzi speaks after the Italian referendum on constitutional reforms, Palazzo Chigi, Dec. 5, 2016, Rome.
Getty Images

Under the mandate of Renzi, investors perceived Italy as a country willing to move ahead with much needed reforms to increase the country's competitiveness. But such perception seems to be changing.

On December 4, Italian voters rejected reforms to the country's constitution – partly because they interpreted the referendum as an opportunity to show discontent towards the government. But ultimately, the vote blocked constitutional reform. Putting another key reform to a referendum "would be a very negative indication about the country's willingness to press ahead with reforms," Barclays added.

After losing the referendum, Renzi resigned and the Italian president decided that an interim government should be put in place until elections can take place.

If the constitutional court approves the referendum, the interim Italian government can only delay it by calling for earlier elections.

"Since the referendum constitutes a risk for the PD (Democratic Party, led by Matteo Renzi), I suspect that Renzi will ensure that elections are held this Spring before such a referendum can take place. That will push the referendum off the agenda until – I believe – 2018," Jones said.

He believes that elections will take place first and once there's a full government in place, there will be a referendum on the labour market reform. Barclays foresees snap elections in the second quarter of next year.

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