A new European crisis, Italian style?

A REFERENDUM intended to stabilize Italy's political system by consolidating power in the hands of the prime minister could instead plunge the country into a new crisis.

The fallout of a "No" vote in the December 4 referendum could be a run on Italy's barely solvent banks, resulting in a renewed crisis of the European financial system and perhaps beyond.

The "No" campaign is the latest expression of a populist backlash Italy, one fueled by long-term economic stagnation. The Italian economy--the third largest in the European Union (EU)-- was growing only at a 1 percent rate on the eve of the 2008 financial crisis before shrinking some 3 percent. A brief recovery was followed by a second slump between 2011-2013, and growth has been at or near zero ever since.

The slow growth has led to mounting debt, both for the Italian government and private banks. Italian banks have an estimated $384 billion in "non-performing" loans--that is, loans that will be repaid only in part or not at all. Under new EU rules, the "resolution" of failed banks requires that investors lose their money in exchange for stock in the failed bank--a scenario that could wipe out millions of small investors. A special bailout fund created last year is probably insufficient to support Italy's weakest bank, Monte dei Paschi di Siena. It is not surprising, therefore, that the weeks before the referendum saw an enormous capital flight from Italy.

The referendum, initiated by Italian Prime Minister Matteo Renzi, would gut the power of Italian senators and move regional governmental authority to the central government. Combined with an earlier reform that gives sweeping authority to any parliament that wins 40 percent or more of the seats in parliament, the new system would eliminate the traditional clout of opposition parties and further strengthen the power of a prime minister to be elected to a five-year term.

Renzi, who took office in early 2014 following post-Berlusconi technocratic governments, proposed the changes as a means to curb Italy's notoriously unstable parliamentary system, where the maneuvers of political factions have for decades not only stymied government initiatives, but routinely driven prime ministers from office. The political reforms, he argues, are a precondition for economic ones--a series of market-friendly policies designed to benefit Italian business at the expense of working people.

Renzi's failure to deliver economic growth since he took office in February 2014 has opened the way for the rise of the Five Star Movement, a populist group led by the comedian Beppe Grillo. Five Star made its first breakthrough in 2013, winning the most votes in the parliamentary elections. Last July, Five Star captured the mayors' posts in Rome and the industrial center of Turin, emerging as the most popular party in Italy. The Five Star Movement combines traditionally left-wing positions such as the defense of social programs with "clean government" demands, anti-immigrant policies and opposition to Italy's role in the European Union.

As Franco Turigliatto, a former senator and leading member of Sinistra Anticapitalista (Anticapitalist Left), put it, the Five Star Movement:

does not develop real campaigns against the dominant neoliberal economic policies or against capitalist austerity. Its main slogan is the demand for honesty and its central political theme is the struggle against the privileges of the political class; the movement is presented as "purifying" and the "savior" of society.

THE RISE of the Five Star Movement is a product of a long-term political crisis that began in the 1990s with a corruption scandal that tore apart both the Socialist and Christian Democratic Parties, which had been the pillars of Italian government since the Second World War. In the aftermath, billionaire media boss Silvio Berlusconi seized the opportunity to reorganize the right under his personal leadership, aided by his extensive holdings in newspapers and television.

Berlusconi won the first of several elections as prime minister in 1994 in alliance with the Northern League, a right-wing, anti-immigrant formation rooted in the wealthier parts of the country that demands autonomy from the much poorer South. The predominately Southern-based National Alliance--rooted in the fascist party of Italy's 1922-1943 dictatorship--was another on-and-off Berlusconi ally.

Berlusconi was in and out of office throughout the 2000s, dominating Italian politics for nearly two decades before he was ultimately weakened by a series of scandals and his relations with underage women.

Renzi, the former mayor of Florence who leads the ruling Democratic Party, promised a fresh start. But the Democratic Party itself is a faction-ridden amalgamation of remnants of the corrupt Socialist Party, liberal splinter parties and the Italian Communist Party. What's more, Renzi is facing broad opposition to the deal within the political establishment. The list includes Berlusconi and former prime ministers Massimo D'Alema, a Democrat, and Mario Monti, a fixture of mainstream Italian politics.

The party that stands to gain most politically from a successful "No" vote is the Five Star Movement. But even if the reform squeaks through, a future Five Star government could use the reforms to hold a Brexit-type referendum on leaving the European Union.

The economic impact of a "No" vote could be immediate, as an Italian banking-driven debt crisis would quickly become a European one. According to the German newspaper Die Welt, French banks are collectively exposed to $264 billion in Italian debt. In Germany, debt-ridden Deutsche Bank, the country's biggest financial player, is exposed to $12.4 billion in Italian debt. That's one reason why the International Monetary Fund reported that Deutsche Bank "appears to be the most important net contributor to systemic risks" to the world financial system.

The situation in Italy and Europe is all the more volatile as the result of last summer's Brexit referendum and the election of Donald Trump as U.S. president. Trump's ties to Brexit leader Nigel Farage of the UK Independence Party and his sympathy for the extreme right, anti-EU National Front in France has given a big boost to anti-EU, right wing parties across the continent. There are many important differences between the Five Star movement and those hard right parties, but Five Star's opposition to the EU will only add to the problems of EUs leaders.

Whatever the outcome of the vote, Italy's political crisis will persist as the result of its long-term economic stagnation and the contradictions of an EU in which Germany pushes policies that prioritize its own economy even as France and Italy struggle with low growth, and weak economies such as Greece endure 1930s-style depression so that bank debts must be paid.

In Italy, the impasse will continue until the once powerful left and the trade unions are able to reassert the genuine interests of working people in the struggles to come.