Fate of Italy’s Economy at Risk If Renzi’s Referendum Fails

Italy’s growth prospects may be on very shaky ground.

If Prime Minister Matteo Renzi falls after a constitutional referendum in early December without a budget in place, that puts the economy at risk of a slowdown in 2017, this week’s projections from the Rome-based Treasury show.

While the government targets growth of 1 percent, the forecast without the budget-law measures is for only 0.6 percent expansion. That would be even less than the pace Renzi’s administration expects for this year.

The premier has tied his future to the Dec. 4 referendum overhauling the Senate, and his downfall could jeopardize planned growth-friendly measures including a boost to the smallest pensions and a reduction in corporate taxes. The budget-law timing is crucial as it needs to be passed by year-end. Failing to do so would add to investors’ concerns about the economy and on how the nation will revive its lenders, loaded with 360 billion euros ($404 billion) of troubled loans.

“If the ’No’ wins in the referendum, you might end up having a political crisis on top of an economic slowdown and a banking mess that needs leadership," said Bloomberg Intelligence economist Maxime Sbaihi. “Suddenly, stars could align for the worst.”

This week Italy cut its GDP forecast for 2016 to 0.8 percent growth, down from 1.2 percent estimated in April. The country’s recovery from its longest recession since World War II came to a halt in the second quarter when the economy stagnated. The unemployment rate was unchanged in August at 11.4 percent, while youth joblessness dropped slightly to 38.8 percent from 39.2 percent in July, statistics agency Istat said Friday.

Echoes of Italy’s difficulties are being felt as far away as Finland. That country’s central bank said the slowdown in the euro region’s third-biggest economy is a reason for major concern, comparable to the effects of the U.K. voters’ decision to leave the European Union.

“The growth of the euro area is also weakened by internal problems and problems not related to Brexit, like the weakened Italian growth outlook and problems in banking sector,” the central bank said in its economic bulletin on Thursday.

— With assistance by Giovanni Salzano