ROME • Italian Prime Minister Matteo Renzi prepared to hand in his resignation yesterday after suffering a ruinous referendum defeat that has sparked fresh jitters about the fate of a united Europe.
"My experience of government finishes here," said a downcast Mr Renzi after acknowledging a defeat of almost 60 per cent to 40 per cent over his constitutional reform bid, which cast a shadow over the short- and long-term future of the euro zone's third-largest economy.
Mr Renzi, 41, was to meet President Sergio Mattarella to hand in his resignation formally after a final Cabinet meeting.
The most probable scenario is a caretaker administration dominated by Mr Renzi's Democratic Party taking over until elections due to take place by the spring of 2018. The new administration's most pressing priority will be finalising the country's 2017 Budget, which the European Commission has threatened to reject.
Mr Mattarella will then be charged with brokering the appointment of a new government or, if he is unable to do that, ordering early elections.
The euro briefly sank to a 20-month low and most Asian stocks also retreated as investors fretted over the effect the political instability could have on a long-running banking crisis, and the possibility of an early election that could usher anti-EU parties into power.
Why referendum was held
Outgoing Prime Minister Matteo Renzi had thought that by streamlining decision-making and cutting red tape and public spending, it could help kick-start Italy's moribund economy, which has not been helped by the country's frequent changes of government.
WHAT WAS THE REFERENDUM ALL ABOUT?
Mr Renzi put to a vote on Sunday his constitutional reform package aimed at overhauling Italy's 68-year-old parliamentary system so that it would be easier to pass laws.
Essentially, the plan was to:
• Reduce the power of the Senate, or Upper House of Parliament, which is equal to the Chamber of Deputies, or Lower House.
• Also reduce the size of the Senate from 315 members to 100, and remove their right to hold a vote of no confidence in the government.
• End elections to the Senate and fill it with 21 regional mayors, 74 regional council heads and five other members selected by the president.
• Reformists had reckoned that this would cut the cost of politics by €500 million (S$754 million) a year and speed up lawmaking, according to the BBC.
WHY WAS THE PLAN NOT WELL RECEIVED?
As is the situation in Europe and the United States, an increasingly large section of Italian society feels alienated from traditional politics and politicians, whom the people blame for economic insecurity and the widening gap between the super wealthy and the rest.
Critics feel that the reforms would give the sitting prime minister too much power without solving the real problems faced by ordinary people, such as spiralling youth unemployment, rampant corruption, a stagnant economy and the migrant crisis.
The populist, anti-euro Five Star Movement, for instance, successfully argued that the "reforms serve to give more power to those who are already in power".
Many people saw Mr Renzi as "just another lying, silver-tongued member of the greedy elite", a factory worker told the BBC.
WHERE DID RENZI GO WRONG?
His gamble - and big miscalculation - was to make the vote about himself.
In an interview with the BBC in September, he was reminded that former British prime minister David Cameron had been confident as well ahead of the June 23 referendum on Britain's European Union membership. He ended up not only losing the vote but also his political career.
"Thanks for the warning!" he said, laughing.
In the end, many Italian voters saw the referendum as an opportunity to punish a serving prime minister, while critics saw his reforms as dangerous for democracy because they would have removed important checks and balances on executive power.
WHAT COULD HAPPEN NEXT?
There are fears that Mr Renzi's resignation could tip Italy into an early election.
And that might give the Five Star Movement and the anti-establishment Northern League an opportunity for success at the polls.
Already, Five Star founder and leader Beppe Grillo called for an election to be called "within a week" on the basis of a recently adopted electoral law, which is designed to ensure that the leading party has a parliamentary majority - a position Five Star could well find itself in at the next election.
But the prospect of two euro-sceptic parties gaining ground in the euro zone's third-biggest economy might well rattle the markets.
At the same time, with Italy's banking system staggering under €360 billion in bad loans, financial analysts have already warned that instability caused by Mr Renzi's premature departure could result in a renewed and possibly contagious financial crisis in Italy.
Almost any outcome that destabilises Italian politics would send tremors through the country's rickety financial system and may topple its ailing banks, with far-reaching implications for the entire euro zone.
However, mainstream politicians reacted with relief to Austria's eurosceptic Norbert Hofer failing to become the European Union's first far-right president. Mr Hofer, like populists elsewhere, had stoked concerns about immigration and globalisation, vowing to "get rid of the dusty establishment" and fight against "Brussels centralising power".
But Austrians' desire to stay anchored in the EU saw more votes for former Greens leader Alexander Van der Bellen.
Some analysts said the Italian referendum could come to be seen as a landmark moment. Mr Holger Schmieding, at the Berenberg private bank, said the risk that Italy could choose to leave the euro, while still remote, had increased.
Populists in Italy and throughout Europe rejoiced at Mr Renzi's downfall, with the founder of the anti-establishment Five Star Movement Beppe Grillo calling for elections "within a week".
"The people have won," Mr Matteo Salvini, head of Italy's anti-immigrant Northern League party, cheered on Twitter, with Ms Marine Le Pen of France's far-right National Front sending him and the Italian people "congratulations on this victory".
Britain's eurosceptic Nigel Farage, who spearheaded the "Brexit" campaign, said the vote looked "more about the euro than constitutional change".
Few Italian observers share that analysis but poll data did show the "no" vote was strongest where unemployment was highest.
Most analysts see immediate elections as unlikely, partly because all the main political parties have already begun discussions on revising the new electoral law.
The most probable scenario is a caretaker administration dominated by Mr Renzi's Democratic Party taking over until elections due to take place by the spring of 2018.
The new administration's most pressing priority will be finalising the country's 2017 Budget, which the European Commission has threatened to reject.
Finance Minister Pier Carlo Padoan is the favourite to succeed Mr Renzi as prime minister and the outgoing leader may stay on as head of his party - which would leave him well placed for a potential comeback to frontline politics at the next elections.
EU Economic Affairs Commissioner Pierre Moscovici said that while there was "political instability", Italy was nonetheless "extremely stable". But German Foreign Minister Frank-Walter Steinmeier said it was "not a positive message to Europe at a difficult time".