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As expected, the Italian referendum has produced a No vote – and a resounding No at that, which exceeded the poll forecasts. True to his word, Matteo Renzi has resigned as Prime Minister after two years and nine months in the job.

The fact that this period in office is well above the average for Italian Prime Ministers is a sign of the political instability that he hoped to solve with his constitutional reforms, and points to more instability that will follow his resignation. The President of the Italian Republic now has to choose whether to try to form a new Government or hold elections. The former might be quite difficult if tried along normal party lines, given the fragmentation of the parliament among numerous medium-sized and small parties, some of whom loathe the president and plenty of whom loathe each other, suggesting he will try to go down the traditional route of installing a technocratic Government to steady the ship.

Even if that proves possible in the short term, the shock delivered by the referendum – throwing the ruling left-wing coalition into chaos and emboldening the disruptive Five Star Movement (M5S) – makes it likely that the next election will be brought forward. What happens then is anyone’s guess.

Beppe Grillo’s M5S will see this as their chance to enter Government, and will throw everything at the campaign.  Ironically, Renzi’s changes to the electoral system – which weren’t on the ballot paper, but which did attract plenty of criticism from M5S and other No campaigners – have now gained the support of Grillo, who wants an immediate election under the new rules. The reason is both ironic and obvious: if brought into force, these rules would make it easier for a party which wins an election but doesn’t secure an outright majority of the vote to still gain a majority in the parliament. The system Renzi envisaged as offering him the opportunity of majority rule, but which contributed to his downfall, could yet propel his principle opponent into majority government instead.

If that system isn’t used, or if it is and Grillo’s hopes of winning an outright majority aren’t fulfilled, what then? Assuming the No parties – including M5S, Berlusconi’s Forza Italia and the Front National-style Lega Nord – do well, then most possible coalitions end up having to incorporate one or more eurosceptic or outright anti-Euro parties. M5S wants a referendum on the Single Currency and are aware that ditching that policy in return for a power-sharing deal would dirty their anti-establishment credentials. Forza Italia don’t have an official anti-Euro policy but have become much more Eurosceptic since they last held power, and are prone to refusing to rule out a referendum. The Lega Nord is dedicatedly anti-Euro – its leader, Matteo Salvini, told the FT in October that in the next election “Everyone who votes for us will know that a Northern League government would get rid of the euro and move back to a national currency”.

While a Euro referendum isn’t a nailed-on certainty, then, it has undoubtedly just become a lot more likely.

Meanwhile, storm clouds continue to hang over the Italian banking sector. Shares dipped this morning but rallied somewhat by lunchtime, suggesting traders had priced in much of the possibility of a No vote. However, various banks still urgently need to raise more capital, and private investors may be understandably concerned by continued political disruption – particularly (as my brother writes over at the Telegraph) given the fact that many of the banks are major holders of Italian Government bonds.

In the traditional political model, this would strengthen Rome’s motivation to install a technocracy in short order to steady the ship. But with Italian politics in uproar, and the victorious No parties demanding a new election immediately, that supposedly safe route could lead to more instability, not less. Either way, Brussels has lost a close ally and its critics are emboldened.

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