European Union governments are scrambling to reassure international investors that their continent's political stability and euro currency management remain unaffected by Italian Prime Minister Matteo Renzi's decision to resign after he suffered a crushing defeat in Sunday's referendum on constitutional reform in his country.
But political turmoil in the euro zone's third-biggest economy seems set to inflict damage on a continent already hit by a far-reaching crisis of confidence. And it could result in a banking crisis which may raise fundamental questions about the euro's existence. The currency has already hit a 20-month low in international markets.
Mr Renzi, at 41 Italy's youngest prime minister, came to power in 2014 on a promise to implement a "radical programme of reform" in a country whose economy has been largely stagnant for the past two decades, and unemployment hovers at around 12 per cent - more than twice the figure in Britain and three times that in Germany.
Yet although his government eased some economic rules, most of his efforts focused on his flagship constitutional reform package.
The reforms included the transformation of the Senate, or Upper House of Parliament, from a directly elected chamber of 315 members into a much smaller and indirectly elected body, as well as a sharp cut in the powers of Italy's 20 regional authorities.
Mr Renzi claimed that the reforms were essential to remove political gridlock, and vowed to resign if these were rejected by voters. It was a monumental gamble, and it failed spectacularly.
Italians rejected the package by the unexpectedly wide margin of 60 to 40 per cent in what was, by Italian standards, an unusually high turnout of nearly 69 per cent.
Some voted against the reforms because they concentrate too much power in the hands of the prime minister. But many dismissed the package as simply an irrelevant distraction from existing economic problems.
Still, there is no diminishing the significance of the crushing defeat.As Mr Renzi admitted, the result was "extraordinarily clear", and it meant that "we didn't make it".
The question now is how Italy itself will weather this self-inflicted political wound. A caretaker administration will remain in place, with the objective of adopting a new electoral law, intended to provide stable governance in a country which has experienced 65 different Cabinets over the past 70 years.
But this law is also deeply controversial, and is guaranteed to face stiff resistance from the Five Star Movement, a populist party led by Mr Beppe Grillo, a former comedian who is trying to mimic Mr Donald Trump's campaign techniques in the US, and is currently projected to end up as the biggest political party after the next general election.
Italy's political class is determined to delay these ballots until late next year. But with the current administration's reputation shot to pieces, the danger is that any caretaker government may become what Italian observers call a "zombie administration", one which does nothing useful, apart from clinging to power.
The most immediate fear, however, is about the survivability of the Italian banking sector, especially of the Monte dei Paschi di Siena - the world's oldest surviving bank and Italy's third-largest lender - which was planning to get a €5 billion (S$7.6 billion) capital increase in the next few days.
UniCredit, the country's largest bank, is also prepping for a further €10 billion private capital injection. If the proposed lenders now shy away from such deals, a run on weak Italian banks is virtually guaranteed, leading to a full-fledged euro crisis.
Under EU rules, ordinary Italian households, which own about €171 billion of bank bonds, are expected to take a loss if banks fail. Otherwise, the European Central Bank (ECB), which manages the currency, can offer no help.
Imposing a loss on ordinary savers would be catastrophic for Italian politics. But getting the Italian state to help is not an option either. Italy already has a massive debt equivalent to 133 per cent of its gross domestic product, and any further government borrowing risks a Greek-style disaster.
To make matters trickier still, German Chancellor Angela Merkel, whose support will be required for any bailout, faces her own elections next year, so she is in no mood to brave the wrath of German voters by offering cash to Italy.
The ECB is run by an Italian, Mr Mario Draghi, who is fully aware of what is at stake. And, provided all of Italy's political actors behave responsibly over the next few weeks, a major crisis may yet be averted.
But the failed referendum episode is a reminder of just how resistant Europe's ailing economies and political structures are to reform. And how disconnected European politicians remain from their electorates.
This article was first published on December 6, 2016.
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