Italy Just Handed the Global Economy Another Giant Variable

Even that possibility threatens Europe with trouble. If investors worry that Italy may leave the euro, they will demand greater rewards for continued lending. Those with the greatest debt burdens — Greece, Spain and Portugal — could see their borrowing costs rise beyond their ability to pay.

.. For now, such grim scenarios appear remote. The referendum maintains the power of the Italian legislature’s upper chamber, a potent check on the Five Star Movement, or any government pursuing radical change.

.. The consensus is that Italy can patch immediate holes in the banking system. But the referendum has destroyed what momentum existed to address the condition that is both cause and effect of the banking problem — a dire lack of economic growth.

Italy’s banks are stuffed with uncollectable debts in part because the country’s economy is smaller than it was a decade ago. Bad loans on bank balance sheets reflect that millions of people have lost jobs, eliminating spending power, while companies have seen sales evaporate.

.. Voters clearly did not trust Mr. Renzi to wield greater power. Now, they will be represented by someone with less power where it matters a great deal: Brussels and Berlin.

.. Brussels and Berlin argue, such countries must deliver so-called structural reforms, stripping away labor protections and trimming pension benefits.

.. German Finance Minister Wolfgang Schäuble effectively threatened to banish Greece from the euro if Athens did not deliver on reforms it promised as a condition of successive European bailouts.

.. Mr. Renzi was a rare leader who carried credibility in such quarters. He gained modest relief from European spending strictures in part by pointing at his reforms.

Renzi is the only leader in recent history who has advanced a structural reform agenda,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a risk consultancy.