Why Italy's vote matters

In the year of political upheavals, there has been another popular uprising - this time in Italy.

Here is how the narrative goes: Italian Prime Minister Matteo Renzi is the establishment figure. He has gambled on holding a referendum to win backing for his reforms. He loses, and resigns.

To some, this is the fall of the third domino: first Brexit, then Trump, now Italy. It marks, so it is argued, the onward march of the populists.

Renzi has had strong support from global leaders. President Obama rolled out White House pageantry for him and even the Germans, with whom Renzi has rowed over austerity, have been singing his praises.

The concern is that now Renzi has said he'll go, Italy's politicians will squabble, the country's fragile economy will suffer, borrowing costs will spike and once again Europe will be facing a crisis in the eurozone.

Comedian-turned-politicain Beppe Grillo (centre) leads the Five Star movement

Waiting in the wings are anti-establishment parties like the Five Star Movement, which is promising that if it eventually wins power, it will offer a referendum on retaining the euro. The very idea of another vote sends shivers down the spines of Europe's leaders.

Five Star's leader, the former comedian Beppe Grillo, has spoken of an "era going up in flames". It is a similar sentiment to that expressed by Nigel Farage, UKIP's former leader, who declared after Mr Trump's victory that the "democratic revolution" was only just beginning.

There is no doubt that Italy needs reforming. The tangle of bureaucracy and judicial delays snares investment projects, reforms get diluted or blocked in the two houses of parliament, and the Senate, with its 315 members, needs shrinking.

But there were legitimate concerns that Renzi's plan would have led to a centralising of power. The winning party would have gained a premium of seats, ensuring an absolute majority. Five Star campaigners successfully argued that the "reforms serve to give more power to those who are already in power".

Reform of the country's Senate is a focus of the referendum

It would be wrong to see this referendum as a Brexit-style campaign about the EU. Some passionate pro-Europeans are among those who opposed Renzi's reforms.

The Italian prime minister's big miscalculation was to make the vote about himself. Many voters saw the referendum as an opportunity to punish a serving prime minister. Some critics say that he put Italy in danger unnecessarily.

The fear is that 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 of success at the polls.

The prospect of two Eurosceptic parties gaining ground in the eurozone's third-biggest economy might well rattle the markets.

Government ministers will tell you that unemployment is inching down, that the deficit is falling and that labour markets have become more flexible. But the economy is 12% smaller than when the financial crisis began in 2008.

Italy's banks remain weak. The problem of non-performing loans has not been sorted out and the country's debt-to-GDP ratio, at 133%, is second only to Greece's.

The European Central Bank could intervene to steady the Italian economy in the event of a No vote

It is not clear what follows Mr Renzi's defeat. Fresh elections will not automatically follow.

If uncertainty forces up borrowing costs, then the European Central Bank (ECB) stands ready to purchase government bonds. But any political vacuum will bring renewed focus on weak banks - and not only in Italy.

An early election could come in late spring, just as the British government triggers Article 50 and begins negotiations to leave the EU.

If there is a risk of further upheaval, the instinct of Europe's leaders will be to circle the wagons, to make life as difficult as possible for the UK. The past 10 days have witnessed a succession of warnings that the coming year for Britain will be "a tough ride" and "you cannot pick and choose what you want".

Political instability in Italy could, of course, prompt Europe's leaders to address what voters in Europe are saying but there has been little evidence of that so far.

The Italian vote is not about Europe or the EU but it will be interpreted as an indicator of the strength of the anti-establishment winds blowing through Europe in the aftermath of Mr Trump's unexpected victory.