By  Simon Nixon

After Brexit and Donald Trump, will Italy be next? Prime Minister Matteo Renzi’s Dec. 4 referendum on his proposed constitutional overhauls—designed to strengthen the power of the government by making it easier to pass laws—is the next opportunity for voters in a major economy to give the establishment another kicking.

Polls currently show the “No” vote narrowly ahead, albeit with up to a quarter of voters still to make up their minds. European policy makers have been privately warning for months that they see Italy as the biggest risk to the financial stability of the eurozone. The market is also starting to sniff trouble ahead: the spread between the yields on German and Italian government bonds has widened to more than 1.6 percentage points, the widest it has been since the European Central Bank started buying bonds in March 2015.

The worst-case scenario goes something like this: A defeat for Mr. Renzi would lead to a period of political instability. Mr. Renzi could follow through on a pledge to resign or be forced into a new coalition until elections are held in 2018. Either way, markets would interpret his defeat as proof that Rome is incapable of reform, raising doubts about Italy’s ability ever to deliver the kind of growth needed to put its debt burden of 135% of gross domestic product on a sustainable footing.

That in turn would make investors even more reluctant to put capital into the Italian banking system, forcing banks to impose losses on bondholders, many of whom are ordinary savers. That would create a spectacular political backlash that could bring the deeply euroskeptic, antiestablishment 5 Star Movement to power in 2018, putting Italy’s euro membership in doubt.There is an alternative viewpoint, which says that the referendum doesn’t really matter at all. Sure, there might be a period of political instability, but political instability is hardly unusual in Italy. Even if Mr. Renzi offered to resign, the president would insist that he stayed. Indeed, the main center-right opposition party led by Silvio Berlusconi wants him to stay and would work with him, senior party officials say.

Similarly, the market shouldn’t worry about a lack of reforms, according to this analysis, since Mr. Renzi’s own reform efforts had in any case run out of steam over the past year and few expected any major initiatives before the 2018 elections. Meanwhile, the overall amount of money needed to recapitalize the Italian banking system is small relative to the country’s GDP, making it likely that Rome and Brussels would work out a mutually satisfactory solution.

The truth may lie somewhere in between. Italy may well muddle through after the referendum, protected by the fire blanket of the European Central Bank’s government bond-buying program. Indeed, the ECB is conveniently scheduled to decide just days later whether to expand and extend its quantitative-easing program. Policy makers at the central bank privately acknowledge that the outcome of the referendum is likely to have a bearing on the decision.

Perhaps Rome will also reach compromises with Brussels in its current standoffs over bank bail-ins and its 2017 budget, which the European Commission currently considers breaches of the eurozone’s fiscal rules. After all, Brussels has shown considerable willingness to indulge Rome over the years, not least by introducing elaborate flexibility into the fiscal rules, mainly for the benefit of Italy. With French and German elections next year, Brussels may be even more anxious to avoid a confrontation in 2017.

The real shock could come later, as the political consequences of Italy’s inability to reform became clear. One test could come at the hand of voters in 2018. Current polls put Mr. Renzi’s Democratic Party ahead of the 5 Star Movement, but that could change if Mr. Renzi quits. Meanwhile, support for Mr. Berlusconi’s party has collapsed, squeezed by the 5 Star Movement and the right-wing Northern League.

Some of Mr. Renzi’s opponents, including on the left of his own party, hope that out of the ashes of a referendum defeat would come a return to old-style Italian consensus politics with mainstream parties working together to keep out Five Star, just as they once did during the Cold War to keep out the Communists. But if that turned out to be a recipe for continued growth-sapping inaction and indulgence of vested interests, it could fuel support for populists.

A second moment of stress is likely to come whenever the ECB finally decides to remove its fire blanket, exposing Italy to the full glare of market scrutiny. That is unlikely to happen in the next year, since the ECB Governing Council is likely to take advantage of continued below target inflation to extend its bond-buying program until beyond the German elections in September next year.

But if the eurozone recovery continues and inflation returns toward its target as expected, the ECB will find it harder to justify persisting with QE, particularly as the negative side effects become more apparent. At that point, it may conclude that it could only keep buying Italian bonds with clear political consent. Then the moment that the eurozone has been trying so hard to avoid will have arrived: Rome will be forced to throw itself at the mercy of Berlin.