Cornered Renzi changes tack in Italy's high stakes reform campaign

By Crispian Balmer and Silvia Ognibene

ROME (Reuters) - Having pegged his political future to a referendum on constitutional reform, Prime Minister Matteo Renzi called up President Barack Obama's communications maestro Jim Messina for advice on how to win the do-or-die vote.

Messina, who led Obama's successful 2012 re-election campaign, met Renzi's inner circle in late July to discuss what they should do to regain the initiative after opinion polls showed the Italian leader faced defeat.

"The prime minister needs to be a bit more malleable," said Messina, according to someone present at the meeting. Renzi's advisers burst out laughing: "We don't need Obama's guru to tell us that," one said. Messina's office declined to comment.

Seen by critics as arrogant and overbearing, Renzi is in trouble. He is struggling to sell his flagship reform to a skeptical public, the economy is slowing down again and the banks are beset by bad loans.

EU allies are awaiting the referendum, which is expected by early December, with alarm, fearing a 'No' vote could revive political instability in the euro zone's third largest economy, with accompanying market turmoil.

"The biggest worry I have is Italy," said a former top EU official, who declined to be named because of the sensitivity of the subject. "If Renzi loses the referendum then the euro zone is in trouble ... Without Renzi we are in no man's land."

Since Messina's visit, Renzi has changed tack to try to win over skeptics, adopting a less antagonistic tone and focusing on the merits of the reform rather than on his threat to quit.

He told party supporters last month: "I made a mistake in making this too personal. We need to tell Italians that this is not a reform about one person, but a reform which will serve all of Italy."

He has also started to lay the groundwork for possible defeat in an effort to allay investors' fears of political paralysis should his government fall.

"Renzi tends to come across as arrogant, but maybe Jim Messina has had a positive impact because he is now using the right arguments on why people should vote 'yes'," said Roberto D'Alimonte, politics professor at Luiss University in Rome who has advised the prime minister on electoral reform.

"No one knows how this will end. The outcome is incredibly uncertain, like the Brexit vote," he said, referring to the shock British decision in June to abandon the European Union.

SEEKING STABILITY

Buoyed by positive opinion polls, Renzi promised last year to resign if he lost the referendum on his flagship reform, which will shrink the Senate, the upper house of parliament, and strip it of the power to bring down governments.

Renzi, who came to power two-and-a-half-years ago following an internal party coup, says this will bring political stability to Italy, which has had 63 governments since World War Two.

Opponents, including within his own Democratic Party (PD), say the reform removes vital democratic checks and balances introduced after the war to prevent the rise of an all-powerful prime minister.

Buoyed by his pledge to quit, Renzi's many foes across the political spectrum have united in calling for a 'No' vote, their arguments often having nothing to do with the reform itself.

"A record number of immigrant boats coming to Italy. This is an invasion. Send the government home by voting 'No'," rightist leader Giorgia Meloni said on Twitter on Aug. 31, referring to a renewed influx of African refugees arriving from Libya.

The latest survey, released by EMG Acqua on Sept. 12, put the 'No' camp ahead by 2.3 percentage points, up from 1.5 points a week earlier, suggesting a scandal shaking one of Renzi's most vocal opponents, the Five Star Movement, was not helping him.

However, a source close to Renzi said private polls carried out by the PD at the start of September showed the 'Yes' camp was ahead by four points.

Seeking to grab the initiative, the PD will soon launch a public information campaign, based on images of ordinary citizens with no mention of Renzi, said a senior party source.

Looking to generate goodwill, the government has also floated potentially popular proposals, promising to facilitate early retirement, cut taxes and improve public sector salaries.

Renzi originally said the referendum would be held in October, but with uncertainty over the outcome growing, the government is hesitating and has still not fixed a date.

By law, it must be held in 2016. Two PD sources said they expected the date to be either Nov. 27 or Dec. 4.

In the meantime, no major legislation will be put before the Senate, where Renzi has no clear majority, to prevent any political crises during the referendum campaign.

ANXIOUS INVESTORS

At the same time, major operations in the financial markets are being put on hold because investors are concerned about political instability.

Italy's privatization program has been put on ice, Treasury officials say, while the country's third largest bank, Monte dei Paschi di Siena, will almost certainly have to delay a desperately needed cash call.

Renzi remains outwardly confident of victory, selling it to Italians weary of politics as way to get rid of 215 of the country's 315 senators and save 500 million euros ($560 million) a year as a result.

But he also acknowledges that success is not certain, and in an effort to allay market fears, is playing down the risks of defeat, saying a 'No' vote will merely extend the status quo.

In this context, he has ruled out elections before the end of parliament's term in 2018.

Some politicians have speculated that if he loses, Renzi might tender his resignation, as promised, only for the Italian president to reject it, allowing him to carry on in power.

But having promised to quit, any attempt to cling to office could wreck his reputation.

"Renzi would emerge enormously weakened in the event of defeat and would lose all credibility if he carried on as prime minister," said Luiss University's D'Alimonte.

A parliamentary source said possible replacement prime ministers were Economy Minister Pier Carlo Padoan or Industry Minister Carlo Calenda. Renzi would remain head of the PD and would stand for re-election in 2018, the source said, declining to be named. The prime minister's office declined comment.

Underscoring the high stakes, Italy's foreign allies have unusually got involved in the debate, much to the anger of the opposition, urging the country to embrace change.

The U.S. ambassador to Italy, John Phillips, said on Tuesday that defeat for Renzi "would mark a step back" for foreign investment in Italy. "What Italy needs is stability and this reform guarantees stability," he said.

($1 = 0.8902 euros)

(Additional reporting by Noah Barkin; Writing by Crispian Balmer; Editing by Giles Elgood)

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