Europe lurched another step towards the eventual break-up of the eurozone on Sunday, when the Italian electorate rejected constitutional reforms that would have broken the country’s legislative logjam, allowing muchneeded economic restructuring.

For European policymakers, the simultaneous rejection across the Alps of farright candidate Norbert Hofer in Austria’s presidential election was small consolation. Hofer’s defeat shows that the political centre continues to hold in the eurozone’s core countries, despite widespread popular grievances, especially over i mmigration. However, the “No” vote in Italy’s referendum and the subsequent resignation of reformminded prime minister Matteo Renzi greatly magnify the centrifugal forces working to split the eurozone’s peripheral economies away from its core. In effect, Italy’s “No” vote was a vote against economic reform within the eurozone. In the long run, that will leave Italy little option but to quit the single currency area.

Whether or not Sunday’s vote was primarily a vote against the political establishment that Renzi was attempting to reform, the most likely near-term upshot for Italy will be the appointment of another unelected technocrat-led government, probably headed by finance minister Pier Carlo Padoan. That will infuriate Italy’s antiestablishment opposition 5-Star Movement, which is calling for an immediate general election.

However, an early election is unlikely, given that Italy’s new Italicum election law now has to be amended to reflect Sunday’s rejection of the constitutional changes it anticipated.

As a result, the likely formation of a new technocrat government will provide a measure of political continuity in the run-up to Italy’s scheduled general election in 2018. Meanwhile, the European Central Bank stands ready to counter any instability in the financial markets, with the governing council expected to announce an extension of its quantitative easing programme at its meeting this Thursday.

Unfortunately, neither near term political continuity nor additional easing from the ECB can solve Italy’s underlying problems. Most immediate of these is the parlous state of the country’s banks, which need to raise an estimated EUR 40bn in new capital to rebuild their balance sheets. That sum is small relative to Italy’s EUR 1.76trn economy, but given the Italian banking sector’s record of capital destruction, there is a negligible chance that the market will advance the necessary funds in the absence of the sort of wholesale restructuring programme that the “No” vote makes politically impossible.

That leaves Rome with few choices. Nationalisation of the weakest banks, notably Banca Monte dei Paschi di Siena, Italy’s fourth largest private sector bank by assets, would be one possibility. However, under European Union banking rules which came into force this year, that would require a bailin of creditors, which include many retail bond-holders. Not only would that be unpalatable politically, it would also further undermine confidence in Italy’s other banks, making market-led recapitalisations even less feasible.

As a result, the most likely course is for Italy’s zombie banks to be kept alive by ECB liquidity, which so far has postponed the sort of market-induced crisis needed to force a restructuring.

But although continued liquidity provision may work as a politically expedient fudge, it comes at a heavy cost for the Italian economy—and the European Union itself. With Italy’s banks largely insolvent, they are unable to lend in volume to the country’s job-creating small business sector, which means Italy’s growth will continue to lag far behind growth in the EU’s northern economies, even as its sovereign debt level continues to mount, exacerbating the divisive forces at work in the euro-area.

Now the Italian electorate has resoundingly rejected Renzi’s formula of reform within the eurozone, a solution outside the euro will be back on the political table. As the Italicum law stands, it favours the electoral fortunes of the 5-Star Movement, which is demanding a referendum on euro membership. If amended to restore the bias towards proportional representation, it will support the chances of established parties including Silvio Berlusconi’s Forza Italia and the Northern League.

Both of these are striking an increasingly Euroskeptic note, reflecting a growing feeling among the country’s economic elite that a return to Italy’s traditional model of repeated currency devaluation would restore competitiveness and reignite growth.

In the near term, therefore, the result of the “No” vote is likely to be the installation of another technocratic government, with a period of stagnation on the economic reform front.

Although the new government is likely to push for concessions from Brussels and Berlin, especially on bank bail-outs, its prospects of success ahead of Germany’s general election next autumn will be slight. As a result, the economic gap between Italy and the eurozone core will only continue to widen in the run-up to Italy’s own 2018 election, making a disorderly dissolution of the eurozone along the lines Anatole Kaletsky described as long ago as 2005 only more likely.