Good Morning Audience;
This Sunday, Italian citizens will vote for a constitutional change in what is considered as the biggest European event since Brexit. This referendum marks an important turning point in Italy’s political history. Italian Prime Minister Matteo Renzi is currently leading the “Yes” vote and has promised to resign if a “No” outcome prevails.
The main goal of this referendum is to allow the government to move forward more easily in its reforms. In practice, the change would mean a reduction in the number of senators from 315 to 100 and most of them would be appointed, rather than elected. Power will also become more centralised with authority move from the regions to the central government. Renzi argues that a more streamlined legislature is what Italy needs in order to pass the structural reforms that would boost the country’s sluggish economy. The “No” side, which is being led by MS5 (the anti-EU Five Star Movement), believes that this would lead to the over-centralisation of power.
We are expecting the referendum to be rejected on the back of a swelling global populist tide.
National sovereignty is always a difficult and sensitive issue, now more than ever, and when it comes to constitutional change, many see such steps as an abandonment of sovereignty towards Brussels.
Economically, Italy’s situation is precarious at best. Even though the labour market has improved in the past 12 months, unemployment has risen to 11.52% from 5.96% since 2007. The current retirement age is now 66 with many Italians concerned about a further increase.
For the moment, financial markets are remaining quiet, especially after so many failed polls this year (Brexit, Trump and François Fillon in France). Nevertheless, Italian bonds are yielding higher despite these growing uncertainties. Volatility may be significant on Monday for Italian banks, which could, pending a rejection, face concerns over the status of their eurozone bailout come into question. Indeed, eurozone tensions are set to rise adding definite downside pressures to the single currency. However, any such market turmoil, will be temporary as the eurozone needs cohesion. A further bailout for Italian banks is still very likely and the eurozone will proceed with its support whatever the outcome. It is believed that Italian banks would need at least a €20 billion bailout plan to be saved.
However, in keeping with EU referendum tradition, it should be said that whatever the democratic outcome, it may not be a definite result. As has happened many times in the past decades, governments can simply bypass the people’s results.
So, in our view there will be no apocalypse on Monday morning. Whatever the results, it will simply mean that negotiations with the eurozone will become more complicated and that member states are not prepared to hand over sovereignty to Europe.