What's going on?
As the date of an important Italian referendum nears, investors are paying closer attention to the next opportunity for a populist uproar (tweet this) – and asking what it could mean for the stability of the eurozone and wider markets.
What does this mean?
On December 4th, Italian voters will vote in a referendum on Prime Minister Matteo Renzi’s plans to reform its political system. Included in the plans are measures that aim to make passing and amending laws far more efficient. Renzi has upped the pressure by suggesting that he will resign in the event of a “no” vote, which has basically made it a referendum on Renzi, his government and his efforts to revive Italy’s flagging economy. A “no” vote would be a boon to Italy’s anti-establishment (and anti-European Union) Five Star Movement – and would almost certainly increase financial risk in the eyes of investors.
Why should I care?
For the markets: Italian politics could be far more dangerous for markets than the Brexit vote.
Italy, unlike Britain, uses the euro as its currency. A “no” vote in the referendum could lead to new national elections within a year and, potentially, a referendum to end Italy’s use of the euro (something that the Five Star Movement has pushed for). Leaving a currency union (i.e. the eurozone) poses different risks than leaving a trade and political union (i.e. the European Union). For example, would Italy pay back its debt in euros, or in a new lira? Would other countries follow Italy’s lead? The uncertainty would be huge – and problematic for markets.
The bigger picture: Italy is only one of many upcoming major elections in Europe.
Europe’s two biggest economies, Germany and France, are holding national elections next year. In both countries (although in France particularly), anti-establishment parties have gained popularity in recent years. Italy’s referendum won’t be the last time that you hear about European political risk over the next 12 months.