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“ItalExit”? Italy’s referendum raise concerns among investors

If Prime Minister Renezi will be defeated it could lead to the rising of populist Euroskeptic party
If Prime Minister Renezi will be defeated it could lead to the rising of populist Euroskeptic party

If Prime Minister Matteo Renzi will be defeated on the referendum, take place in December 4, it would undermine the nation’s fragile political stability, and in the worst-case scenario, even can pull Italy out of the Europe’s monetary union.

So what’s the story all about? Renzi, who proposed the referendum, initially pledged to resign if the results didn’t go his way. If he will resign it could lead to early elections, in a time when the support of the populist Eurosceptic party the Five Star Movement is rising. This party has been actively campaigning for a referendum on exiting the single currency block. The party’s leader, Luigi Di Maio, is the vice president of the Italian lower house today, and he said that if the party will gain more power, it would push for an advisory referendum on euro membership.

But “ItalExit”, as some analysts already called it, isn’t seems to be likely, and investors’ fears seem, for the time being, as overdone. Even if early elections were called after a Renezi possible defeat, Five Star’s chances of getting into power and carry out a referendum about leaving the EU, seem very low. Firstly, because even the party will win the election it might not be enough because they could have a hard time finding enough allies to form a parliamentary majority. Secondly, the Italian constitution bans the abrogation of international treaties through a popular vote, so constitutional amendment, voting in the 2 houses of parliament and going through the Constitutional Court, it all would take a long time and complex negotiations, which doesn’t seem to take place so soon. Just as the Britain discovered with Article 50 court case, leaving the EU, or part of it, isn’t as straightforward as might be imagined.

“The idea that Italy is going to leave the euro the day after the referendum, or even quite some time after, is really exaggerated” said to Bloomberg Antonio Villafranca, a Europe analyst at the Italian Institute for International Political Studies. A poll published a week ago is strengthening Villafranca claim, when showing only 15.2% of Italians are in favor of leaving the single currency.

But this figure doesn’t make the investors calmer. The recent unpredictable developments in the world, The Brexit voting in the UK and the suppressing winning of Donald Trump in the US, make the investors more skeptic and suspicious for the future to come. “We think the EU will break and that Italy will leave the Euro” said to Bloomberg Jim Smigiel, an American money manager at SEI Investments “Until a while ago this was unthinkable, implausible, but we’re starting to see the wheels in motion, at the very least”.

Only the political intention for the referendum would face a market backlash. Markets are showing stresses ahead of the Italy’s referendum because what it might unleash, and it come just in time when Italy’s 10-year bond yield climbing above 2% for the first time in more than a year while the euro slide this month to the lowest level since March 2015. “Any credible noise about euro exit would induce capital flight and severe market turmoil, so that market pressure might force parties and campaigned for euro exit to quickly revise their plans” said London-based economists Gianluca Salford and Marco Protopapa in a note they released lately.