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Italy in Crisis

Published on: 02/12/2016

Throughout 2016 we experienced many political shocks, most notably Britain’s vote to leave the European Union and Donald Trump’s presidential win in the United States. Just when you think nothing can get worse now that this unusual year is almost at its end, 2016 proves that it’s not quite done with us yet. The shock this time comes from Italy where a historic referendum till take place this Sunday that has the potential to darken the future of Europe even further.

The Referendum:
The referendum is led by Italy’s prime minister Matteo Renzi who, along with many others, believes the Italian political system to be in crisis. He seeks to amend the constitution of Italy and reduce the number of members of parliament in order to make policy making a faster, more efficient process. A change such as this is seen as an answer to Italy’s stagnant economy – wages haven’t grown in years, the GDP hasn’t increased since the 90s, and several Italian banks are struggling financially.

The Outcome:
Renzi has stated that if the “no” vote wins, his government will resign – a turn of events that could be a terrible blow to European unity. An Italy without Renzi might go into the hands of eurosceptics seeking to follow Britain’s example and leave the EU or at least the eurozone. The future of Italian banks would also be unclear amid a political crisis.

At times of turmoil and political insecurity votes often go to populist platforms, and Italy has an abundance of these – the Five-Star Movement on the left, and the Lega Nord on the right side of the political spectrum, to name the most significant ones. Both of these parties have been openly sceptical of the EU and if elected would likely push for a Brexit-like referendum. Beppe Grillo, a professional comedian who is the leader of the Five-Star Movement, might cash in on the very same fears that made millions of Americans vote for Trump.

Still, we have to remember that this is speculation. Renzi hasn’t resigned yet; and even if he does, we don’t know who will be elected next. In case it’s any of these parties, it still doesn’t mean they would necessarily try to leave the eurozone.

The Markets’ Reaction:
Yields on Italian government bonds have risen beyond 2%, according to CNN. Borrowing costs have increased and Italy is currently perceived by traders and investors as Europe’s very own ticking time bomb, and perhaps, in a more pessimistic light, another great nail in the EU’s coffin.

Italian banks currently have about €360 billion in debt, about 30% of the total loans in the entire eurozone. The volatility on the market that may ensue should Italy be left in a political crisis will have severe consequences on the country’s financial sector.

An example of this is Monte dei Paschi which is currently hard-pressed to gather funds before the possible political storm begins. CNN reports that the bank’s stocks have fallen 86% this year alone. Other big names such as Unicredit aren’t doing much better.

Even though nothing is yet certain, it’s important for traders to stay on their guard. Almost nobody expected Brexit or Trump’s win either, yet 2016 proved nothing is impossible. Be prepared for volatility in the euro as the results start coming in on Sunday and Monday.

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