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Oh "No": Italy votes against Referendum

5 December 2016

Industries: Financial Institutions
Jurisdictions: Italy

By Jeffrey Greenbaum

Yesterday Italians took to the polls to vote on proposed constitutional changes, aimed at streamlining the legislative activity of the Italian Parliament. The overwhelming result, 'no', has led to the subsequent resignation of PM Matteo Renzi. We explore the implications for the country's political and financial stability, as well as the broader ramifications for Brexit and the EU.

Last night, Italy overwhelmingly voted 'no' in the Referendum. This was a resounding defeat for Matteo Renzi, who is resigning today, with more than 59% voting against him. Indeed, in almost every city and region in Italy voters rejected the proposed amendments to the Italian Constitution, which were aimed at streamlining the legislative activity of the Italian Parliament as well as reviewing the allocation of powers between State, Regions, and administrative entities. The "No" vote had different reasons: most voted against Renzi, others against a reform which was considered not well balanced. On the other hand, one cannot ignore that the "Sì" vote was more than 40%. If one reads this as a referendum on Renzi (as most people effectively did), this would be consistent with his support basis in the 2014 European elections, so it may be too early to write him off entirely

Where does this leave us? Italy is now waiting for the President of the Republic Mattarella to decide what the next move should be; it is unclear whether Italy will have elections or rather a so-called technical government with the present Parliament. While this is a moment of uncertainty, it is not an unusual situation for Italy, as there have been more than 60 governments since the end of World War II. In fact, the Renzi government was one of the more stable and long lasting governments in recent times. Now it is time to move on. 

While many commentators expected the Referendum results to have significant negative effects on the Italian economy and stock market, the markets have not collapsed. While the Italian market is slightly down today, the losses have been contained. So far, there has been no need for prohibitions against short-selling of Italian bank securities as we have seen from time to time in the past. A number of commentators believe that as "No" was the expected outcome, markets had already factored the result into stock prices.

As for implications for Brexit, these are unclear. Much will depend on whether Italy moves quickly to new elections, and then what the results of the elections are, or stays with the present Parliament. In the meantime, Italy will have a caretaker government until national elections. It would be surprising for such a government to devote much time to developing a coherent Brexit policy. Even a new government would be unlikely to consider Brexit an immediate priority. It is unlikely therefore that Italy will devote much energy, at least for the moment, in being a moderating force in the Brexit debate. This may have an impact on negotiations.

More importantly, we need to see if the 5 Star Movement and the Northern League push ahead with their promises to do what they can to take Italy out of the Euro. Rather than the Referendum itself, or the fall of the Renzi government, this would likely have the greatest impact on Brexit. A 'Quitaly' would significantly exacerbate the potential consequences of Brexit for the EU. 

In our previous blog we were hoping for boredom on December 5.  Looks like we will have interesting times ahead.