Italian referendum
All you need to know ahead of the vote
* On 4 December, Italy will hold its constitutional referendum
* Renzi's premiership could be on the line, particularly if the "no" vote wins by a wide margin…
* …but the immediate implications for domestic politics and reforms are not as great as the markets seem to believe
On 4 December, Italy will hold a constitutional referendum on whether to reduce the
role of the upper house of parliament. Voting will take place between 6am and 10pm
(GMT). The result should be known by the early hours on Monday (Table 1). The final
polls (polls are not allowed in the two weeks running up to the vote) have implied a 5-
7ppt lead for "no", but 20-25% of the population still appears to be undecided (Chart 2).
The referendum might not have been so important from a political and market
perspective had Prime Minister Matteo Renzi not decided to put his political future at
stake at the beginning of the year, pledging to resign if "no" won. His move shifted
the focus of the referendum from the reform on to his government, pushing all
opposition parties to campaign for a "no" vote. Mr Renzi has attempted to backtrack
on this pledge, but has not managed to separate himself from the referendum. His
premiership could still be on the line, particularly if "no" wins by a wide margin. But
our central scenario is that Mr Renzi will remain Prime Minister.
In this note, we dispel three main market misconceptions. We argue:
A "yes" vote would not mark the beginning of a new era of reforms and political
stability, at least not in 2017, with elections taking place in early 2018 anyway
A "no" vote is unlikely to lead to immediate elections, as the President would be
reluctant to call elections without a new electoral law for the upper house
A "no" vote would not necessarily increase the chances of populist party, Five
Star Movement (5SM), coming to power. If anything, a "yes" vote might
This does not mean the referendum doesn't matter. We still think that passing the
reform could yield benefits in the medium term, ie after the 2018 election.
The markets seem to be pricing in a "no" vote (betting odds are 75%). However,
markets could fall further if "no" wins, particularly if Mr Renzi resigns (which might not
necessarily happen overnight), and the banking sector could take the biggest hit.