Key Takeaway
In the past year, Italy’s equity market has reflected a perfect storm of European woes: sluggish growth, high youth unemployment, banks saddled with bad debt and deflation. The promise of reforms has turned into a backlash against
Renzi himself who appears to have miscalculated by linking his government to the referendum results.
The concern is that a defeat weakens Renzi and the PD, which in turn strengthens the second biggest party in Italy, the populist 5-Star Movement who are seeking a referendum on EMU membership. With a wave of elections in Europe in 2017, such a shift in sentiment would undermine political integration and increase demand for national sovereignty.
Irrespective of the referendum decision on reforms to be held on December 4th, Italy was already finding economic growth challenging. While the intention of the constitutional reform was to make government’s more stable (there have
been more than 60 since WWII), thereby creating enough support for economic reforms, Renzi’s determination to put his job on the line created a backlash by anti-populist movements. Moreover, many groups were worried that the political reforms removed important checks and balances. With the opinion polls closed, surveys had shown the opposition consistently ahead. A defeat might see Renzi resign despite him backtracking on his original promise, but it
might not necessarily mean an automatic general election.