After years of political gridlock that has produced 63 governments in 70 years, Italians went to the polls on December 4 to vote on constitutional reforms designed to reduce the power of the Senate and make it easier for Parliament to pass new legislation.
Prime Minister Matteo Renzi embraced the proposed changes, vowing to resign if the referendum failed which shifted the referendum’s focus from the reforms to his own future as Prime Minister.
The Italians rejected the referendum by a large margin, 59% to 41%. While the magnitude of the response came as a shock to many, the result did not.
Renzi stepped down the day after the election and a new interim government will be appointed until the 2018 general election, although an early election is possible.
Financial markets were not at all surprised by the outcome and the direct implications of the referendum for the global economy and markets are very modest.
LONGER TERM IMPLICATIONS
The Italian economy has performed very poorly over the past 15 years and will likely continue to do so unless significant structural reforms are undertaken. Economic struggles have contributed to the rise of the anti-establishment Five Star Movement that wants to take Italy out of the Eurozone.
The impact of such a move could be devastating for the global economy and markets as Italy is the third-largest economy in the EU and has the most amount of debt.
In the near term, attention will also be focused on the banking sector, which is struggling under a mountain of bad debts. Political instability could make it even more challenging to recapitalize the banks.
The direct implications of the referendum for the global economy and markets are modest however this is one more sign of the growing discontent among the populace of many Western economies. With elections in the Netherlands, France and Germany next year, politics will remain in the spotlight over the next few quarters.
Any signs that the Eurozone could break-up would be very bad news, although a continuation of the recent recovery that has lowered unemployment below 10% could reduce the support of anti-establishment parties.
Investors should seek financial advice before making decisions based on political events or predictions on how the market might respond. Unless your personal circumstances have changed don’t make any rushed decisions.