Possible uncertainty coming for Europe

All you need to know about the Italian referendum and how it will affect markets across the Globe.

When will the Italian Referendum take place?

It will take place on 4th of December.

What is it about?

Matteo Renzi, the Italian Prime Minister, wishes to make big constitutional changes so that the Italian government can evolve into a more efficient one and make the government more ‘governable’. It is important to raise the point that Italy had 63 governments in the 70 years since the birth of the republic.

The Italian referendum concerns three main issues that the public has to approve. The main proposal is to end the perfect bicameral system -meaning its two chambers have the same powers- which block reforms and improvements that the Italian governments proposes from time to time. This proposal aims to reduce the power of the Senate and tip the balance of power towards the Chamber of Deputies (Italy’s equivalent to House of Commons in UK). The other suggestion is to reduce the members of the Parliament and another one to restrain the operating costs of the institutions. (1)

It is important to note that both chambers have approved the changes but the 2/3 majority was not reached in order to force the legislation to go through. (2) As a result, Mr. Renzi had to call for a referendum.

Possible implications of a YES or NO vote

In case of a YES vote: Matteo Renzi will remain as Prime Minister of Italy and will have all the means that he requires to revive the Italian economy, fight the banking crisis and keep Italy in EU. Furthermore, his chances of winning the general elections in 2018 will be increased significantly.

In case of a NO vote: There is a high possibility that Matteo Renzi will resign as Prime Minister as he said “If I have to stay on in parliament and do what everyone else has done before me, that is, to scrape by and just flow there, that does not suit me.” As a result, political crisis may take place and a replacement PM will have to come in and try to manage the ongoing banking crisis with the ‘tools’ available and current bureaucratic situation. (3)

It will have to be noted that in 2018, PM elections will take place, and the Five Star Movement will gain ground in case of a NO vote. This political party is against Italy’s membership in the European Union and as a result the whole European project will be at risk since if UK and Italy leaves the EU, there is no guarantee that other countries will demand the same thing. French elections are closing in and Marine Le Pen who is anti-EU is likely to win the race. (4)

How are financial markets going to be affected?

The biggest market volatility is expected to occur with pairs concerning the EURO. A NO vote might be received as a bad sign for the EURO by investors and as a result cause a drop in its value. The reverse might take place if Italians vote for YES. Investors may become more optimistic about the prospects of the Italian economy which could finally reach its high potential.

Volatility is expected to increase substantially as this referendum result could prove important for Italy’s and Europe’s future. In the days close to the referendum, investors might seek safe heavens in GOLD, Swiss Franc and YEN as witnessed from recent events. (Brexit and US elections)

Sources

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Source:: Possible uncertainty coming for Europe

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