Italy’s Double Edged Sword

We are now just 2 weeks out from the Italian referendum.  As we reported in the Weekly Wrap on Friday the No vote is now firmly in the lead with 32 polls by 11 different pollsters since 21 October.  We are now in the pre referendum poll ban so there won’t be any others.  That said, after Trump people probably take them with a grain of salt anyway.  The bookies however have the No at 75%... that seems pretty clear.

Prime Minister Renzi reaffirmed over the weekend that he will definitely resign should the vote on constitutional reform not get up.  The reform sees more power shift to the lower Parliament, weakening the ‘checks’ of the Senate.  Only a third of Italians supposedly understand what the referendum is even about.  It is that fundamental shift in power that raises the double edged sword that voters, and indeed the Euro, should understand.

Should the No win and Renzi resigns that opens the door for the Anti EU and Anti Euro party, Beppe Grillo’s Five Star Movement (M5S), to take control, but would do so under the old system.  Some believe the bigger risk is that Yes wins and M5S, who are ahead in the polls, would take government later and without the checks of the Senate, even if the Italian version is highly flawed.  It’s a little ‘damned if you do’, ‘more damned if you don’t’.  The graph below from Wikipedia collates a number of polls to show the average.  Critically though it is from August and evidence shows that the Trump victory has legitimatised and emboldened the disenfranchised, anti EU and anti establishment crowd and M5S is now in front.

As we reported in the Weekly Wrap podcast the Italian bond market is reacting badly.  Whilst it is caught up in the global post Trump bond rout, it has taken that to a worse level on growing fears of the referendum outcome.  Their once heralded 50 year bond has lost 14% since October adding pressure to the already fragile Italian economy.

Political upheaval is not new to Italy, after all they have seen 64 governments since the last World War.  But this presents a very significant and different case.  They are now part of a combined quasi government and financial system far far bigger than themselves, the EU.  Should M5S come to power, and particularly if this is later with a Yes vote handing absolute power to the government, the exit of the 3^rd biggest economy in the EU would see the whole house of cards come down.

Oh, and did we mention Marine Le Pen is now ahead in the French polls and Merkel confirmed over the weekend she will run again in September….?