Business

Why the Italian referendum matters to you

December 5, 2016

Ever since the Global Financial Crisis (GFC) in 2008, the European Union (EU) has been mired in uncertainty about its future. From the sovereign debt crisis to the immigration backlash and Brexit, the EU continues to battle large issues and anti-establishment voices that threaten to tear the union apart. The Italian referendum may send another shock throughout Europe.

What’s happening?

The Italians voted on whether to adjust their constitution and streamline the legislative process. The changes would have updated approximately 33% of the Italian constitution’s 139 articles--a sweeping legislative change--but the Prime Minister Matteo Renzi said he would resign if Italians voted ‘no’. Since pegging his tenure to the vote, the referendum became another opportunity to speak out against the political establishment. In the aftermath of the ‘No’ vote, Prime Minister Renzi has confirmed that he will resign and his departure could further destabilize the eurozone.

According to the New York Times, “The vote is ‘a test of strength of the anti-Europe and anti-establishment forces in Italy.”¹ So the question is: now that Italy has joined the U.S. and U.K. in protesting the existing system of governance, what will happen to the euro?

Why does it matter?

Italy has the 4th largest GDP in Europe, yet its banks are still battling with the aftermath of non-performing loans made to small Italian businesses during the recession. A number of Italian banks, including the world’s oldest bank Monte Dei Paschi, teeter on the brink of collapse if the referendum triggers extended market instability.

According to the Financial Times, “The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.”²

What does it mean for your money?

As Renzi steps down, the euro is likely to take a hit against most major currencies. In the hours after the election, the euro quickly recovered from a 1% loss against the dollar to a .5% loss, but the effects of the vote could be protracted. How far down the euro goes depends on how long it takes to resolve the power vacuum and what happens to the Italian banks. If traders perceive a weakness in the euro, the U.S. dollar could get a boost while the pound sterling may be held back by its ties to continental Europe. If you’ve been waiting for the euro to decline, so you can move your money, this may be the time to seize the rate.

^Sources

^{1. http://www.nytimes.com/2016/12/04/world/europe/italy-matteo-renzi-referendum.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0}

^{2. Sanderson, Rachel. “Fears mount of multiple bank failures if Renzi loses referendum.” The Financial Times. November 27, 2016.}

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