Finance Finance News Why Italy’s referendum result is bad news for Europe and its economy

Why Italy’s referendum result is bad news for Europe and its economy

italy referendum
Matteo Renzi was elected by pledging reform but that reform has been rejected. Photo: AAP
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Italy has voted against amending its constitution in a referendum result that threatens Europe’s economic stability and has forced Prime Minister Matteo Renzi to resign.

Mr Renzi’s referendum loss and subsequent resignation could also push an anti-Europe leader into power, fuelling fears that Italy could follow the United Kingdom’s “Brexit” with an “Italexit” out of the European union.

The “no” campaign won the referendum with almost 60 per cent of the vote, defeating a “yes” campaign that hoped to deflate the size and power of Italy’s Senate and some of its regional bureaucracy.

The “no” campaign was backed by parties that support Italy leaving the euro zone, and with Mr Renzi dethroned, experts are tipping that one of those parties will likely come to power.

That resulting uncertainty has caused the euro to drop to a 20-month low. Futures markets predicted further losses when European and United States markets opened.

Australian-based Italian and Griffith University economist Professor Fabrizio Carmignani told The New Daily the uncertainty the result created in Italian politics would likely fuel concerns about the nation’s banking debt sustainability.

“This fragile political situation will not help the economy and the banking system,” Prof Carmignani said.

“It is a huge concern for Italy and Europe as a whole. If there is a bank crisis in Italy this will hurt the whole European economy.”

Here’s an explanation of some of the other key questions to come out of the result.

What did the ‘yes’ campaign want?

To diminish the power of Italy’s Senate and make it easier to pass effective legislation.

italy referendum
Mr Renzi campaigns for a “yes”, or “si”, vote. Photo: AAP

Mr Renzi – who led the referendum and its “yes” campaign – believed a smaller and less powerful upper house would allow the lower house to pass laws that would instigate economic reform, thus boosting Italy’s dire economy.

The “no” campaign mainly argued the reforms would diminish voter rights.

The reforms would give too much power to the upper house and the controlling party of the day, they believed.

Why did Matteo Renzi resign?

Because Mr Renzi promised he would step down if the “no” campaign won. He will formally resign on Tuesday (AEDT).

When he was elected in February 2014, Mr Renzi promised to reform Italy and transform its struggling economy. The referendum was the key action in that pledge.

italy referendum
Italian comedian Beppe Grillo is the Five Star Movement’s leader. Photo: AAP

Mr Renzi, 41, was seen as a young outsider and anti-establishment at the time. The proposed referendum reforms tried to deliver on the momentum that fuelled his meteoric rise to power.

Ironically, his referendum was defeated in part thanks to the support of the anti-establishment party Five Star Movement.

An interim PM from Mr Renzi’s Democratic Party will soon be appointed and an election will likely be called for between early and mid-2017.

Prof Carmignani believed that election would produce a PM who favoured leaving the European Union.

Why is this result bad for the economy?

Prof Carmignani said the uncertainty over who would replace Mr Renzi and the possible Italian exit from the euro zone would be the chief causes of economic instability.

burning euro
There are grave fears for the future performance of the euro. Photo: Getty

This could lead to Italy’s already poor BBB- credit rating being lowered and then capital being removed by investors.

These kinds of shockwaves could spread across Europe, Prof Carmignani argued, adding that the failure to approve reform to Italy’s cumbersome government could stunt economic development in the long term.

“It is difficult to complete the legislation process in Italy, but the quantity of laws approved is large, however quality and efficiency of legislation is low,” he said.

The nation’s banks are weighed down by debt that in some cases cannot be repaid and its biggest and oldest bank, Monte dei Paschi di Siena, is currently deciding how to go about planned recapitalisation in the wake of the referendum result.

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