Referendum in Italy

The next showdown for the EU

A sense of crisis builds ahead of the anniversary

25 March 2017 is a special date for the European Union (EU) that marks the 60th anniversary of the signing of the Treaty of Rome. Belgium, the Netherlands, Luxembourg, Germany, France and Italy ratified the agreement – thought of as the ‘birth certificate’ of the community of nations – in spring 1957. Yet on the eve of this important anniversary, the 28 member states of the now-expanded EU are encountering headwinds. Alongside the refugee crisis, Brexit represents an acid test for the Union. And just a few months after the British vote to leave the EU, another important referendum is rearing its head as the Italian electorate is called to vote on 4 December.

National referendum, explosive international effect

Unlike in the United Kingdom, this vote does not directly concern EU membership. Instead, Prime Minister Matteo Renzi is hoping the Italian people will give their blessing to profound constitutional reform. In particular, the vote revisits the composition and powers of the Senate. Until now, legislation has needed to be approved by both the Senate and the Chamber of Deputies (the upper and lower chambers of the Italian parliament). Those who instigated the referendum claim that this paralyses the legislature and hampers reform. Renzi expects the change to lead to faster decision-making and significant cost savings. However, this vote is about more than just the efficiency of Rome’s political machinery. As the Prime Minister has coupled his political fate to the vote, a defeat could have unforeseeable consequences. Observers believe it is possible that Renzi will step down, thus paving the way for the eurosceptic Five Star Movement to seize power.

Neck and neck in the polls

According to national surveys, advocates and opponents of the constitutional reform are neck and neck, though the No camp was edging slightly ahead in the latest polls (see the chart below). It is therefore no great surprise that Renzi is taking every opportunity to be seen and heard in the media as he campaigns passionately for a Yes vote. At the same time, he is on course for confrontation with the EU and has emphatically rejected criticism from Brussels regarding Rome’s projected budget deficit in 2017, for instance. The upcoming referendum does not merely pose a threat to Italy and the EU; it also carries potential risks for the capital markets. Fitch recently downgraded its outlook for Italy from ‘stable’ to ‘negative’. Besides the country’s weak growth and high level of debt, the rating agency pointed to uncertainty regarding the outcome of the referendum.

Neck and neck in the polls:
The latest polls on the constitutional reform in Italy


Threat of yield increases

Finance costs are already increasing for the southern European nation. At the end of October, the average coupon rate in the auction of a ten-year government bond was 1.60 per cent – the highest value since August 2015. In fact, the European bond market is currently experiencing a general upturn in yield premiums due to expectations that the European Central Bank could gradually tighten its ultra-loose monetary policy. However, Italian bonds came under particular pressure. The value of a ten-year government bond dropped by more than 7 per cent in just four weeks. Meanwhile, the equivalent German government bond dipped by just 2.8 per cent. As a result, the yield spread between the two benchmark bonds widened by just short of 150 basis points. If the proposals for constitutional reform are defeated, analysts expect a further increase in Italian bond yields – which they say could lead to another marked increase in spread.

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