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Cammack Retirement Investment Brief: Italy Referendum - Investor Basics

Italians overwhelming rejected constitutional changes aimed at streamlining lawmaking and boosting competitiveness, marking a sobering start to what could be a defining year ahead for the European Union.  On December 4th 2016, 59% of voters voted "no" to the referendum sought by Prime Minister Matteo Renzi, prompting him to announce his resignation.  Although the referendum was intended to stabilize the government and reduce political gridlock, it became increasingly viewed as a way for Italians to air their discontent with the establishment, much like the U.K. referendum.  Anti-Globalist and anti-establishment sentiment continues to be a major theme of 2016, dominating political and capital market uncertainty.

The objective of the constitutional referendum was to reform the role of the upper house in  the Italian Parliament. The reform would have eliminated the duplicate power of the Senate and would have cut its seats by two-thirds.  If the referendum had been successful, the number of Senators would have been reduced from 315 to 100, thus lowering the cost of a political apparatus, which is one of the most expensive in the western world.  Importantly, the reform also would have introduced new paths for a new law to be approved, making it easier and faster.  The referendum was designed to give more power to the clear winner and overcome the stasis of coalition governments that has slowed decision making in the past.  The proposed reform was strongly supported by Prime Minister Matteo Renzi, who pledged to resign if the referendum failed.  The polls have shown that the majority of Italians had limited knowledge of the actual reform and used the referendum as a vote for or against the government.  Italy has three opposition parties, all of which campaigned in favor of "no" and all favoring Italy's exit from the European Union.  

Many economists view Italy as being in need of structural reforms, as the current political system has proven to be ineffective to counter many economic issues.  Since the global financial crisis, Italy's economic growth has lagged the euro zone.  A key driver of this slow growth has been the persistent growth in productivity and the high unemployment rate, compared to the euro zone average. The country's high public sector debt and a poorly capitalized banking system remain fragile and in need of a solution.  Italian bank stocks tumbled in Monday trading, after voters rejected the constitutional overhauls, stirring fresh turmoil in the nation’s already battered financial sector.

Overall market reaction was minimal as the "no" outcome was largely expected.  Initially, the Euro fell to its 20-month low compared to the U.S. Dollar, but managed to rebound quickly.  Investors had widely anticipated the referendum result and subsequent resignation of Prime Minister Matteo Renzi, and consequently sold Italian equities, bonds and the Euro in the weeks leading up to the vote.  On Monday morning, European stocks moved further into positive territory, with initial fears of a euro zone crisis in the aftermath of Italy’s referendum result quickly evaporating.  In a move similar to the one seen after Donald Trump’s election victory last month, the STOXX Europe 600 dropped at the open, but rose 0.8% late morning with every sector in positive territory.  Italy’s FTSE MIB index reversed early losses to trade flat despite widespread losses in the banking sector.

Mr. Renzi’s resignation opens the door to parliamentary elections next year in Italy.  It is also viewed as benefiting the anti-establishment 5-Star Movement, which has called for a non-binding referendum on the country’s membership of the Euro.  The Italian referendum is the first of a series of pivotal votes in Europe over the coming year. In 2017, elections will occur in the Netherlands, France and Germany; the results displaying the level to which anti-establishment politicians are gaining power across Europe.  Markets have started to price in political risk, most recently seen in a rise in the French bond yield.  More volatility could be expected ahead of these key votes.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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