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Donald Trump and the Italian Referendum

After the Brexit vote in the UK and Donald Trump’s win in the US, the Italian referendum and the French election are in the spotlight. We can ignore the French election for now but Italy’s referendum on 4th December is rapidly approaching.

The past twenty polls all show the No vote will win. True, the polls were wrong about Brexit and Trump but only because they under-estimated the extent of the protest vote. After last week’s US election, it seems likely to us that PM Renzi will lose the referendum and it is time to think about what happens next.

It will mean broadly no change for the Italian political system but Matteo Renzi is likely to resign as prime minister. Although he has furiously back-tracked, he has unwisely made the referendum a vote of confidence in his leadership. Maybe there is a slight chance he stays but we doubt it.

Thus, President Mattarella will face a choice between early elections – next due March 2018 – or a technocratic government. He is likely to choose the latter, led by either Pier Carlo Padoan or Enrico Letta.

Nothing to see here then, you might think, but you would be wrong. First, there is no guarantee that a technocratic government would last. If the No vote is sufficiently decisive (say 55% to 45%), then the outcry for new elections could become irresistible.

Second, even without early elections, it would only delay matters by some fifteen months. Note that the ruling Democratic Party is the only major party in the Italian parliament which is actively pro-euro. The next most popular parties – the Five Star Movement and the Northern League – wish to pull Italy out of the euro. And the latest polls show support for Democratic at 33% and Five Star Movement at 31%.

Third, before Trump’s win, it was plausible that the protest parties could win power in March 2018 and start the process of leaving the euro, thanks to weak growth, banking system problems and a refugee crisis. The dramatic US election result last week has reinforced the argument. Austria’s presidential election, the same day as Italy’s referendum, is yet another wild card.

The smart money is shifting the same way. The chart shows the spread between ten year Italian and German government bonds: this has widened out to 180 bps this morning from 115 bps three months ago. Another indicator is Italian central bank balances with the eurosystem. These show that €132bn has flowed out of Italy over the past year.


Neither indicator is anywhere near the panic levels of the Eurozone debt crisis in 2012 but both show rising concern. We would get seriously concerned if the BTP/bund spread climbed above 300 bps. For now, investors should avoid Italian assets.

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