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Italy Votes No

Yesterday, Italy voted No to constitutional reform by a wide margin. After the UK Brexit vote and Donald Trump’s US election victory, is this another seismic change or just a little local difficulty?

The Vote. The gap was 59.1% to 40.9%, with nearly 33m votes counted, in a comprehensive rejection of PM Matteo Renzi’s plan. For many, especially in southern Italy, it was a protest vote against hard economic times and the migration crisis. However, many who were in favour of reform still voted No because this particular proposal was poorly framed. While it might have made Italy more governable, it also raised the chances of the “wrong” person holding power for five years.

In a parallel vote yesterday, Austria rejected far right presidential candidate Norbert Hofer by 53.3% to 46.7%. The margin was smaller than in Italy but did suggest that a weaker protest vote across Europe than first feared.

Immediate Implications. PM Renzi will resign as prime minister. It currently looks as though finance minister Pier Carlo Padoan or Senate leader Pietro Grasso will form an interim government until early 2018 elections. However, given the heavy No vote, the danger is an early general election and a win for the anti-euro opposition parties.

Another pressing issue is the Italian banking system and its €360bn of non-performing loans. Banca Monte dei Paschi di Siena plans to raise €5bn in fresh capital and dispose of nearly €28bn of bad loans by year end. Unicredit is due to unveil a €13bn turnround plan next week, including sales of two sizeable businesses and €50bn of non-performing loans.

There is a key Italy versus EU conflict here. Italy would prefer a state bail-out, with no political pain for the man in the street. The EU are opposed to state-aid in any industry and want bond-holders to be “bailed in”. This is politically toxic for the Italian authorities, as households hold €170bn of domestic bank bonds.

Finally, the ECB meets this Thursday to consider its asset purchase programme. The Italian referendum result will doubtless feature in the discussion. Some think that it might prompt an easier ECB stance than otherwise. We are not so sure but, even so, there is a difficult judgement regarding how quickly to wind down the quantitative easing scheme from its current €80bn a month pace.

Longer-Term Consequences. The underlying fear is that Italy could cause the break-up of the euro, starting with this referendum result. The chart shows one reason why.


While Germany and France have at least weathered the two eurozone recessions since 2007, Italian GDP per head has fallen by more than 12% over the past nine years, according to annual data from the IMF. It is no great surprise that Italians should be unhappy.

The market reaction to this morning’s news was benign. The euro reached new lows against the US dollar but has since bounced by one and a half cents; Italian equities are barely changed but are up over 5% from late November lows; but the 10yr BTP is 10 bps higher in yield. Partly this reflects better political news from Austria but perhaps also the feeling that Italy will muddle through. With Dutch, French and German elections due next year, this could yet be a slow-moving seismic change.

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