Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Europe Crisis - Italy’s “No” Vote Is Just the Beginning

Politics / Eurozone Debt Crisis Dec 13, 2016 - 02:54 PM GMT

By: John_Mauldin

Politics

BY ANTONIA COLIBASANU AND JACOB SHAPIRO : An important vote recently occurred in Italy. Italians said “No” to a referendum on government reforms. The vote was broadly viewed as a referendum on Prime Minister Matteo Renzi. He has since tendered his resignation.

The result of Italy’s referendum means three things. First, the slow devolution of the European Union rumbles on. Second, Italy has declared itself in open revolt internally and against the EU. This is a challenge not just for the EU, but for Germany in particular. Third, this is the beginning of a major political shift in the third largest economy in the Eurozone.


Italy will hold elections in 2017. It is unclear whether the political establishment will retain control. Parties like the Five Star Movement and Northern League advocate nationalist economic policies and a review of the EU. They could seize power. The damage already is done. Nationalist sentiment won’t go away soon.

Nationalist Momentum

This is the latest in the increasing power of European nationalist politics. Voters rejected Renzi’s proposal for reducing the Senate’s power. They opposed power transfers from regions to the central government in Rome.

By promising to resign, Renzi created major chance for nationalist parties in Italy to make their influence felt. The anti-system Five Star Movement and the Northern League turned the campaign into a rejection of the Renzi government.

Unlike Brexit, polls correctly predicted Italy’s outcome. Still, the margin was bigger than polls had predicted. A large number of Italian voters turned out to show contempt for the political establishment. The establishment erroneously believed that even if reform proposals failed, the political system would remain intact. But the opposite is happening.

Italy’s Banking Crisis

Italy is in the midst of a banking crisis. The proposed reforms to simplify decision making also attempted to fix the banking sector. Keeping investor sentiment strong is crucial. The amount of non-performing loans (NPLs) hasn’t increased in the last year and banks have started a recapitalization process to further consolidate to cut costs. But the banking sector remains fragile.

Banca Monte dei Paschi di Siena, the country’s weakest major lender, is a test case for Italy. It is the first state-backed campaign to steady the banking sector and attempt to clean up the Italian banks’ 360 billion euros ($387 billion) of NPLs. While a debt-to-equity swap that ended last Friday managed to raise 1 billion euros of the 5 billion needed, a share sale to raise more capital likely won’t be launched soon.

The banking woes are not simply an Italian problem. Italy is the third largest economy in the eurozone. Both Germany and France are exposed to troubles in the Italian banking sector. The EU and Italy have negotiated solutions for over two years, with few tangible results.

Tensions over negotiations surfaced in 2016 between Renzi and German Chancellor Angela Merkel. The referendum was not only about the Italian people’s desire for change, it also was a message that Italy won’t accept German methods or directives from Brussels on how to fix Italy’s problems. The EU and Italy are playing a game of cat and mouse over the issue of NPLs. But the referendum is a clear signal that Italians want a government that will make decisions in terms of what is best for Rome.

A Power Shift?

All eyes should now be on the Five Star Movement. It has advocated a non-binding referendum on whether Italy should remain in the eurozone. The Northern League also supports such a referendum. Populist center-right party Forza Italia may support it given its criticism of EU common currency.

A caretaker government will now take the helm from Renzi. Flexible rules for a Monte dei Paschi bailout will be decided with the European Commission. Another Band-Aid solution will be administered for the banking sector. But mistrust in the Italian economy will increase. That drives higher interest rates on sovereign debt.

The vote against Renzi was partly caused by social problems, including high unemployment following 2008. Austerity measures and slow recovery have caused increasing distance between the public and the traditional political elite. That makes room for anti-establishment and nationalistic parties to appear.

Renzi’s resignation will lead to early elections next year. It is possible the political establishment will lose that vote as well. As a result, the Five Star Movement could take power. That scenario would change the way Italian domestic politics function. It also would change the nature of ties to Brussels and Berlin.

Investors don’t lose confidence when governments change. But they do lose trust when systems change and different government rules could be implemented. The establishment’s moves are meant to reassure investors. That tactic will work for several weeks, perhaps months. But Renzi leaving is not the end of political upheaval in Italy—it is the beginning. The shockwaves will be felt in Berlin and throughout the eurozone.

Prepare Yourself for Tomorrow with George Friedman’s This Week in Geopolitics

This riveting weekly newsletter by global-intelligence guru George Friedman gives you an in-depth view of the hidden forces that drive world events and markets. You’ll learn that economic trends, social upheaval, stock market cycles, and more… are all connected to powerful geopolitical currents that most of us aren’t even aware of. Get This Week in Geopolitics free in your inbox every Monday.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in