18 Aug 2016 2 min read

Pizza, piazzas, and political turmoil?

By LGIM

I’ve had Italy in my sights for a long time. Beautiful lakes, stunning food…and oh, some potential political turmoil. So before I go off to enjoy the delights of Lake Garda, I’ll impart my latest thoughts on political developments in Italy.

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Italian politics is highly fractured, and the country has a history of unstable governments that rarely last more than a year or two. Moreover, with a string of political parties that are anti-euro in nature, a stagnant economy and weak banking sector, all the makings of a crisis are there. So Italy has been on our radar for a while.

 

Some of the risks will now be tested, as this autumn the government is scheduled to hold a referendum on constitutional issues. That Italy’s parliamentary system is slow and gummed up is well known, and something Prime Minister Matteo Renzi has promised to reform. 

 

Raising the stakes even more, Renzi has said he would quit if the reform is rejected.

Key amongst the proposed changes is limiting the role of the upper house and reducing the number of senators from 315 to around 100. And yet what was deemed a popular measure, now looks to be at risk of not getting the backing from voters.

 

Raising the stakes even more, Renzi has said he would quit if the reform is rejected. More recently, it seems that he regrets having made the referendum about his premiership, but it is probably too late now to untangle the referendum from an effective confidence vote on him or the government in general.

 

He promises to spend the money saved from reduced public administration costs on fighting poverty, but despite this the polls show the referendum outcome to be on a knife edge.

 

Concerns about the ability of a major euro area country to pass reforms and generate growth could make investors run for hills.

If the referendum is passed, the government’s reform agenda can carry on. But if voters reject it, and Renzi does indeed resign, then political uncertainty is likely to heighten. Snap elections seem unlikely as this would most probably create a hung Parliament given that the two chambers would be elected under two different voting systems yet retain equal powers. This would therefore not guarantee post-election political stability, and would be a messy outcome, with the government probably being forced to carry on in its current form until elections in 2018.

 

If there’s one thing investors don’t like, it is uncertainty, and Europe has already had more than its fair share with Grexit fears (at least twice) and the UK’s EU referendum. Italy could give another jolt to the increasingly fragile political project that is the EU. Concerns about the ability of a major euro area country to pass reforms and generate growth is likely to be negative from a risk assets perspective, and could make investors run for hills. Or in my case, the Dolomites.

LGIM

LGIM contributors

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LGIM