Does the No Vote in Italy’s Constitutional Referendum Mean Bad News for the Global Economy?

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Marcus TJ

italyIf you have not seen the Oscar-winning film The Big Short, you are missing out on a truly seminal movie. This vehicle narrates the tale of the sub-prime mortgage collapse in the U.S., which of course sparked the great recession and a global, economic decline. More specifically, it explores the actions of Wall Street trader Steve Eisman, who foresaw the collapse of the housing market and profited by betting billions against the banks holding onto mortgage assets.

Eisman made billions from this tactic and it is a philosophy that has continued to underpin his trades since essentially taking advantage of the natural fluctuations of the economy in the same way that forex and commodity traders operate. He remains tight-lipped about the precise derivatives and markets that he is expecting to plummet, of course, but recent trends and developments have made it clear that he has a prominent target in mind at present. With an estimated $25 billion having been withdrawn from hedge funds during the last three quarters (and given the continued plight of the Eurozone), continental Europe’s banks have emerged has an obvious target for Eisman and similar traders at present.

Why Italy’s Constitutional No Vote Could be the Trigger for Another Economic Collapse 

While these factors have been ongoing for a prolonged period of time, there are fears that the decision of the Italian electorate to reject Prime Minister’s Matteo Renzi proposals for constitutional reform. Perceived as an attempt to reduce the power and influence of the electorate, this has the potential to trigger widespread uncertainty and decline while it has already accounted for the resignation of Renzi himself.

With calls for a snap-election, Italy could follow the lead of the U.S. by voting in a popularist, anti-establishment party and candidate. The Five Star Movement has gained tremendous credibility in recent times as outgoing Prime Minister Renzi’s popularity has gradually declined, with this party’s main electoral pledge being to hold a referendum on Italy’s continued membership of the Eurozone. This, in turn, could have a huge impact on the vulnerable and increasingly fragmented Eurozone, while potentially triggered the break-up of the ailing single currency.

In truth the value and appeal of the Euro has been in decline ever since the Greek financial crisis first began, but the latest developments could be the trigger the total disintegration of the single, European block and a period of sustained economic decline across the globe.

 

The Bottom Line: What Will the Immediate Economic Impact be and Can it be Avoided? 

Italy’s recent veto of Renzi’s reform proposals has already caused national economic unrest, while further exacerbating the issues surrounding the European central banking crisis. It has also reduced the prospects of driving structural reform within the Italian government, causing a contraction in growth and pushing the nation further towards a recession. A departure from the Eurozone is unlikely to help in the longer-term, while this will also impact international trade by triggering a global economic decline.

The question that remains is can this fate be avoided?  A period of calm would undoubtedly help the economy to consolidate and then recover, while the election of a more conservative, technocrat would also ensure that Italy remained in the Eurozone for the foreseeable future. This would usually seem the most likely course of events, but the Brexit vote and the election of Donald Trump as U.S. President highlight a distinct trend for nationalist and popularist movements in the modern age.

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