2016 has been a year of unexpected political results, with Brexit and Donald Trump dominating not only headlines but investor sentiment too.
Added to the pile now is the defeat of the Italian government who have lost a referendum on constitutional and voting reforms.
Italy’s prime minister Matteo Renzi is now expected to resign after staking his political career on the vote.
The public dealt Renzi a decisive defeat on Sunday, voting 59% vs. 41% against the reforms.
According to Azad Zangana, Senior European Economist & Strategist at Schroders, the referendum result will increase pressure on the European Central Bank to maintain stimulus.
Zangana believes electoral reform is still needed, with Renzi’s resignation dealing a major blow for Italy’s medium to long-term outlook.
“The question posed in the referendum was related to voting reforms, which would have given the ruling party more power to enact legislative change.
“Italy’s equal system of power between the Chamber of Deputies (lower chamber) and the Senate (upper chamber) has created gridlock, and is a key obstacle to greater economic reforms.”
Zangana says that Italy now has an incomplete and incompatible electoral system.
This issue will need to be resolved before the next election in 2018, meaning that Italy’s next leader will be lumbered with this task instead of working on boosting growth.
When Renzi resigns this evening, Italy’s president, Sergio Mattarella will need to appoint a caretaker, hopefully reducing the chances of a snap election.
Zangana believes an early election could allow anti-establishment parties like the Five Star Movement or the Northern League to increase the share of seats they have.
Both have gained popularity in recent years while advocating anti-austerity policy as well as leaving the EU and euro.
According to Lazard Asset Management, the outcome of the referendum was already partially priced into the market.
Lazard have said the reform would have simplified the process for laws to be approved in Italy and ensure government stability. However, this result defends the status quo and effectively stalls the push for much-needed reform in Italy.
Fund manager Architas have posed a series of questions following the referendum result, including whether the recapitalisation of troubled Italian banks will succeed, whether a populist party could get voted in next year, and if the result places the future of the eurozone at stake.
They noted the muted response from investment markets, despite the uncertainty over the future government.
Markets appear to be focused on the prospects for the recapitalisation of the Italian banking sector, rather than any potential breakup of the eurozone.
Next year looks set to be just as ‘interesting’ as 2017 in terms of global politics, with Donald Trump’s inauguration as US President in January setting the tone for the year ahead.
