Based on early results, it appears that Italy’s referendum will be defeated. On November 22nd I wrote about the upcoming referendum and its potential impact, if it failed to pass. Now that the failure is apparent, what does this mean to the investment community?
The referendum’s failure is a short-term cause for weakness in the Euro. This is because it is believed that without the referendum’s reforms, fiscal reform in Italy will not happen. The failure being seen as also a larger message, which speaks to the dissatisfaction many Italian voters with the European Union (EU). In short, Italy isn’t interested in the fiscal austerity that the EU is selling.
What is more worrisome for the EU is the potential that Italy’s inability to reform itself will lead to the EU having to take more self-directed measures. Such measures will push the Italian’s in the direction the EU desires. Such measure will be taken because the EU does not want one of its member countries having multiple bank failures.
If the desired fiscal changes are not a possibility in Italy, then the future becomes much more uncertain. The concern is that many believe Italy will seek to break from the EU, such as Britain did earlier this year.
It will be interesting to see how this vote rocks the market. We see currency trading responding by the Euro falling against other currencies. What about the European stock market and other world markets? How spooked will markets become as a result of this news? We’ll see when trading begins this Monday.