Italy referendum: 'No' vote to boost populist sentiment and lead to the demise of the Eurozone?
Italy's and Prime Minister Matteo Renzi’s constitutional referendum was met with a resounding ‘no’ on Sunday.
The referendum was aimed at greatly simplifying the currently cumbersome relationship between the two chambers of Italian parliament to ultimately create a more efficient decision-making system and boost competitiveness. However, Beppe Grillo and his populist anti-EU Five Star Movement, was critical in delivering the ‘no’ vote, which highlights the continent’s rising tide of populism.
The outcome of the referendum marked the beginning of a very important year for the European Union and could, in the very worst case scenario, lead to the demise of the common currency bloc.
In late September, we highlighted some upcoming votes in Europe that could have ramifications on the continent for years to come. One of which being the Presidential Election in Austria that could have seen the first far-right leader elected to office in Europe.
Polls were too close to call before last weekend, however, far-right leader Norbert Hoffer conceded defeat to his left-leaning rival on Sunday. Nonetheless, as Senior Economist Angela Bouzanis stated in her post in September, Hoffer’s close call highlights growing Euro skepticism and could still provide a symbolic moment for other European populist movements.
Upcoming political events in 2017 could be detrimental to EU
There are a slew of politcal events coming up in early 2017 that have the potential to derail the Eurozone.
On 15 March, the Netherlands will have a parliamentary election. According to latest polls the far-right, anti-immigration, Party for Freedom, led by Geert Wilders, will win more seats in Parliament than any other party.
By the end of March, Theresa May is expected to begin negotiations to leave the EU. The negotiation period is expected to take up to two years, however, depending on the nature of the Brexit, be it light or hard, could significantly impact economic sentiment and lead to more anti-EU populist sentiment.
Shortly thereafter, on 23 April and 7 May, France will hold presidential elections where far-right National Front party’s Marine Le Pen is expected to at the very least make it to the second round of elections. Le Pen has promised a ‘Frexit’ referendum if she wins, and although Brexit was big news, France is a member of the euro, which would likely represent a bigger issue for the Eurozone economy.
Worst-case scenario: Could the Eurozone actually go down?
Although according to analysts the “worst-case scenario” in most of these elections is unlikely to happen, nothing can be ruled out after the shock of not only the Brexit-vote, but also the shot heard ‘round the world, as Donald J. Trump was elected President of the United States on 8 November.
Carsten Brzeksi, Chief German Economist at ING-DiBa Bank, believes that if just one of the votes goes the way of the worst-case scenario, it has the potential to bring down the entire Eurozone.
"Since the 9th of November, times have changed […] I think each [political event] has the potential to derail the Eurozone, to further disintegrate the Eurozone, to maybe possibly even lead to a breakup of the Eurozone — but only in the worst, worst-case scenario."
After the ‘no’ vote in the Italian constitutional referendum, Matteo Renzi will step down as Prime Minister on Monday. A new government of short duration, focused mainly on carrying the country over to the scheduled May 2018 general election is likely to take over. However, the consequences of the ‘no’ vote could be much worse according to FocusEconomics Economist Massimo Bassetti:
“The greatest risk […] would be the calling of an immediate early election won by the populist, protectionist and statist Five Star Movement. This could result in a referendum on the euro, the adoption of a battery of protectionist measures as well as in an increase in public spending.”
Global financial markets and economy reacting well to political shocks
Some analysts believe that concern over the growth of populism has been muted, as global financial markets have been largely stable and even shown signs of improvement since the UK and U.S. shocks. The prevailing view from many was that the global economy would crumble with the election of Trump as well as Brexit in June, however, neither has come to pass and in the immediate aftermath of the Italian referendum, markets in Italy are also stable.
As senior investment strategist at Aberdeen Asset Management, Craig McKenzie, puts it, “[These outcomes are] teaching the market that political shocks are not necessarily the start of the next bear market [...] The market is harder to shock."
Although it has only been a short time since outcomes of each vote, analysts believe that the not-so-negative effects on financial markets after the votes may have fueled the fire of the populist movements. Austria’s Hoffer had been more ambiguous with his views on EU membership, distinguishing himself from other far-right leaders that unequivocally want out. However, a majority Party of Freedom in Dutch parliament could lead to the Netherlands leaving the EU. Add to that the possibility of Le Pen’s ‘Frexit’ and pro-EU politicians and economists may be getting a bit nervous, especially after the unexpected Brexit and Trump votes.
How could the possibility of any of these scenarios affect economic sentiment? This is hard to say. Right now it seems that investors and companies aren’t really expecting a crisis. Economic sentiment in the Eurozone just hit its highest level since December 2015 in October and inched up even further in November. Business confidence in Germany, Europe’s largest economy, jumped to an over 2-year high in October. The Eurozone economy seems to have shrugged off any early Brexit contagion as growth in Q3 remained steady albeit moderate. The common currency bloc grew 0.3% in Q3 over the previous period and the unemployment rate continued on a downward trend in the third quarter. France’s economy rebounded, Italy’s economy picked up steam and Greece’s growth surged in the third quarter. And Spain, despite not having a government for the first 9 months of the year, is still one of the fastest growing economies in Europe.
A new European debt crisis on the horizon?
Eurozone economies appear to be shrugging off political developments. The common-currency bloc looks to be enjoying moderate growth, just a few years after the 2009-2012 debt crisis that hit, in particular, Southern Europe and threatened to break up the Eurozone. However, a new debt crisis could be on the horizon as Eurozone countries such as France, Spain, Portugal and Italy look as if they will miss debt and deficit targets again in 2016 and possibly 2017 and Italy's populist Five Star Movement may play a big part in that.
FocusEconomics Senior Economics Editor, Caroline Gray, argues that the EU will continue to bend its rules to accommodate the growing debt issues in Southern European Eurozone countries to avoid a breakup of the bloc.
Commerzbank Chief Economist Jörg Kraemer argues, however, that Italy may be the biggest threat to the EU especially after Renzi’s defeat. Although it would take a pretty unlikely sequence of events to play out, a Five Star government could take power, if not immediately, in the May 2018 general election.
According to Kraemer, a Five Star government could increase public spending to the point of busting the Eurozone's rules on deficit limits, adding more debt to Italy's already hefty debt of 133 percent of economic growth.
More deficit spending and debt "will create a huge conflict with the fiscal rules and the European Commission," Kraemer said. "And in such an environment there is a significant risk that private bond investors will go on strike and refuse to buy Italian government bonds. That means there is a significant risk that we will see a return of the southern debt crisis if the Five Star movement continues to lead in the polls and there are early elections."
Growing anti-EU populist movements and another EU debt crisis could mean another move to breakup the EU. However, at the moment it is all hypothetical, so as is often the case, we will just have to wait and see what happens.
To stay in the know, keep checking back with us for the latest economic news, data and forecasts. You can also download a free sample of one of our FocusEconomics Consensus Forecast reports by clicking on the button below.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: December 5, 2016
TagsCommodities Eastern Europe Portugal Exchange Rate Bitcoin OPEC Japan Gold Italy Sub-Saharan Africa Iran Argentina Latin America precious metals United States Spain Inflation G7 Ukraine Economic Growth (GDP) Major Economies Russia Healthcare MENA France Vietnam European Union China Banking Sector IMF Brexit Venezuela Trade Consensus Forecast Canada oil prices Infographic Agricultural Commodities USA Germany TPP Australia Turkey Energy Commodities Nordic Economies Unemployment rate Precious Metals Commodities Cryptocurrency Colombia Greece Euro Area Oil Brazil Emerging Markets Investment Base Metals Commodities South Africa Mexico Housing Market Company News India United Kingdom Forex Asia Tunisia UK Africa
A comprehensive set of data shows that the economy of Central America and the Caribbean strengthened in Q2. Get the… https://t.co/3E1YRhmHYi
1 hour ago
Growth in Central America and the Caribbean should be remain robust going forward, however downside risks persist.… https://t.co/7ZCK4GfURO
2 hours ago
2 hours ago
RT @dlacalle_IA: Brazil 🇧🇷: Main imbalances, including "twin deficits" and rising inflation, will continue over the next years. Politic…
2 hours ago
Mexican GDP is expected to grow a healthy 2.2% this year, in large part thanks to a booming U.S. economy. Find out… https://t.co/7Hn3bKVGWw
3 hours ago
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit