In Insights

Does the fate of the Eurozone rest on this weekend’s events?

RENZI EU
Though 2016 as a whole has already proven to be yet another year full of political and economic strife for the member states of the European Union, this weekend is quite another kettle of fish.
First up, Italy’s Prime Minister Matteo Renzi will be praying for a ‘yes’ vote in Sunday’s referendum which is all about constitutional reform in the country’s Parliament. Sadly for Mr Renzi, polls (which have been less than stellar at predicting events this year) are indicating a ‘No’ from the public, which could be bad for Italy and Europe for several reasons.
Firstly, Renzi has said that he will stand down as PM if he loses, which could pave the way for a populist anti-EU party named ‘Five Star Movement’ to take centre stage. Similarly to anti-establishment and anti-globalist movements gaining traction in France (Marine La Pen) and the Netherlands (Geert Wilders) the group seeks to disrupt the status quo and potentially call for a referendum on Italy’s membership of the EU and the single currency (though, interestingly, statistics indicate that Italians are divided on remaining part of the Euro or not, despite data like this which shows they haven’t gained from Eurozone membership like other EU economies):

ITALY GDP

What does all of this in the Eurozone mean for you?

European stocks have already dropped ahead of the outcome, but some are saying the referendum is being over-hyped. We will have to wait and see. In Italy generally, bank shares slumped over last month on renewed concerns of bailouts being given to the countries lenders which are facing serious hardship as they are saddled with billions of euros in NPL’s (non-performing loans), the oldest bank in the world (Monte Dei Paschi di Siena) included. Though Italy is of course the central player in this, what also matters is the long term outlook for the strength of the European Union as a whole.
Politicians in the Eurozone and elsewhere are looking at Italy and wondering whether it may be the next ‘domino’ to fall, after Brexit defied the pollsters in June, while some comments are more doom-laden, saying that the Eurozone could crumble as a result of the outcome.
Uncertainty in the financial markets is likely if Renzi loses and steps down, especially because if he goes, his proposed bank bailout may be scrapped at least for the time being. Then, if Italy should face a full blown banking crisis, due to the interconnectedness of the global banking system, the rest of the European banking system might be hit as well, whilst many lenders on the continent are already struggling, in the case of Portugal’s biggest bank Caixa Geral de Depositos for example. This could prompt fresh uncertainty and worry for investors. It would be prudent to expect volatility in the Euro as well as European equities off the back of this upcoming result and the fallout.
Not only this, next comes Austria. Two men, Alexander van der Bellen, a Green candidate and son of Estonian refugees, the other Norbert Hofer, a right-wing populist who would like to dissolve the Parliament that oversaw 2015’s migrant crisis, will be the central players when Austrian’s head to the polls on Sunday.

BeFunky Collage

The latter (on the right) would be the countries first right wing leader (if elected) since the Second World War. This potential outcome would put yet another spanner in the works of the EU project and would be sure to upset the European commission, because he has said he would back a referendum on Austria’s EU membership if the bloc becomes more centralized or if Turkey joins.
So both of these developments in key EU countries have ruffled the feathers of those with a strong interest in keeping the idea of European political and monetary union alive. Recently, the controversial EU President Jean Claude Juncker mentioned in an interview with Euronews, that ‘Regarding referenda on EU membership, I think it is not wise to organise this kind of debate, not only because I might be concerned about the final result but because this will pile more controversy onto the huge number already present at the heart of the EU’.
Whatever the results, the European Union has a lot to take into consideration, and the effect on the markets is likely to be considerable.

 

 

 

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