By Todd Mattina, Chief Economist and Strategist, Mackenzie Asset Allocation Team
On December 4, 2016, Italians voted ‘No’ in a constitutional referendum that many voters interpreted as a vote of confidence in Prime Minister Matteo Renzi’s government and Italy’s place in the Euro Area. Renzi resigned after approximately 60% of Italians rejected constitutional reform. The resounding defeat sets the stage for heightened political uncertainty in Italy, the Euro Area’s third-largest economy.
The ‘No’ vote shines a light on Italy’s troubled financial sector and highly indebted public sector with total debt of about 135% of GDP. The increased political uncertainty risks sidelining urgently needed reforms, such as recapitalizing the banking system and modernizing the sluggish Italian economy.
Markets quickly recovered losses after an initial selloff and flight to safe haven assets, as the referendum outcome was widely anticipated. The negative economic fallout from the ‘No’ vote is expected to focus mainly on Italy at this stage, with limited international spillovers. Looking ahead, we remain neutral on the euro relative to the loonie and modestly underweight European stocks relative to Canadian equities.
In the immediate aftermath of Italy’s referendum, here is our analysis of several key issues for Italy, Europe and global financial markets:
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