The Wheels Are Off – the Italian Referendum Results

The majority of Italians have voted against the constitutional reforms proposed in a national referendum and Italian Premier Matteo Renzi’s “experience of government” is now over as he steps down.

The Italian economy has been like a Ferrari with its wheels slashed – its economic performance has been the worst amongst any of the Eurozone country with the exception of Greece; it’s government loans sit at 130% of GDP and unemployment exceeds 11%.

This failure of the referendum is now akin to the Ferrari with its wheels completely off the axle – and the casualties won’t just be the Italians in the Ferrari but indeed the whole of the Eurozone.

Early indicators are that the Euro has fallen sharply against the Dollar and the Asian markets are spooked by what is to come from Europe.

What does this result mean for Italy, Europe and the world?

1. Brace for a hard landing of the banking sector.

We could see the demise of a few banks in Italy, starting with the Monte dei Paschi di Siena (MPS) – the world’s oldest bank – which has already lost almost 90% of its value this year. MPS is already one of Europe’s weakest banks and they are subject to a bailout plan which may now not come to fruition.

Italian banks are struggling with about €360 billion of bad loans and are significantly undercapitalised. There will be a huge sell-off of Italian and European banking stock once the markets open.

The problem is that the scale of interconnectedness means that a hit to the Italian banking system will leave a trail of destruction across the rest of the European and global banking sector starting with the largest European lenders such as Deutsche Bank.

2. The EU and Euro are both going to go through an existentialist phase

Brexit dealt a big blow to the EU project. The rise of the Five Star Movement, a Eurosceptic opposition which has already claimed ‘victory’ in this referendum means that over time their views on EU and the Euro are going to gain even further traction. Even if the Five Star Movement do not win in any early elections called as a result of this referendum (they have a campaign promise to hold another referendum on Italy’s membership within the EU), their views are going to be, over time, become mainstream.

3. Imposition of capital controls?

In 2015 we saw capital controls applied in Greece to stop a run on the banking system and see a flood of capital out of the country. A run on the Italian banking sector will have a colossal impact and a pre-emptive series of capital controls, though damaging from a reputational perspective, may be required for reasons of survival.

4. An Italian sneeze will cause an European contagion.

This result will no doubt cause another slump in the Eurozone economy and will cause a negative investment sentiment. Unemployment will continue rising and living standards will fall, not just in Italy but across Europe.

The people have spoken and have demonstrated a willingness to face a hard landing. Whether they are prepared for a hard reset is another matter altogether and this is going to be the start of a period of extreme uncertainty, economic uncertainty and hardship.

What Italy needs now is an expert driver who is going to be able to manouvere the Ferrari with no wheels skillfully so that it causes the least damage both to the Ferrari’s passengers and other Eurozone travellers.

 

 

 

Seven beneficiaries of UK’s Brexit

Following the  proxy class war that was the EU referendum, I was reflecting on who I think will be some of the beneficiaries of UK’s Leave or Brexit result besides the obvious parties like the Leave campaigners and Boris Johnson.

As a slight aside my personal view is that the root cause of this result is inequality which has led to a disenfranchised populace that is reacting against the increasing economic marginalisation an increasing majority of citizenry are facing. Even the issues of migration are being amplified against this backdrop of growing economic inequality. This is one of THE policy challenges of our time. Resolve this huge issue of rising economic inequality and I suspect we will find in it the panacea to a large number of other issues we are facing.

So on to who I suspect will be benefiting from this:

  1. Scottish independence campaigners – The will of the Scottish people is reflected in the results – they want to remain in the EU. During the last independence referendum, there was a clear statement that any exit from the EU by the UK may trigger another call for independence. Whilst 2014’s independence referendum was deemed a once in a generation campaign, I suspect the result of the 24th of June 2016 may bring forward the next independence referendum to as soon as the next two years.
  2. The United Irish brigade / and IrelandSinn Fein have been quick off the mark to argue their case for a union of the Northern Irish with the Republic of Ireland. Similar to the Scots, the Northern Irish were also in favour of remaining with the EU and there is a case for them to argue for independence and fulfil the long-held dreams and aspirations of Irish nationalists.

    Any push towards reunification will also lead to the levels of investment and pump-priming of both Irish economies leading to further growth. Furthermore, in the near term, I suspect some of the investment meant for the UK may be diverted to Ireland, particularly in the financial services and outsourcing sectors.

  3. First time home buyers – With the expected fall in asset prices, it may finally become easier for people trying to get onto the property ladder. Furthermore, a reduction in immigration will also dampen demand for housing and rental yields, leading to more affordable homes. It is also widely expected that the Bank of England will not be hiking rates any time soon to carry on fostering demand as well, making the overall cost of home ownership more affordable.
  4. Lawyers and accountants – Over the next two years, as major UK enterprises and companies seek to understand their legal, tax and financial planning positions vis-à-vis the EU, they will rely on an army of lawyers and accountants to make sense of their obligations and required strategies to maximise profit and minimise liabilities (legal and financial).
  5. Management consultants – I am fairly sure BCG, McKinsey, Booz (PwC), and other management consultants heard a loud ker-ching of cash registers going off collectively as they seek to become the ‘experts’ in EU law and supporting both the public sector (particularly as they become overnight subject matter experts in Article 50 of the Lisbon Treaty that governs EU exit) and private enterprises as they help organisations make sense of what Brexit means for them (by first asking them what it means for them and then re-writing it into 100 PowerPoint slides and charging them a fortune for it…).
  6. Trump’s policy advisors and US isolationist/protectionist campaigners – The Donald will point to UK’s EU referendum results to his domestic base and use it as an argument about why his protectionist and isolationist policies are for the best and will help “Make America Great Again (TM).” It could also be a powerful argument against the likely Democrats’ positions about open economies and trade reforms.
  7. UK exporters – At least in the short to medium term, as there is a downward rebalance of the UK Sterling, I suspect it will help improve UK’s exporters (particularly seeing as 50% of UK’s 15 export partners in volume are outside the EU). However, it has to be also noted that UK’s net deficit is roughly £300 billion and given the higher level of imports, it is also likely there will be a strong inflationary pressure with little monetary tools or options at the Bank of England’s disposal.