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.

 

 

 

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Greece – Defiance in the wake of economic and policy waterboarding

The events overnight in Brussels have been nothing short of what can only be considered as a brutal attack against the Greek government and its people.

Watching the images of the embattled Tspiras and Tsakalotos, the new Greek Finance Minister, struggling in meetings with Merkel and the rest of Europe’s leadership, while doing their best by the people who elected them and also gave them a clear ‘No’ vote last weekend, was painful.

However, despite the struggles, I cannot but feel a deep respect for the Greek government who are trying valiantly to hold things together in the face of such steadfast adversity.

Germany and a raft of other nations are demanding that Greece pass a whole series of legislative reforms in the next 72 hours before they extend any credit lines. Some of the bills being demanded include:

  • VAT reforms
  • Changing the pension system
  • Implement spending cuts
  • Increasing the tax base
  • Establishing greater independence for the national statistics office
  • Privatising the electrical grid.
  • Return of the ECB, IMF and the European Commission to Athens

How this is meant to all be realistically debated, agreed and passed by the Greek Parliament in 72 hours is ludicrous. In essence, a gun is being held to Athen’s head and a series of demands are being made which, if not met, will lead to an economic and social collapse in the country. In circumstances such as these, what options do the Greeks really have?

Privatising national assets worth €50B

Amidst these changes, there is also a plan by the European Commission to privatise €50B worth of Greek national assets and use it as a trust to pay off their debt! Again, this is an example of a country that’s down being crushed in an absolute and merciless manner.

This call towards privatisation is worrying. If all basic services are privatised, who is going to buy over these national services and run them? The Greek people, already suffering from a 25% contraction of their economy over the last few years, massive unemployment and falling pensions, will be dealt with possibly higher prices and debt! How is this going to realistically alleviate the conditions of the Greeks?

The word ‘Europe’ is Greek

Where is the famed European solidarity? The European experiment was meant to be a showcase of unified achievement, progress and development. It was meant to highlight how Europe, as a whole, is greater than the sum of all its parts. However, tonight’s events have hardly been a ringing endorsement.

To their credit, Hollande and Dragi have been fighting Greece’s cause and maintain a united Europe, but it is a fight they are surely losing.

The IMF is also seeking to replace the Tspiras government with one that is more likely to carry out the painful reforms which are being demanded of Greece. If this does happen, it does make a shambles of the whole notion of democracy, ironically, in the birthplace of democracy as we know it!

What hope of espousing the values of democracy, fair-play and justice to the rest of the world which will see this and realise that in the end, the might of economic power will trample over the notions of decency and support every time.

It is no coincidence that #ThisIsACoup is trending on Twitter right now.