There is no Turning Back for the European Union

The European Union project is in trouble.

Born in the aftermath of the brutal Second War World, the EU was designed to bring peace and prosperity. Yet after the 2008 Global economic crisis, euro-scepticism is growing.

As you probably already know, Britain voted to leave the EU during the Brexit vote last June 23. Now Italy could be next to leave the EU.

In 1946, Italians went to the polls. They had to choose between keeping a monarchy who had aided the rise of dictator Benito Mussolini and had taken them to a world war, or a republic. Needless to say, the republic won, and the king had to go into exile.

Two years later, the Italian constitution was born. It gave equal power to the senate and the deputy houses, to prevent another dictator like Mussolini from seizing power.

Yesterday, just 60 years after the referendum vote that led to the Italian constitution, Italians have visited the polls again. You see, Prime Minister Matteo Renzi wanted to reform the constitution to reduce the power of the senate.

He argued that having two chambers with equal powers slows down the lawmaking process. Yet Italians were a bit hesitant to give more power to the PM.

Renzi put everything on the line. Much like British ex-prime minister David Cameron, he vowed to quit if the referendum did not go his way.

Renzi’s opposition turned the referendum into a judgement on the state of the country. Well, Italians are not happy.

After gambling for the all or nothing, Renzi has nothing. The no vote won by an ample margin. Take a look at the map below.

Italy Referendum

Source: Corriere della Sera

Unlike Brexit and the US election, the result was not a surprising. You see, polls were already predicting a win for the ‘no’ vote. Yet people did not put a lot of faith on the polls; after all, how many times have they been right this year?

Markets factored in a no win. Yet, even with forewarning, the Euro fell.

And the fact is, this is bad news for Italian banks. They are already struggling, with large amounts of non-performing loans. The third largest one, Monte dei Paschi di Siena, needs 5 billion euros by the end of the year, or it will face the risk being wound up. After the referendum defeat, it will be tricky for Monte del Paschi to raise that capital.

And a shaky Monte dei Paschi can spread the risk to other European banks.

True to his word, Renzi has submitted his resignation. Beppe Grillo, leader of the ‘no’ movement, has already called for elections. He sees the referendum results as an opportunity for Italians to reconsider their EU membership.

The third-largest economy in Europe — and the country with the second highest public debt to GDP in the world — is now facing elections, a banking crisis and political turmoil.

And there is a roller coaster ahead for Europe in 2017, with elections in Netherlands, France and Germany coming up in the next year.

Is this the moment of no return for Europe? Departing words from Renzi may prove fateful, ‘Good luck to us all’.

Yet Italy, and Europe, need more than luck to turn things around.


Selva Freigedo,
Contributing Editor, for Markets and Money

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Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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