Italy’s Referendum Potentially More Disruptive To Markets Than Trump Win

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Robert Donachie Capitol Hill and Health Care Reporter
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Financial experts and economists predicted imminent market implosion if Trump were to win the presidency, but the bigger threat to the global marketplace may very well be the impending Italian constitutional referendum on Dec. 4.

Paul Krugman, opinion writer and economist for The New York Times, wrote that if Trump were to win: “we are very probably looking at a global recession, with no end in sight.” Krugman even went so far as to claim that the markets would “never,” recover. (RELATED: Paul Krugman Says Markets Will ‘Never’ Recover From Trump; Dow Hits Record High)

“If Trump wins, it (the market) should go down 7 percent,” Eric Zitzewitz, economics professor at Dartmouth College, told CNBC.

News of President-elect Donald Trump’s win over former Secretary Hillary Clinton did cause the market to react with volatility, as futures listed on the Dow Jones dropped some 750 points Tuesday evening. Markets, however, did not follow these doom and gloom predictions, as they largely recovered and even improved in days following Trump’s election.

The Dow Jones Industrial Average hit a new all-time intra-day trading high Thursday, and are soaring since the announcement of President-elect Donald Trump’s victory. The S&P 500 is also up substantially; gold and silver futures are also rising steadily as of Friday morning.

The Italian constitutional referendum is a critical moment for both the future of Italy and the European Union, with some international scholars warning it could be “as significant as Brexit.” Italy’s Head of Public Debt, Maria Cannata, said the government’s constitutional reform could easily feed market volatility.

There are a few reasons why some are expecting a volatile market reaction to the Italian referendum.

The first is that Italian Prime Minister Matteo Renzi promises to resign if the constitutional reforms are not passed. Political transitions breed uncertainty in the marketplace, and investors are often unsure how to react. Renzi was also one of the few world leaders who publicly endorsed Hillary Clinton for president.

Trump’s rise to power was fueled heavily by the anti-establishment fervor of the American people, a wave that is also sweeping over the people of Italy and does not bode well for Renzi. Renzi spent the past two months bashing the EU, and even EU leadership, in efforts to save his political career and push for the referendum he so desperately desires.

However the market responds will undoubtedly be exacerbated by the fact that Italy presides over the fourth-largest public debt in the world, in addition to recent conflicts with the European Central Bank (ECB) over debt relief programs. A possible regime change during an already tumultuous economic period could cause some investors to react skittishly.

What could also add to the instability is the fact that the EU stepped in and installed a new government in Italy in 2011 during the beginnings of its debt crisis. Essentially, the EU suspended the rules of democracy by installing a government filled with non-elected officials. Many of these people were former Goldman Sachs advisers.

Given Renzi’s anti-EU rhetoric and the EU’s takeover of Italy’s government in 2011, some investors fear that the Italian referendum could be the next Brexit. “If Italy decides to leave, it is confirmation” that the European Union is in trouble, Ana Thaker, a market economist at PhillipCapital UK, told CNBC.

It is important to note that the vote Dec. 4 is not about whether Italy stays or leaves the European Union. The vote is to decide whether the Italian government should change its constitution.

The idea behind the proposed reforms would be to change the balance of power in the Italian legislature by giving the lower chamber greater decision-making power in respect to the higher chamber, which some say would further centralize the government. Centralized governments worry investors, since they have fewer checks and balances.

Governments that runs off checks and balances work to reassure “investors of the security of their property rights and the sanctity of their contracts. Reassured investors are eager investors and devote more capital to projects in countries that they believe will protect their rights,” Michael Touchton, assistant professor of Political Science at Boise State University, explains.

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