Italian Prime Minister Matteo Renzi has announced he will resign from office following the defeat of his referendum to reduce the power of the Italian senate, once again sparking fears the European Union will break up.
State Street Global Advisors head of investment solutions group for Asia Pacific Mark Wills cautioned in October that Mr Renzi’s resignation could pave the way for the anti-EU Five Star Movement (5SM) to gain office.
“If a failed Italian referendum leads to Renzi’s resignation as promised, followed by an election, a 5SM victory and a successful vote to leave the EU, this chain of events could have repercussions through European and global markets,” he warned.
Mr Wills said such an outcome would lead to “a depreciation of the euro against the US dollar, followed by the selloff of European sovereign bond markets” given Italy’s position as the third largest member of the EU’s monetary union.
“Faced with this potential outcome, investors in so-called riskless assets — like EU member bonds — may have to question just how defensive these assets really are,” he said.
“European yield curves could experience a parallel shift as investors consider a new risk premium, while European equities would weaken as analysts reduce earnings expectations.”
AMP Capital chief economist Shane Oliver, however, noted that Mr Renzi’s resignation does not guarantee a victory for 5SM, adding that an election is itself unlikely to be held before its due date in 2018.
“Even if there is, it’s not clear that the populist Five Star Movement will win, unless it changes its anti-Euro stance, and even if 5SM were to win and call a referendum on Italy's membership of the Euro – which would first require a constitutional change – a majority of Italians support staying in the Euro,” he said.
Mr Oliver also pointed to the recent re-run of the Austrian election, which saw pro-Euro Alexander Van Bellen defeat his Eurosceptic rival Norbert Hofer over the weekend, as further evidence the European Union is likely to remain intact.
“More broadly, my view remains that the Eurozone is likely to continue to hang together and bouts of market turmoil driven by break-up fears should ultimately be seen as buying opportunities, just as we have seen since the Eurozone crisis began earlier this decade,” he said.
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