All eyes are riveted to the Italian referendum on constitutional reform due on Sunday 4th December.
The “no” vote is still ahead in the polls, even if the past 18 months should have taught us to be weary of polls’ predictive powers.
The worst-case-scenario advanced centres on reformist Prime Minister Renzi’s resignation, the rise to power of the euro-sceptic Five Star Movement (M5S), a jump in Italian bond yields, the fragile banking sector and economy’s collapse and Italy’s eventual exit from the eurozone and EU.
The more likely political, financial and economic outcome from a “no” vote is perhaps less dramatic, in my view, and financial markets, including the euro, have been reasonably well behaved in the run-up to the referendum.
A “no” vote may well usher in a less reform-minded technocratic government and fuel support for the populist M5S and its leader Beppe Grillo but their path to the top will not be straightforward.
The banking sector, riddled with bad-loans and planning a recapitalisation of its balance-sheet, can ill afford the negative press a “no” vote may bring. But both Italian and eurozone policy-makers have a strong incentive to shore up Italian banks and the economy, even if posturing may precede an eventual solution.
The ECB may well extend its QE program at its policy meeting on 8th December in order to help alleviate any stress in eurozone markets but I don’t expect other major central banks to follow suit with monetary policy loosening of their own near-term.
Finally, while the future of the eurozone and EU has been written off many times, I don’t envisage Italy being the trigger for a break-up of either.