Yesterday Italians voted on a package of constitutional changes. The main idea was to make one of Italy’s two branches of parliament less powerful so it would be easier to pass new laws. The referendum failed by a bigger margin than people were expecting– and now the financial press is panicking.
A lot of people voted against it because they worried that limiting the power of one part of government could make the prime minister way too powerful. PM Matteo Renzi promised he would resign if the referendum failed – which meant that what was originally a debate over the constitution turned into an opportunity for people who didn't like him to push him out...which they did.
It's a big political identity crisis for Italy, but the main thing the media seems to be focusing on is what it means for the economy. Here's a few of the biggest headlines, and what they really mean.
One big worry is that Italy might leave the euro.
PM Matteo Renzi is highly likely to resign. Whoever is in charge after him probably won’t be able to make any big changes before new elections next year —people are calling the arrangement a ‘caretaker government’.
One of the most popular parties in Italy right now—called the Five Star Movement—doesn’t like the European Union or the euro very much. Another pretty popular party—the Northern League—isn’t happy about immigration.
If there are new elections and these two do really well, we might be looking at an Italian Brexit a year or so down the road.
Brexit is messy enough, but unlike Britain, Italy is one of the biggest economies to use the euro. If they pulled out, things could get messy. Investors are already spooked, and starting selling off their euros yesterday, causing the value to fall against the dollar.
Another big headline is the story of what's happening to banks and the various 'financial instruments' they trade.
This one has less to do with long term problems and more to do with the state of the economy in the next year or so.
Now, Italy is looking at a year with ‘caretakers’ in charge, so it'll be pretty difficult to pass any significant policies for a while – one economist described it as a "long period of gridlock, which is not unusual in Italy."
So when we talk about markets 'getting prepared', what does that actually mean? In this case, it means the Italian government is being charged higher
to borrow money (in jargon terms, 'debt yields are up'). And it means people are less willing to invest in Italian banks ('bank shares are down').
Then there's the problem of Italy's third biggest bank running out of money...woops.
What's this got to do with the referendum? Well, the government originally had a deal with a group of private investors who'd agreed to come up with most of the needed money to bail out the bank... but only if the referendum passed, so now that plan is off.
Whoever takes over for Renzi will need to figure this one out. A bank going under could be a disaster for Italy’s financial system (hence “big implications”). And Europe’s banking system is pretty interconnected, so what happens in Italy will certainly not say there.
But what about the side of this story that's not economics?
But at the same time, this story is about more than just economics. Changing the constitution is a big deal for Italians—the kind of thing their children could still be talking about decades from now. So much as we think the economic implications should get their fair share of coverage, let's make sure we're talking about what these means in terms of everything else too – from Italian identity, to European identity, to democracy itself.