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22 November 2016
Research Italy
No ‘Italexit’ in the case of a ‘No’ in the referendum
On 4 December, Italians are set to vote on the constitutional reform proposed by Prime
Minister Matteo Renzi. The aim of the constitutional reform is to bring political
stability to Italy by diluting the power of the senate and the regions, thus empowering the
government.
Supporters of the bill argue that the new constitution would bring much-needed political
stability (Italy has had 63 governments since 1945) and allow governments to push through
important growth-enhancing reforms, which might otherwise be rejected by the senate.
Critics argue the government will become too powerful and that the issue is not passing
reforms but executing them in the inefficient bureaucracy.
The referendum has more aspects than the constitutional bill – not least with increasing EU
scepticism and following the UK’s Brexit vote and Donald Trump winning the US election.
Originally, Renzi announced that he would step down if he loses the vote but later
members of the coalition said the government would stay in place. Over the weekend,
Renzi’s resignation seemed to be confirmed in the case of a ‘No’ vote, as he said the
government would fall if he loses the referendum.
Polls from the end of October suggest the referendum is likely to be rejected by
around 52% ‘No’ votes on average but some polls suggest up to 50% of the population
has not decided. Observers note that the referendum has become a way for the population
to express discontent with Renzi’s government, the 2017 budget and growth initiatives.
The outcome of the referendum is of high importance for the Italian economy and European
market sentiment. If accepted, the bill could boost confidence in the recovery of the
Italian economy, create political stability and reduce uncertainty about the future of
the euro area. Italy has been one of the worst performers since the financial crisis. Contrary
to most euro area economies, Italian GDP has still not returned to its pre-crisis level and
the country is coping with a large public debt and deficit (respectively 132.7% and -2.6%
of GDP) and a high share of non-performing loans (18% of total loans). On top of this, Italy
has Europe’s fifth highest unemployment rate (11.7%), a very high youth unemployment
rate (37.1%) and low productivity. Accepting the bill should boost the government’s ability
to cope with these issues but depending on the political development and the design of the
new electoral law, the Five Star Movement could gain power in the next election (see more
on the following pages).
However, if rejected, the referendum could throw Italy into new political disarray and
increase uncertainty stemming from the rising euro scepticism across the euro area.
According to the Italian government and other economists, 2017 growth will fall from 1%
to around 0.6% without the budget and growth-measures suggested. Additionally, the
political uncertainty that arises around the future of Renzi’s government could hurt market
sentiment as the influence of the Five Star Movement could increase (see more below). The
Italian population is already among the most sceptical regarding the euro (see Unchanged
support for the euro before Brexit but optimism about EU’s future is lower, 1 August).
Key facts
 Population (2016): 60.7m.
 GDP per capita (2015):
EUR27,000, ninth highest in the
euro area.
 Government type: Republic with an
upper house (Senato della
Repubblica) and a lower house
(Camera dei Deputati).
 Government coalition: PD, NCD,
UdC, SC, Ppl, Demo. S, PSI, CD.
 Prime Minister: Matteo Renzi,
Democratic Party (PD).
 President: Sergio Mattarella.
 Central Bank Governor: Ignazio
Visco.
Economic characteristics
 GDP still below pre-crisis level.
 Large public debt.
 High youth unemployment.
 High degree of political instability.
 Struggles with corruption.
 Troubled financial sector.
Senior Analyst
Pernille Bomholdt Henneberg
+45 45 13 20 21
[email protected]
First Year Analyst
Aila Mihr
+45 45 13 78 67
[email protected]
Assistant Analyst
Christian Belling Sørensen
[email protected]
Important disclosures and certifications are contained from page 10 of this report.
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Scenarios after the referendum – market reaction dependent on the political path
Referendum on Italy’s
constitutional reform
‘ YES’
‘NO’
Initial positive market
reaction
Initial negative market
reaction
Renzi continues growth
reforms. Work on new
electoral law
Renzi stays PM
Renzi steps down
President Mattarella
rejects Renzi’s
resignation
Strong support for
Renzi government
Election in 2018
based on revised Italicum
Weak support for
Renzi’s government
Renzi is not likely to take
part in new government
President Mattarella
accepts Renzi’s
resignation
New government/coalition
serving as placeholder
until election in 2018
Focused on new
electoral law. No
reform progress
Renzi gets second term
with more government
power
Care-taker government
and snap election
Snap election in H2 2017
based on revised Italicum
Coalition government
The Five Star Movement
emerges into power
Positive market reaction. No/little
uncertainty about Italy’s future in euro / EU
Snap election in H1 2017
based on current Italicum
Strong reform
progress. Work on
new electoral law
Negative market reaction. Uncertainty
about Italy’s future in the euro / EU
Source: Danske Bank Markets
Political impact of a ‘No’ vote
The big question in the case of a ‘No’ vote is whether Prime Minister Renzi will
honour his initial pledge to step down or stick to his later stance that his initial
comment was a mistake. Although Renzi has declined to comment on this question for
the past two months, there have been some signals that stepping down is a very likely
outcome. On 14 November, he indicated that he may not stay on if the referendum fails,
saying that he would not take part in any attempt to form a temporary or technocratic
government. A resignation by Renzi in the case of a ‘No’ vote was also confirmed by his
latest remarks on 20 November that the government would fall if he loses the referendum
and that we would then have to see which parties can reach agreement for a new
government.
Referendum polls showing ‘ No’ vote in
the lead (undecided not included)
Source: Macrobond Financial, Danske Bank
Scenarios and related probabilities following a ‘No’ vote
Renzi steps down
Renzi steps down
Renzi stays PM
No elections before revised
'Italicum', but technocratic
transition government
Early elections in H1 17 under
current 'Italicum' and Five Star
Movement in government
Weak and fractured PD
government
Baseline scenario
70%
Alternative scenario 1
5%
Alternative scenario 2
25%
Source: Danske Bank Markets
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If Renzi resigns, President Sergio Mattarella would be likely to nominate an interim
government before dissolving the lower house and calling early snap elections for
2017, as elections should be held within 70 days of the President dissolving Parliament.
Predicting the outcome of such an election is complicated and is likely to be highly
dependent on whether or not the new electoral law – ‘Italicum’ – will still be in place in an
unchanged form when the election takes place. Given that Renzi has said that Italicum will
be changed no matter what the outcome of the referendum and that there is broad political
support for such a move, it is likely that snap elections for 2017 would not proceed under
the new electoral law in its current form. With a revised electoral law that excludes the
majority bonus for a single party, we would be likely to see again a coalition government
in place, limiting the chances of the Five Star Movement gaining power (see below).
Facts about Italicum – the new electoral law
The aim of Italicum is to prevent governments of unstable coalitions, as Italicum gives the party
winning at least 40% of the votes in the first round or winning a second round between the two
biggest parties, a large number of bonus seats to ensure it has a 54% majority (340 out of
630 seats) in the lower house.
Italicum entered into force in July but the constitutionality of the new law has been challenged
in the constitutional court and a final ruling is not expected before early next year.
Italicum will be revised regardless of the outcome of the constitutional reform on 4 December.
Renzi has stated that Italicum will be changed and there is a broad political support for this.
In the case of a ‘No’-vote, rejecting the government’s reform plans would make it more likely
that the Italicum would be abandoned altogether and it is likely we would see a return to the
old proportional representation electoral system also used in the Senate.
In case of a ‘Yes’, this would reduce pressure on the government to amend the Italicum;
however, there seems to be broad support among the PD and some opposition parties for
revising it towards a majority bonus for a coalition instead of a single party, to minimise the
risk of anti-establishment parties coming to power after the next general election. Given the
Five Star Movements’ opposition to forming coalitions, such a move would severely weaken its
chances.
Source: Danske Bank Markets
However, in the event that the election should take place very early in 2017, before the final
ruling of the constitutional court, there is a risk that voting could proceed under the Italicum
in unchanged form. Should voting proceed under the new electoral law without
changes, it would benefit the anti-establishment Five Star Movement. By capturing as
little as 30% of the popular vote in the first round, it could end up with a clear majority in
the lower house, by winning the second round run-off and receiving the bonus seats.
Currently, the Five Star Movement is head-to-head with the PD in most opinion polls,
making it still a likely candidate for the next government in the absence of certainty
on planned changes on Italicum. Members of the movement were already elected as
mayors of Rome and Turin in 2016. Although the Five Star Movement has pledged a
referendum on the euro, it has stopped short of advocating an immediate exit from the EU.
Furthermore, it is not clear that if such a referendum were held, the majority of Italians
would vote in favour of an exit, as support for the EU among the population actually
increased after Brexit according to an IFOP poll. An imminent ‘Italexit’ therefore seems
unlikely for now.
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Polls show Five Star Movement headto-head with Renzi’s PD
%
40
35
30
25
20
15
10
5
0
Five Star Movement
PD
Source: SWG, Danske Bank Markets
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Forza Italia
Research Italy
Apart from calling new elections, President Sergio Mattarella has other options to resolve
a potential political impasse following the referendum. He could reject the resignation of
Renzi if he can command a majority in parliament, replace him with a technocrat as
happened in 2011 when Mario Monti replaced Silvio Berlusconi or grant someone else the
right to form a government. If the other parties in the governing coalition support such a
move, the caretaker government would then take over until the next scheduled general
election in 2018. However, given that Renzi has said that he would not be willing to seek
a deal with other parties to form a temporary or technocratic government if he loses the
referendum, such a move seems unlikely.
A low share is against the euro in Italy
90%
Ratio being against the euro as a common currency
80%
SE
71%
UK
76%
DK
65%
70%
60%
50%
40%
Finally, Renzi could decide to stay as Prime Minister, as he is aware of the likelihood of
the Five Star Movement winning an early election, particularly as its momentum should be
strong after a ‘No’ in the referendum. In this scenario, Renzi’s party’s popular mandate
would still be dramatically weakened but the hope would be that ‘something’ could
change ahead of the election in 2018. This said, divisions within the PD party between
Renzi backers and traditionalists such as former PD leaders Massimo D’Alema and Pier
Luigi Bersani, who criticise Renzi for moving the party too far to the right, pose the risk of
a weak, fractured government and a slowdown of reforms, potentially leading to a
government crisis and early election in 2017.
GR
34%
30%
BE
20%
20%
FI
20%
NL
21%
DE
22%
FR
24%
AT
25%
PT
26%
EA
26%
IT
35%
EU
38%
SP
27%
IE
13%
10%
0%
Source: European Commission Eurobarometer,
Danske Bank Markets
Timeline after a ‘No’ vote
‘No’ vote in referendum
04-12-2016
Interim government
and new election
2nd half 2017
Snap elections
if no government
12-12-2016 + 70d
Renzi steps down as PM
05-12-2016
Parliament
approves reform bill
12-04-2016
Obama endorses ‘yes’
19-10-2016
Government sets
referendum data
26-09-2016
Q2
2016
Q3
President accepts
Renzi’s resignation
12-12-2016
Q1
2017
Q4
Politicians working on
changing ‘Italicum’
First part of 2017
Q2
Q3
Latest date for
new election
23-05-2018
Q4
Q1
2018
Today
Source: Danske Bank Markets
Economic impact of a ‘No’ vote
According to the Italian government, GDP growth in 2017 will fall by 0.4pp without the
suggested budget and growth-measures. Added to this, there could be some negative impact
from higher political uncertainty but, in our view, the short-term effects of higher
political uncertainty may not be that large in Italy, as the country is used to political
instability, implying a likely small impact on consumer and business confidence.
Additionally, the experience from the Brexit vote and the US election is that a new political
agenda will not affect economic sentiment to a large degree. Finally, having a caretaker
government for a period of time would not necessarily be negative for the near-term growth
outlook or implementation of economic reforms. Based on this, we expect limited
economic impact in the short term.
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In a longer term perspective, the political instability connected with a ‘No’ vote is
likely to imply fewer structural reforms and continued problems in terms of bringing
the economy to a solid recovery. Italy is also likely to continue to be challenged by
bringing down its very high public debt, while the fragile banking sector could also have a
negative impact on the economic outlook.
Market reactions
In our view, a ‘No’ vote would mean prolonged uncertainty for global investors and
trigger political turmoil. Uncertainty on ‘what is next’ is likely to cause elevated
volatility and further shake confidence in the European project. A ‘high’ political risk
premium is already priced in the Italian government bond market with Italy having
underperformed Spain by 30bp since early September, mainly on political woes. Renzi
himself said that he expects high market volatility in the run-up to the referendum. Given
Italy’s sizable government debt (130% of GDP) and the possibility of a slowdown in reforms
and growth, questions about the direction for Italy (and Europe) have the potential to drive
global risk sentiment around the referendum date. These fears could spill over to other
periphery countries. The political impasse would also heighten concerns about Italy’s
banking system, with its large share of non-performing loans. Economic and political
uncertainty would weigh on the EUR and depress investments and future potential growth.
This said, the market reaction is very dependent on the political path following the ‘No’ vote.
As spreads have already widened significantly ahead of the referendum, we do not rule out
that we could see tightening even in a ‘No’ scenario (‘sell the rumour – buy the fact’).
Yields have been rising since August
in anticipation of the referendum
Outlook for key economic variables
Source: Macrobond Financial, Danske Bank
Italy - Outlook for key economic variables
Italy
GDP (1)
CPI (1)
Unemployment (2)
Govt. Budget (3)
Govt. Debt (3)
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
Danske Bank
0.8
0.9
-0.1
1.3
11.5
11.3
-2.5
-2.0
132.9
133.0
IMF
0.8
0.9
-0.1
0.5
11.5
11.2
-2.5
-2.2
133.2
133.4
OECD
0.8
0.8
0.2
0.9
11.3
10.8
-2.3
-2.0
132.8
131.9
EU (Commission)
0.7
0.9
0.0
1.2
11.5
11.4
-2.4
-2.4
133.0
133.1
1) % y/y. 2) % of labour force. 3) % of GDP.
Source: OECD, IMF, European Commission, Danske Bank Markets
What does the Five Star Movement stand for?
The Five Star Movement (M5S) was founded by comedian Beppe Grillo and IT executive
Gianroberto Casaleggio in 2009. M5S has become Italy’s second most popular party and
its biggest opposition group, as support for the movement’s push for direct democracy and
its anti-establishment and anti-corruption campaign surged among the population. At the
previous lower house elections in 2013, the M5S took 25% of the vote.
Within the movement, online ballots are used to set policy and select and expel candidates and
it plans similar online referendums on political issues once in government. In contrast to other
populist movements in Europe, which are clearly associated with either the political right or
left, M5S has attracted votes across the political spectrum. While left-wing voters respond to
its pro-environment, anti-austerity and anti-capitalist stance, right-wing voters are
attracted by its tough stance on immigration and opposition to the EU and euro and its
alliance with other right-wing parties in the European Parliament, such as UKIP. However, this
characteristic also makes the movement vulnerable to internal clashes, as left- and right-leaning
members increasingly seem to disagree on policy and issues such as privatisation or abortion.
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Apart from internal fragmentation, another big challenge for the movement comes in the
form of its electoral candidates’ inexperience in questions of governance, politics and
economics. The new M5S mayor of Rome has already made a disastrous start, struggling
over administrative hurdles due to her inexperience. Faced with economic challenges or a
renewed banking crisis, an M5S government hence seems unlikely to come up with timely
and adequate policy responses, especially as it has voiced strong opposition to previous
public invention on this front. Its anti-austerity stance would also put it on a collision course
with the European Commission and fiscal largess would aggravate concerns about the
sustainability of the public debt burden.
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Italian GDP has by no means recovered to 2008 level
PMIs signal continued modest Italian GDP growth
Source: Eurostat, Danske Bank Markets
Source: European Commission, Danske Bank Markets
The declining trend in the unemployment rate has stopped
Italy’s youth unemployment is still much higher than euro area’s
Source: European Commission, Eurostat, Danske Bank Markets
Source: Eurostat, Danske Bank Markets
Government budget has improved post crisis but still deficit
Italy’s public debt may have peaked but at a very high level
Source: Eurostat, European Commission Danske Bank Markets
Source: European Commission, Danske Bank Markets
Inflation and core inflation remain far from ECB’s 2% target
Italy’s output gap has been larger than the euro area
% points
0
-2
-2
-4
-4
-6
Jan 10
Jan 11
Jan 12
Euro Area 15
Source: Eurostat, Danske Bank Markets
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22 November 2016
% points
Output gap
0
Jan 13
Jan 14
OECD Countries
Jan 15
Jan 16
United States
Source: OECD, Danske Bank Markets
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Italy
-6
Jan 17
Research Italy
Private consumption has also lagged behind
Consumer confidence has weakened this year
Source: Eurostat, Danske Bank Markets
Source: Fitch, Moody’s, S&P, Danske Bank Markets
Almost no growth in Italian investments
Industrial production has also struggled to recover
Source: Eurostat, Danske Bank Markets
Source: Fitch, Moody’s, S&P, Danske Bank Markets
Industrial confidence around its historical means
Still high business and consumer confidence
Source: European Commission, Danske Bank Markets
Source: European Commission, Danske Bank Markets
Current account surplus close to euro area
Low exports share of GDP in Italy
Source: Eurostat, Danske Bank Markets
Source: Eurostat, Danske Bank Markets
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Nominal unit labour costs rose faster than in euro area
Productivity lags behind the euro area
Source: Eurostat, Danske Bank Markets
Source: European Commission, Danske Bank Markets
Population is projected to decline in line with euro area
Italian employment growth weak compared with euro area
Source: Eurostat, Danske Bank Markets
Source: Eurostat, Danske Bank Markets
Housing prices have not bottomed out in Italy yet
Construction permits very, very low
Source: Eurostat, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
Higher yields recently but still low in a longer term perspective
Low Italian debt ratings from all three agencies
Source: Macrobond Financial, Danske Bank Markets
Source: Fitch, Moody’s, Standard & Poor’s, Danske Bank Markets
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Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’).
The authors of this research report are Pernille Bomholdt Henneberg (Senior Analyst), Aila Mihr (First-Year
Analyst) and Christian Belling Sørensen (Assistant Analyst).
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