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As if the EU referendum and U.S. elections haven’t provided enough political action this year, Italy will also hold a key referendum on the 4th of December this year.

What’s it all about? More importantly, will it lead to an “Italeave?”

What the heck is Italy’s referendum all about?

First, you have to remember that political instability is as common in Italy as their Margherita pizza. The country has seen at least 60 government turnovers since 1945, with Matteo Renzi from the Democratic Party currently serving as Prime Minister.

Renzi, known for his progressive stance on political and economic reforms, is now pushing for a constitutional change that would include reducing the numbers and powers of the Senate as well as redefine the powers between local and central institutions.

See, the Italian Parliament currently operates on a bicameral legislature, with bills (and their revisions) needing the approval of both the Chamber of Deputies and the Senate before they become law. This means that it would usually take key bills years (if not decades) before they become law.

Renzi argues that the changes would make it easier for the government to enact critical reforms. More importantly, it will foster stable governments as it would all but allow a Prime Minister to serve his full term. However, critics maintain that such changes would leave the government with too much power, as it removes the checks and balances that the bicameral system provided.

What are the chances of a Yes/No vote?

With all the political brouhaha that we’ve seen so far this year, analysts can’t help but see the echoes of the EU referendum and the recent U.S. elections in Italy’s own referendum. For one, the “anti-establishment” theme has gained momentum especially after Renzi has hinted that he might step down if the “No” votes prevail.

But there are also key differences. For starters, the “No” camp is currently backed ex-Prime Minister Silvio Berlusconi’s Forza Italia and Beppe Grillo’s 5-Star Movement, a party that has gained support for its anti-EU stance.

Not exactly the freshest options for Italy. Renzi also hardly fits the old, established power stereotype since he’s currently the youngest G7 leader and he’s been actively campaigning for aggressive reforms.

But, since the common Italian can’t really see the impact of Renzi’s proposed changes to their everyday lives, the referendum has evolved into a confidence vote for Renzi and his reformist stance. Current opinion polls put the odds in favor of a “No” vote, though it’s still too close to call right now.

Will a “No” vote lead to an “Italeave?”

Not necessarily. For one thing, Article 75 of Italy’s written constitution emphasizes that the government cannot hold a referendum on anything related to international treaties. Since the EU membership falls under “international treaties,” the government can’t immediately call for an EU referendum.

Here’s part of Article 75 (emphasis ours):

A general referendum may be held to repeal, in whole or in part, a law or a measure having the force of law, when so requested by five hundred thousand voters or five Regional Councils. No referendum may be held on a law regulating taxes, the budget, amnesty or pardon, or a law ratifying an international treaty.

So, in order for “Italeave” to happen, an extremely anti-EU government would have to win with an absolute majority and then gain the approval of two-thirds of BOTH chambers for a constitutional change that would facilitate an exit. A pretty tall order, don’t you think?

Even if Grillo’s 5-Star Movement manages to jump over such high hurdles, it’s still unlikely that a “No” vote would lead to an election. For one, Renzi has already started to backpedal on his promise to resign, saying that they need to “tell Italians that this is not a reform about one person, but a reform which will serve all of Italy.

And, if Renzi does resign, it’s also likely that President Sergio Mattarella may demand Renzi to form a new government before he accepts his resignation.

What does this mean for forex traders?

While the prospect of an “Italeave” isn’t as probably as we first thought, the prospect of political instability in Italy will be enough to spook traders away from the common currency. Already the euro has lost pips against its major counterparts on the idea that Italians might vote “No” just to push Renzi out of power.

For now, a momentum towards a “YES” vote represents future reforms and political stability for Italy. Meanwhile, “No” votes would fuel uncertainty and likely drag the euro lower. Again, it’s too early to call a winner, but keep your eyes glued to the tube for any news that might shift public sentiment in either direction and influence the euro’s price action!