Does The Italian Referendum “No” Vote Mark The Beginning Of The End For The Euro?

The result of the constitutional referendum in Italy held last Sunday, December 4^th, is undisputable, 60% voting “no”, and there was a large participation. Matteo Renzi immediately drew the logical conclusion and resigned his post as head of the government. Questions directly regarding the constitution did not matter as much as the inefficiency of economic reforms put in place by Mario Monti (2011-2013), Enrico Letta (2013-2014) and Matteo Renzi (2014-2016), that have had little to no effect on unemployment and growth. The “no” victory also means a rejection of the euro, largely criticised in the peninsula, as well as a refusal to accept immigrants.

The lethal process we had invoked last July (at the time, the referendum was set for October) is likely to occur: since Renzi is resigning, there will be new elections, and polls predict that a coalition led by Beppe Grillo’s 5-star party would win. And their main demand is a referendum to abandon the euro – which would probably go through. This would be the end of the euro as we know it. How can a country the size of Italy exit the euro zone? Well, no one knows.

Adding to this turbulent political agenda, the situation with Italian banks, getting worse by the day, is calling for urgent solutions. Who will implement them? No one knows for sure. The Italian banks hold a total of 360 billion euro in bad loans, equal to 22% of the country’s GDP, a ratio normally seen in a bankrupt country. The large banks (Monte Paschi, Unicredit, Banco Popolare) need to be recapitalised; will that mean injections of public funds, which are, in principle, forbidden by Brussels, or tapping into their clients’ accounts, as per the BRRD directive? Both solutions have but inconveniences: in one case, more debt, making it harder to find investors, and in the other, the wrath of the savers.

There is a looming calamity that could precipitate things: if interest rates on Italian debt were to rise sharply, this would mean that investors would shy away from it and that the country could not refinance itself and would stare bankruptcy in the face. Greece has found itself in this situation before, but Italy weighs a lot more than Greece, with its 2 trillion euro of public debt (300 billion for Greece). No bailout plan could be significant enough to extinguish this fire. The risk of contagion would be real (Spain and Portugal, where banks are failing, and France, much involved in the peninsula, as we’ve said before).

But why worry? The European Central Bank is run by Mario Drahi – an Italian! – who was once in charge of the Bank of Italy, so he is well aware of all this. He’ll just have to spin the printing presses a little faster... and the ECB will become the sole buyer of Italy’s debt, without a care about this deluge of money that would devaluate the euro further (it has already started to lose value against the dollar), about Germany’s protestations against this laxity. However, all this good will wouldn’t suffice if Italy were to exit the euro zone. We would probably see Mario Draghi holding heavy suitcases full of cash and saying, ”What, you don’t want my money anymore?” A real comedia del arte!