The global financial markets were on high alert Monday after Italian Prime Minister Matteo Renzi conceded defeat in the December 4 referendum. Analysts note his defeat likely paves the way for the populist Five Star Movement to sweep to power.
Renzi staked his political career on a “Yes” outcome in the referendum he proposed, which would have reformed the constitution by reducing the powers of the Senate. Renzi, who made his name as an anti-establishment candidate, has formally resigned from office.
“The experience of my government ends here,” Renzi said in a news conference, adding that the outcome of the plebiscite “extraordinary clear.”
“I have lost and I say it out loud,” he said.
Exit polls showed more than 59% of voters said “No” to the constitutional reforms, compared to around 40.4% who voted in favour of them. According to the country’s Interior Ministry, around 70% of eligible voters participated in the plebiscite.
Public opinion polls in the weeks leading up to the referendum painted a grim picture for the embattled prime minister, who was increasingly viewed in a negative light by Italians frustrated by dismal growth and high unemployment. Therefore, the referendum was also seen as a vote of confidence in the now former leader.
The global financial markets are bracing for possible turmoil in the aftermath of the vote. The euro immediately plunged to 20-month lows against the US dollar, with the EUR/USD exchange rate falling toward 1.0500.
Asian stocks were down across the board, with mainland China’s Shanghai Shenzhen down nearly 2% in the early afternoon.
However, analysts noted that the market’s response was muted in comparison to other major events earlier this year, as investors had already priced in a Renzi defeat.
“Risk sentiment has taken a hit from rejection of the Italian referendum,” Citigroup analysts said in a report following the referendum, adding that the margin of rejection is “surprising.”
They added, “Italy’s Prime Minister Renzi has resigned after accepting defeat in the referendum. This raises the political risks in Italy and may weigh on its troubled banking sector. This also casts significant doubts over Italy’s membership of the European Union and the future of Eurozone.”
Italy is currently mired in an escalating banking crisis that may erupt in a regional calamity. Italian banks hold nearly one-third of the euro area’s nonperforming loans. That amounts to roughly €360 billion. About €286 billion are concentrated in 14 of the country’s largest banks. While the European Central Bank (ECB) has already stipulated targets for reducing the amount of nonperforming loans, there is little it can do about the banks’ capital requirements unless Rome asks for a rescue package to bail out its financial sector.
The exit of Renzi leaves the door wide open for the Five Star Movement to gain power. The far-right populist party has vowed to shake-up Italian politics by bringing the question of euro membership to the people. Following Brexit and the election of Donald Trump to the US presidency, anti-establishment politics are quickly gaining traction. The prospect of “Quitaly,” as it is so called, threatens to undermine what little confidence is left in pan-European membership.
Italy’s economic recovery nearly stalled in the second quarter. Gross domestic product (GDP) expanded 0.3% in the three months through September, matching the broader euro area’s growth rate.
The Italian economy has expanded in each of the past seven quarters, but remains very weak overall. Earlier this year, analysts at the International Monetary Fund (IMF) warned that Italy will remain locked in low growth for another decade, highlighting the ongoing challenges of one of Europe’s most troubled economies.
 Russia Today (December 4, 2016). “Italy’s PM Renzi cedes defeat, plans to resign after decisive ‘No’ vote in constitutional referendum.”
 Sam Bourgi (November 20, 2016). “Italy at Risk of Breaking EU Budget Rules as Referendum Looms.” Economic Calendar.
 Martin Farrer (December 6, 2016). “Italy: what happens next?” The Guardian.
 Barney Henderson and Harry Yorke (December 5, 2016). “Euro slides to 20-month low and markets braced for turmoil as ‘No’ wins Italy referendum.” The Telegraph.
 Reuters (November 29, 2016). “Italian banks hold nearly a third of euro zone’s bad loans: ECB.” CNBC.
 Mehreen Khan (May 23, 2016). “Italy stuck in lock growth for another decade – IMF.” Financial Times.