Matteo Renzi delays resignation until after budget

It was a tough weekend for European politics.

The outgoing prime minister formally handed in his resignation to president Sergio Mattarella in the evening, after a major constitutional reform backed by his cabinet was rejected by 59 percent of voters in a referendum on Sunday.

Here’s a look at the potential economic implications of Italy’s political drama.

Austria’s Norbert Hofer with his wife, Verena, following his narrow presidential race defeat. While Austria’s presidency is a largely ceremonial position, it has sufficient power to clash with the center-left government that now rules.

The result, coming on the coattails of Brexit and Donald Trump’s United States election win, has plunged Italy into a period of political uncertainty and cast a shadow over the short- and long-term future of the eurozone’s third-largest economy. “In Italy it is much more elastic”. Renzi took office two years ago determined to shake up the ossified and crusty bureaucracy that institutionalized political dysfunction and paralyzed the economy.

It would have also cut down the number of senators and reduced the powers of regional authorities.

Some analysts said the referendum could come to be seen as a landmark moment.

His resignation announcement followed a referendum that the 41-year-old turned into a de facto vote on his own domestic popularity – one he gambled everything on by pledging to quit if he lost.

Italian Prime Minister Matteo Renzi has resigned following the country’s decision to vote “no” on Sunday in a landmark constitutional referendum.

Given that Renzi’s Democratic Party (PD) is running neck-and-neck in opinion polls with 5-star, which has called for a referendum on Italy’s membership of the euro zone, an early election would be likely to rattle investors.

Any caretaker government will likely focus on rewriting a 2015 electoral law known as the Italicum, which grants an automatic majority to the biggest party in parliament, as well as the electoral law for the Senate.

It is into this febrile political climate that anti-establishment forces have grown in Italy, including the Northern League’s far-right leader Matteo Salvini, and the Five Star movement, founded seven years ago by former comic Beppe Grillo. One of the Five Star leaders greeted the referendum defeat with the pronouncement that “starting tomorrow we’ll be at work on a Five Star government”.

The banks remain weak and the country’s debt-to-GDP ratio, at 133%, (second only to Greece’s in the eurozone) means many Italian banks are in need of refinancing.

The euro briefly tumbled overnight to 20-month lows against the dollar, as markets anxious that instability could reignite an European Union debt crisis and deal a hammer blow to Italy’s fragile banking sector, especially the troubled Banca Monte dei Paschi di Siena. Monday’s sanguine market reaction can also be attributed to the fact that Italy’s markets indirectly enjoy a big backstop from the European Central Bank. He said the euro fell sharply in Asian trade because the currency market was the first place in which investors could react to the Italian vote result, with European bond and equity markets closed at the time. We see little progress ahead for reforms to streamline the country’s government and liberalize the economy.