Italy referendum: Can ‘the Trump effect’ save Italy’s prime minister?

On Sunday, Italians will vote in a referendum. In practice, voters, politicians and financial analysts are likely to view it in the context of a wider global trend.

“I want this to be clear – whoever wants to put an end to the caste should pick up a pencil on Sunday (and vote in favour of the reforms)”. Mr Mingardi said the political establishment is anxious that the beneficiaries of an election would be the populist Five Star Movement. “But they’re unlikely to reach “critical mass” regardless of whether political risk rises or falls”.

It is widely believed that the Italian referendum will be a turning point for Europe.

Italy, Austria and a host of other euro zone countries saw their cost of raising debt compared to benchmark borrower Germany increase on Monday ahead of the first of many political tests due in the coming months.

Britain’s financial weekly The Economist publicly backed the “No” vote last week, arguing that a technocratic government would allow Italy to “get back to real reforms”, while Renzi has argued that only a strong, elected government can provide Italy with much-needed stability.

After Merkel, US President Barack Obama, JPMorgan Chase & Co and European Commissioner Pierre Moscovici, here was “another “mega-bureaucrat” wishing for a “Yes” victory in the referendum”, Grillo commented in his blog. The Italian political system also has numerous checks and balances, so any major changes could face significant opposition.

Changes like these have been discussed for 30 years.

A Demos poll has revealed Mr Renzi’s reforms will be rejected by an 11 percentage point margin in the south of the country – where most of the poorest regions are located – compared with a seven-point margin across the country.

In its twice yearly Financial Stability Review, the European Central Bank stated “elevated geopolitical tensions and heightened political uncertainty have the potential to reignite global risk-aversion and to trigger a major confidence shock”.

But a negative vote likely would make it harder for Italy’s fragile banks to recapitalize in the short term, exacerbate tensions among European leaders in the medium term – and could alter the vision of Europe in the long term. Theresa May has recently reiterated that Article 50 will be triggered before the end of March, which will start the two-year clock for the United Kingdom to leave the European Union.

Italian GDP has still not returned to its pre-crisis level and the country is coping with a large public debt – at 132.7% of GDP – and deficit – at -2.6% of GDP – as well as a high share of non-performing loans (18% of total loans). That package and other recapitalisations could be at risk after a “no” vote.

The issue at stake in the referendum is not inconsequential, but it should not decide the fate of Europe.

Fund managers have expressed caution over both European cyclicals and defensives ahead of this weekend’s referendum in Italy and general election re-run in neighbouring Austria.