Currency News: What Italy’s Referendum Means For The Euro
Currency News
Italian Referendum Vote Can Affect The Future of The Eurozone
On December 4, 2016, Italy and its people had voted against constitutional reform. Many have called this moment “Italexit,” mimicking the popular “Brexit” term, but this is hardly the same thing. Italy had not voted to secede from the European Union, it was more of a vote of change against the establishment. But this change that had been approved, may lead Italy to their own version of an exit – a cancelled EU membership and a depleted currency.
Italy is the third largest economy in the Eurozone which currently consists of 28 countries. Regardless, the country stands at over two trillion euros in debt, high unemployment, snail-paced growth, and is facing a migrant crisis. When Prime Minister, Matteo Renzi, had taken office, he wanted to be the change Italy needed to prosper. His idea was to reduce the number of seats in the Senate from 315 to 100, increasing the power of the Chamber of Deputies, and allowing laws that are good for the country to be passed with ease. Both chambers needed to agree for it to go into action, but they did not reach a 2/3 majority, therefore a referendum was called. Mr. Renzi vowed to resign if his measures did not pass, turning the vote into a popularity contest. With an outcome of 40.6% to 59.4%, Prime Minister Renzi and his establishment had admitted to their loss and keeping his word, stepped down. Fears grew that the defeat of Renzi’s Democratic party, Italy’s only pro-Euro establishment, could lead to much more than a lost election.
The euro currency has dropped to its lowest value against the dollar, 1.06, since December of 2015. Goldman Sacs predicts the euro falling even further to 0.95 cents within one year, while Bloomberg sees the Euro down 3% by the end of 2016. The currency began to weaken in 2015 when the European Central Bank pumped 1 trillion euros into Europe’s economy in a quantitative easing program. The growing money supply decreased the power of the euro and targeted the low inflation rate. Just months before, the ECB cut rates to historic lows to combat deflation, leading investors to take their money elsewhere knowing they will get higher returns. Europe saw a weak euro as beneficial for trade, leading to greater exports, especially with their largest trading partner, the U.S.
While the Europeans were devaluing their currency, the Americans were increasing the value in theirs. The Federal Reserve recently increased interest rates, increasing inflation and the power of the dollar compared to the euro. President-elect Donald Trump’s victory in the U.S. has also weakened the euro, due to his plans to cut taxes and invest in infrastructure, adding to domestic inflation.
With Mr. Renzi’s resignation, elections in Italy may come early this year. There is the possibility that his party may not stay in power, passing the torch to other anti-establishment groups. The referendum outcome has proven that there has been a rise in populist and anti-establishment parties in Italy. These parties have vowed to hold a referendum on Italy’s Eurozone membership, enhancing the notion that they too may leave the euro path. In turn, this will further decrease the value of the euro.
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