The outcome of last night’s referendum on the Italian constitution and the subsequent resignation of prime minister Matteo Renzi will be identified as another indication of the rejection of the political establishment along the same lines as Brexit and Donald Trump’s election victory.
Whilst true in part, one important distinction of the outcome of last night’s vote, is that the outcome was largely expected and has been seen as the most likely one almost from the point at which the referendum was announced. It is also true that the strong political motivation behind the UK’s vote to leave the EU and the US turning republican were driven both by a desire for change but also by a desire, for want of better expressions, for freedom and control.
In the context of Italy’s notoriously bureaucratic administration, Renzi positioned himself against the prevailing orthodox so whether intentionally or otherwise, the outcome of the Italian referendum can be seen as an endorsement for the status quo.
In the short term, therefore, the outcome of the referendum is unlikely to trigger either a meaningful political crisis in Italy or to exact renewed pressure on the structure of the Eurozone. The Five Star movement and other populist voices in the country may feel emboldened by Sunday’s vote but in truth the steel-riveted checks and balances means that degrees of freedom in government are small and power and unpopularity seem almost linked as evidenced by the recently elected Mayor of Rome.
Hence with a technocrat government in prospect and an interventionist ECB, the risk of genuine contagion from the referendum outcome is low. Even as the fragility of the banking system in Italy is brought into sharp focus, this is likely to be seen more as an Italian issue rather than a risk to the broader European system (as it arguably has been for most of the last two decades).
Putting the impact on Italy itself to one side, investors will assess 2016 as a year when attention to political risk was proven to be right in focus but arguably wide of the mark in terms of impact.
Whilst it is, of course, incorrect to suggest that what have seen are not seismic political events, the reason that their impact has been far less negative for markets has been for two principal reasons.
First, is that the real economic impacts of these political events has been (and tends to be) of a much lower amplitude than they are represented and second is that the increasingly cautious positioning of banks, investors and corporates over the last few years means that there was little ‘optimism at risk’ in the pricing of most assets.