After the UK voted to leave the European Union in June, populist movements throughout the Eurozone have gained popularity. Though no other European countries are set to vote on leaving the EU, the strength of populism threatens the passage of an Italian constitutional referendum set to take place this upcoming Sunday, December 4th.
The December referendum, championed by current Prime Minister, Matteo Renzi, seeks to greatly reduce the power of the nation’s Senate as well as its regional governments, making the executive branch significantly more powerful. Renzi has staked his position on Prime Minister on the referendum’s outcome, vowing to resign if the referendum fails.
However, Renzi is not the only one who could suffer if the referendum fails. Not one, but eight of Italy’s largest banks “may fail” if Italians vote against the measure, according to senior bankers who spoke to the Financial Times. Many of Italy’s largest banks have been in crisis for quite some time and largely considered to be completely insolvent as Italian banks, overall, hold €360 billion in bad debt yet only have €225 billion of equity. Renzi’s hands have been tied regarding how to address the crisis thanks to new EU banking regulations and has since championed a “free market” solution, which unfortunately has proven near impossible due to the magnitude and prevalence of bad debt among Italian banks.
As the many other European banks are already in crisis, particularly the massive Deutsche bank, Italian banks could be the first domino to fall with potentially global consequences. Though the economic doom and gloom that preceded a successful “Brexit” and a Trump victory never materialized, Italy is already in a massive banking crisis – only one shock to the system, no matter how small, could bring eight or more of its banks crashing down.
With polls showing that a “no” vote is the most likely outcome, the next few weeks could ignite a crisis felt throughout the Eurozone and, perhaps, the world.
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Photo Credit: today.it