Europe after Brexit and why Italy is on our watch list

As the European Union (EU) plans for a UK departure following the Brexit vote in June, the region’s underlying economic and political woes are still continuing.

Unemployment is high, growth is not and regional crises continue

Unemployment in Europe is now sitting at 10.1 per cent with a total of 16.3 million people out of work. Growth also continues to disappoint with the region down to 0.3 per cent on the previous quarter’s 0.6 per cent. Italy was a stand-out with zero growth1.

Compounding the malaise is the fact that little or no progress has been made on the Greek debt crisis, the Europe-wide refugee situation or Italy’s banking problems. And while post-Brexit economic data from the UK seems to indicate the economic damage is less than anticipated, the main risks in the region are political.

The November referendum in Italy is one to watch 

Illustrating these political challenges is the situation brewing in Italy with the country holding a referendum in November. And, like Brexit, a ‘no’ vote will bring potentially disruptive consequences.

The referendum itself has notionally no relevance to the wider European debate. The Italian Prime Minister Matteo Renzi is seeking constitutional reform. His goal is to streamline Italy’s legislative process, break the parliamentary gridlock that has crippled successive governments, and open the way to enact far-reaching economic reforms. Reducing the number of senators is one of the methods that he hopes will help achieve that goal by controlling the senate's ability to block legislation.

Renzi has, in frustration it seems, staked his office on obtaining a ‘yes’ vote. However, senators wishing to maintain the status quo have aligned themselves with disgruntled protest voters sick of corruption and self-interest – which is making a ‘yes’ vote far from certain.

In fact, that which seemed sensible and popular has degenerated into near farce. This is driven in part by the banking crisis, with Renzi’s popularity damaged as a result of being forced by the EU to bail-in retail depositors of bankrupt smaller banks that required restructuring. It is also driven in part by a broader wave of political disaffection.

A ‘no’ vote is likely to trigger a general election that would unleash the full force of the anti-Europe sentiment brewing among Italy’s unemployed and youth. Two political parties (the Five Star Movement and the Northern League) have promised a popular vote on Eurozone membership if they hold the balance of power. The outcome of such a vote, if held, is at best a lottery in the current environment.

This is of significant concern to investors and as such, we urge caution in Europe

Italy is the third largest economy in the Eurozone. With its industrial northern heartland and poor underdeveloped south, it is afflicted with the same issues affecting the wider union. On our assessment, there is a non-trivial chance that an Italian referendum on internal constitutional reform could trigger the demise of the euro currency, such are the current tensions within Europe. The turmoil from such an outcome would definitely affect global investment markets, and as such we continue to remain highly cautious about investing in the region as a whole.

Any strategies or recommendations are general in nature and do not take into account your objectives, financial situation or needs. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended. Further any forward looking statements are based on current expectations at the time of writing. No assurance can be given that these statements will prove to be correct.

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Patrick Broughton

Investment Committee Chairman

With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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