Euro slips amidst Italy’s constitutional referendum

Economy - Akanksha Singh - Dec 05,2016

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euro slips amidst italian referendum

Italy’s constitutional referendum makes the already unstable Euro hit its lowest ever

Prime Minister Matteo Renzi announced on Monday, that he is resigning from the office of Italy’s Prime Minister, after his brainchild, the constitutional reform was rejected by most of the Italians. One of the biggest reasons was the success of the “No” campaign which won over 60% of the votes. Euro slipped against dollar and bank stocks in Italy slumped, as the country appeared to head for a political and financial instability.

The mere prospect of instability in the Eurozone's third largest economy made the euro hit low of about 1% against the dollar to around $1.0507 in Asian trade, its lowest level in over a year (March 2015). However, the market trimmed those losses later in the day, rebounding at $1.056, still a percent short from Friday’s close.

Though, the global market reaction was comparatively muted, perhaps because Renzi's referendums defeat was an expected outcome, however Italy’s economy is in a fragile state and a stretched period of uncertainty be it political or financial, can wreck the economy further.

Italy's economy, which has been stuck in the neutral zone, is indeed going to suffer. The government led by Matteo Renzi had initiated a series of reforms aimed at boosting growth and pushing the stagnant economy out of its sleep. Several of these reforms are either incomplete or still in the pipeline, because of which progress is now likely to stall.  Fresh general elections could take place, but they could be many months away; hence, economists expect growth to weaken tragically over the next year, while some say a return to recession is more than possible.

Economic analysts are particularly concerned about Italy's banking industry, which has been struggling for a while now and is seen as pretty vulnerable to a loss of confidence. Several banks are already coping with a burden of bad debt and are in dire need of refinancing, which would be extremely hard to come by amid a political crisis.