Italy’s upcoming referendum on December 4 asks the Italian electorate whether they wish to accept a series of constitutional changes, which include senate reform and a new process to elect the President. This bill was originally passed by the Chamber of Deputies in May 2014 and the Senate in May 2016, and will now be voted on by the popular electorate.
As the Partito Democratico’s (Democratic Party) poll ratings – particularly those of Prime Minister Renzi – have declined, this referendum is increasingly being seen as an opportunity for the electorate to express their dissatisfaction with the current government’s inability to deliver the economic recovery that Prime Minister Renzi promised. In that sense, it can be compared to the UK’s referendum on the EU.
Current polls put the NO vote slightly ahead, as has been the case for the past several months. With roughly 25% of the electorate still undecided, these final two weeks of the campaign (during which no polls will be published) will continue to be crucial in determining the outcome. Furthermore, turnout will also be important – with high turnout likely to favor the NO campaign.
Our base-case scenario (with a 50% probability) is that the referendum will result in a narrow NO vote. Also, when aggregating probabilities of both strong/narrow NO votes (see definitions below) there is an overall 70% probability of a NO vote.
In our base case scenario of a narrow NO vote, we expect the resignation of Prime Minister Renzi and the installation of a technocrat government whose key priority will be to change the electoral law before elections are due to be held in May 2018. Given that the polls have been relatively consistent, we believe the markets are pricing in our base-case.
The flow chart below explores the potential implications of the other outcomes.
In the case of either a strong YES or strong NO vote, we could see discussion of the need for early elections – or the market looking ahead to the regular elections scheduled for May 2018. It will be important to note whether or not the elections take place under one or two electoral laws, as this could determine the stability of an elected government.
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