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Italy referendum could be the third most disruptive event of 2016 after Brexit and US election

Italians are set to go to the polls on 4 December to vote on constitutional changes amid renewed pledge from Prime Minister Matteo Renzi to resign if he loses Italy's upcoming constitutional referendum. In an interview on Italian radio last week, the premier said: "I'm here to change things. If that doesn't happen, there is no role for me to play."

The reforms would see the number of senators and their legislative power drastically reduced, which Renzi claims will cut down on bureaucracy, making government more stable and efficient. But his opponents argue that there are inconsistencies in his proposed changes, and that they would put too much power in the hands of the prime minister.

Italy’s economic success and bank system health remain vital for the eurozone as a whole. A rejection of the measure on Dec. 4 has the potential to rattle stocks, bonds and the euro—and set a damaging tone for Europe. Latest opinion polls put the “no” vote just ahead, with more than 20 percent undecided.

If there is a shock in Italy and the European Central Bank can’t calm markets, “the potential for contagion to the rest of the eurozone is much greater than Brexit,” said Isabelle Mateos y Lago, chief multi-asset strategist for BlackRock Inc.

Referendum jitters have already unnerved the nation's bond markets. The spread between Italian and benchmark German government bonds has widened to around 1.7 percentage points, near the highest in two years.

If Prime Minister Renzi steps down, parliamentary elections which are now slated for 2018 could be brought forward. It is then likely that a temporary or caretaker government will be formed to change the electoral law before general elections can be held.

FxWirePro's Hourly EUR Spot Index was at -55.0536 (Neutral), while Hourly USD Spot Index was at 31.0144 (Neutral) at 1300 GMT. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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