Italy could be at a brink of another political crisis if the 4 December referendum fails to pass.  PM Renzi has indicated he may resign if his reform proposals fail to go through. Loss of the referendum and the resignation of PM Renzi could herald a period of heightened uncertainty for the EU and the euro area.

Italian GDP has failed to recover and is currently around levels last seen in 2000. The unemployment rate remains stubbornly high at 11.4 percent, house prices are still falling, (Q2 -1.7 percent y/y), and non-performing loans in the banking system are estimated to be around 20 percent of GDP.

The very high level of bad debts is a major source of disinflationary pressure and the government’s ability to stimulate fiscal policy is constrained by public debt levels of around 132% of GDP.

The 4 December referendum will be used as a protest against the current economic performance. Despite disapproval of the EU’s handling of the economy, there is, however, overwhelming support in Italy to remain part of the EU.

The ambitious constitutional reforms proposed by Renzi sharply diminish the size and powers of the Senate in an attempt to streamline legislation. Recent opinion polls show that opposition to the referendum is ahead by between 5-10 percent.