* Italy government suffers crushing defeat in referendum
* Euro fell to 20-month lows against the dollar
* Referendum failure may open way for Five Star Movement to become stronger
The Italian government, led by Prime Minister Matteo Renzi, suffered a crushing defeat in a referendum proposing constitutional reform on Sunday night, Reuters reported.
Italian Prime Minister Matteo Renzi had vowed to reign after the defeat, tipping the country into potential political turmoil.
Following the results, the euro fell to 20-month lows against the dollar, as markets worried that instability in the euro zone’s third-largest economy could add further pressures to the financial crisis and the country’s already weak banking sector.
The outcome of the Italian Referendum naturally has a negative impact on the markets, at least in the short term.
“Momentum behind country reforms is likely to slow down or stall altogether, with disappointed investors going back in their minds to the roots of the European crisis,” Gary Dugan, Chief Investment Officer at Emirate NBD, wrote on Monday.
“Although the potential for rising volatility may be dampened by the favourable economic outlook in the euro zone, on a longer time horizon, general elections may see the rise of populist movements calling for an Italian exit from the bloc,” he added.
Rise of 5 Star Movement
It was speculated that a referendum failure would open up the way for the populist, anti-establishment Five Star Movement to become stronger and form a government.
The movement, which began in 2009, is led by former stand-up comedian Beppe Grillo. In the 2013 elections, it became the second most voted-for party despite having no history in national governance and service.
This comes as populist movements gain strength across Europe and the Westerns world, evidenced by the unexpected win of Donald Trump in the US presidential race, the appointment of Theresa May as UK’s PM after Brexit and the headlines made by France’s Marine Le Pen.
Italy, the euro zone and the world are yet to see the longer-term impacts of the referendum failure and the resignation of Prime Minister Renzi. However, one thing is certain: this failure ends 2016 on a volatile note.