Renzi Steps Down as Head of Italy’s Democratic Party

On Sunday, former Italian Prime Minister Matteo Renzi stepped down as the head of the Democratic Party. Thus begins a battle between the traditional membership and the liberal wing for the leadership of the nation’s top political machine. The winning faction will represent the party in the upcoming national elections against the populist Five Star Movement (5SM), headed by actor and comedian Beppe Grillo. This election could determine whether Italy will remain in the EU, or if it will follow Britain and restructure its relationship with Europe and the euro.

Former Italian Prime Minister Matteo Renzi steps down as Democratic Party leader.

Referendum at the Root of Renzi’s Rejection

Matteo Renzi’s fall from grace began in 2016, with his failed support for a reform of the country’s Parliament. 60 percent of the electorate voted against the measure in December, and in response Renzi stepped down as Prime Minister. The position then went to Foreign Affairs Minister Paolo Gentiloni, also a member of the Democratic Party. The rejection of the referendum reflects a crisis in which nearly a third of Italian citizens back a right-wing coalition which campaigns on withdrawing from the EU.

Economy Is Central to Italy’s Political Uncertainty

Many analysts expect that the fallout from the internal conflict in the Democratic Party could lower the approval ratings enough to put 5SM in the driver’s seat when it comes to negotiating with Brussels. The two parties are currently drawing similar numbers in national polls. Italy’s economy has not yet recovered from the global recession that lasted nearly 10 years, and has some of the highest rates of unemployment and nonperforming loans in Europe. The European Commission is expected to issue an official warning to Italy in the near future regarding its growing budget deficit and public debt.

Italian Debt Default Could Drag Down EU

Italy’s economy ranks third in mainland Europe, behind Germany and France. A default on its outstanding loans valued at least $2.5 trillion could leave the International Monetary Fund struggling to bail out the country. This is especially true as the populace rebuffs austerity measures aimed at reigning in spending. Italian critics lay some of the blame at the feet of the European Central Bank (ECB). The institution has been slow to raise interest rates. Mario Draghi noted this month that he is still concerned about the impact of inflation on the euro, and sees signs of improvement as merely cosmetic. However the ECB’s “quantitative easing” has kept Italian businesses from being able to expand, limiting employment opportunities and keeping the country from reaching its full potential on the international stage.

ECB’s Draghi Tells Italy that Euro Is the Only Option

During an address to the European parliament earlier this month, Draghi warned anti-euro politicians such as Italy’s Grillo and France’s Marine Le Pen that there was no way to withdraw from the euro as a currency without also withdrawing from the EU. Few countries are willing to undertake this risky step without seeing the result of the upcoming Brexit. Switching from the euro to a national currency could allow for devaluation. That would make exports to other European nations more attractive. But it would also mean settling up any outstanding debts held by the ECB. Italy currently owes more than 133 percent of its GDP. This makes the country unlikely to be able to repay its debts any time in the near future.

Renzi Chances Early Elections

Renzi supports moving the scheduled national elections from 2018 to the summer of 2017. This is one reason he is calling for party elections in the spring. His detractors have complained that moving the election season forward does not give the party enough time to come up with a coherent platform while staying true to the liberal ideals upon which the movement was based.

Another reason for the escalated timing is that Renzi faces a risk of breakaway groups forming their own party. Starting next year, proportional voting will lessen the impact of coalitions. This is how the Democratic Party came to power in the last elections. It’s estimated that 4 percent of Italian voters would support a new left-wing political group. While this does not sound significant, it would be enough to put 5SM in the lead. Right-wing parties, Forza Italia and Northern League account for a quarter of Italian voters. They could also join a coalition with 5SM.

How Renzi’s Resignation Affects Trading

The uncertainty of the Italian political situation will depress gold prices. Renzi should win control of the party. However, if enough of a schism is created, 5SM could take over the government later this year. The euro is likely to fall, thanks to pessimism about the Italian economy. Neither of the front running parties seems to have the needed public support to manage public debt.

Italy’s banking system has been hit hard by a series of non-performing loans. The ECB has pointedly refused to underwrite these bad debts. This is keeping the London FTSE index from reaching its full potential. Additionally, Italian bank shares are seeing a large drop.