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Euro Volatile After Italys Referendum

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Euro rate is now Volatile After Italys Referendum

The Euro continues to be the biggest casualty following Italy’s no-vote on Sunday. On 4th December, Italians overwhelmingly rejected constitutional changes by voting for no on what is being seen as an anti-establishment vote. Matteo Renzi, Italy’s prime minister had proposed to reduce senate powers, to cut the number of senators from 315 to 100 and to change electoral laws. He had previously stated that the current structure of government made it difficult to govern the country. But it seems, the majority of Italians do not share Matteo’s sentiments. Many Italians felt that such changes would give the government too much power. It would glorify the opinions of the political elite at the expense of the other citizens and reduce system checks and balances.
Political uncertainty in Italy is sending ripples all over the European Union and driving investors away to safer markets. The no-vote may be a loss for Matteo’s government but it is a win for opposition parties especially the 5-star movement. The movement is the biggest anti-euro proponent in Italy. Investors are growing weary of this anti-euro sentiment across Italy and this is responsible for falling Euro value.

On Monday the Euro traded at 1.0524 to a dollar, the lowest it has ever gone since June last year. But in a surprising twist, the Euro bounced back relatively well over the past few hours trading at a high of 1.75 to a dollar. This is the highest value the Euro has attained in the last two weeks. Investors are seemingly confident about Italy’s future in Eurozone. It would seem that investors don’t believe that Italy is going to abandon the Euro altogether, at least for the time being. Stocks also appear unfazed by the referendum’s outcome with FTSE 100,FTSE MIB and DAX all making significant gains.

Focus now shifts to the effect of Matteo’s resignation to the Euro’s value. The move is likely to bring more political instability to the country and weaken its economy further. Italy’s banks have been facing their own set of challenges in recent months. The banking sector is burdened with loads of bad debt and the economy is on the brink of a recession. Italy’s government has previously bailed out debt-ridden banks. But the European Union now terms this kind of no-strings-attached bank bailout by EU governments as illegal. The overall effect is that 40% of the country’s bank loans cannot be recovered, the government cannot salvage the sector and banks are holding on to their cash and denying customers loans. These economic struggles combined with a referendum are responsible for the Euro’s volatility.

So what next for you as an investor? It would be wise to shift your assets for the time being from Euro based markets to safer places like dollar-based markets. You could also take the risky route and invest in the Euro now hoping to cash in in the long term when it bounces back to stability. The stability will be gained once the wave of populism leaves Europe. The Euro has proven to be resilient to political turmoil and numerous economic woes. It is therefore expected that this volatility will not be experienced for long.

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