What Will Italy’s Referendum Mean for the Euro?

Investors reeling from democratic shocks in Britain and the U.S. are worried about Italy’s future in Europe’s monetary union. They’re concerned that a defeat for Prime Minister Matteo Renzi in the Dec. 4 constitutional-reform referendum would undermine the nation’s fragile political stability. Yet pulling Italy out of the euro doesn’t seem to be an imminent threat because it would require cross-party political backing as well as a tortuous legislative process.

A defeat for Renzi, who proposed the vote and initially pledged to resign if the result didn’t go his way, could lead to early elections and a rise in support for the populist Five Star Movement. This party has pledged to carry out a referendum on whether Italy should stay in the euro area. Some investors are already predicting the end of the European Union, let alone the single currency. “We think the EU will break and that Italy will leave the euro,” said Jim Smigiel, a U.S.-based money manager at SEI Investments Co. “Until a while ago this was just unthinkable, implausible, but we’re starting to see the wheels in motion, at the very least.”