Uncertainty has enveloped Italy after prime minister Matteo Renzi resigned following the December 4 referendum, at which a constitutional reform he had long championed was rejected by a sound majority.

Mainstream parties are now calling for a transitional government to end the legislature, whereas the mounting populist wave led by former comedian Beppe Grillo wants immediate new elections. Meanwhile, investors are holding their breath as the banking system teeters on the brink of collapse, jeopardising the country’s fragile economic recovery and casting shadows across the whole eurozone.   

“There is an emotional aspect to the whole issue, as well as a rational one,” Emanuele Serafini, director of the FDI desk of the Italian Trade Commission (ICE) in London, told fDi.

“The emotional aspect concerns the destabilising effect of the event. Now uncertainty is king, although the financial doom many had expected has not materialised. On the other hand, other reforms more pertinent to investment in the fields of justice, taxes and labour market have already been approved. Today foreign investors are focusing mostly on real estate and small and medium-sized enterprises, and this event doesn’t really affect these flows of investment. But big deals are on hold.”

Capital needed

Mr Renzi, whose resignation will come into effect once Congress approves the budget law under discussion, leaves the country in the middle of a fragile economic recovery (the government estimates growth below 1% in both 2016 and 2017) and a banking crisis that originates in Siena-based lender Monte dei Paschi, which desperately needs €5bn in fresh capital to rescue it from the brink of collapse and prevent a domino effect across the Italian market and beyond. 

However, Mr Renzi has been long perceived abroad as an element of stability, and foreign investment has risen during his 1000 days at Palazzo Chigi. Attracting valuation boosted cross-border M&A which set a new quarterly record between June and September, with total transactions of $22.1bn, according to Bloomberg figures. At the same time, greenfield FDI reached over $3bn in the first 10 months of the year, confirming the mild recovery experienced in the previous two years, according to fDi Markets, an FT data service.

So far financial markets have been pretty indifferent to Mr Renzi’s electoral defeat. But as this magazine goes to press, nobody knows whether a transition government or new elections will follow him. Only once this becomes clear, will investors will regain their composure?