Jitters over fate of EU after Italy's 'no' vote

European countries faced fresh uncertainties with Italian Prime Minister Matteo Renzi set to quit after losing a referendum vote, and this caused jitters in currency markets, including a knee-jerk fall in the euro to a 20-month low against the US dollar yesterday.

Italian voters on Sunday rejected Mr Renzi's constitutional reform plan by an overwhelming 60 per cent to 40 per cent, forcing him to announce he would step down.

They did not buy into his plan to reduce the power and size of the Senate so as to make it easier to pass laws, including those to help reinvigorate the euro zone's third- largest economy.

Initial jitters saw the euro dive to as low as 1.0503 to the greenback early yesterday - a fall of 1.6 per cent from Friday. Hours later, it rebounded to about 1.0698, clawing back all its losses.

It was a similar story with the Singapore dollar - the euro shed 1.2 per cent to 1.4952 yesterday morning from Friday's close of 1.5141, before climbing back to around 1.5235.

The initial plunge in the euro was sparked by fears that the referendum defeat - and Mr Renzi's resignation - would hinder efforts to shore up Italy's fragile banking sector and deliver another hit to the European Union.

But the worries were mitigated somewhat by Austrian voters' rejection of far-right politician Norbert Hofer as their president on Sunday.

However, the kind of volatility seen in the euro yesterday could become all too familiar next year.

Mr Philip Wee, senior currency strategist at DBS Group Research, believes that the euro is likely to weaken further against the greenback as the United States rolls out more interest rate hikes.

"The EU could also face break-up risks again next year from rising populism and waning appetite for reforms," he said.

Mr Wee added that the concerns of Singapore firms in Europe will go beyond exchange-rate levels, given the growing backlash against globalisation and free trade.

The outcome of the Italian referendum is the latest in a series of political events this year that chronicle the rise of anti-establishment sentiment globally, after Britain's shock vote to leave the EU in June and Mr Donald Trump's win in the Nov 8 US presidential election.

European stock markets opened on a steadier footing, with the Stoxx Europe 600 Index gaining 1.45 per cent and London's FTSE 100 Index up 0.29 per cent.

This article was first published on December 6, 2016.
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