ASSET ALLOCATION - What Donald Trump’s election changes... and what it doesn’t

The essential

The issue is whether US economic policy will be sharply different, particularly fiscal and tax policies. We know that tax cuts and a revival of infrastructure spending are planned, and that the impact on the budget deficit can be very high, with the usual consequences on long rates, public debt... and monetary policy. Among other areas of uncertainty is the temptation of protectionism.

US Congress will not unconditionally back the new president on these subjects: it is certainly not enthusiastic about large budget deficits and is fairly pro-free trade. Having said that, even if the changes remain moderate compared to what was said on the campaign trail, not betting on substantial change would undoubtedly be a mistake. The victory of Donald Trump brings uncertainty on many points, and risk of a major shift in economic policy, leading to a widening of deficits, is not marginal at this stage. However, we will have to wait more than two months before getting answers to any of these questions (inauguration on 20 January, then discussions with Congress). In this article, we will review what will not change with Trump’s election and the elements of uncertainty in key areas, such as the impact on bond yields, the emerging markets and monetary policy.

> Risk Factors

> Macroeconomic picture

> Macroeconomic and financial forecasts

> Facteurs de risque

> Contexte macroéconomique

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December 2016

Decembre 2016

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Jobs Act: towards a new referendum in Italy?

The largest Italian union (Confederazione Generale Italiana del Lavoro, CGIL) has collected enough signatures (more than 3 million) to call for a referendum to abolish global labor market reforms. These were introduced in 2014 by the Renzi Government (Jobs Act). The union wishes by referendum to restore the impossibility for the companies to dismiss the employees. If the idea is clear, the process is not that simple. Let us recall that there are two types of referendum in Italy:

“Confirmatory” referendums, which are intended to validate constitutional changes and do not require a quorum. However, they require the approval of at least two-thirds of the members of Parliament who voted;
“Abrogative” referendums requiring 500,000 signatures.

The referendum on the Jobs Act would be an abrogative referendum. Before starting the procedure, however, there are 4 important prerequisites:

Prerequisite # 1: First of all, the Italian Constitutional Court must rule on the validity of the application. An abrogative referendum cannot relate to a Treaty (for example, a European Treaty) or to tax aspects (repeal of a tax law, for example). The Court will give reply on 11 January. If it validates the request, the referendum should take place between 15 April and 15 June.
Prerequisite # 2: This referendum can be held effectively ... unless there is an announcement of early elections. These would become priorities.
Prerequisite # 3: This referendum will also lapse if Parliament changes some elements of the current Jobs Act. In other words, if the new government wants to avoid a referendum, it simply needs to amend, even partially, the current Jobs Act.
Prerequisite # 4: An abrogative referendum requires a quorum of 50%. If less than 50% of voters mobilize, then the result of the referendum would be invalidated. It should be remembered that of the last eight referendums repealing, seven failed to obtain the
necessary quorum of 50%. The strong participation in the last referendum (68.5%) nevertheless suggests that the outcome of a referendum on the Jobs Act would be likely to be validated.

All in all, in the current context, it seems reasonable to consider that the 4 conditions mentioned above will not be met, and that there will be no referendum on Mr. Renzi’s “Jobs Act”. Building on changes in the Jobs Act seems credible to us.

ITHURBIDE Philippe , Senior Economic Advisor

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