5 February 2016 Focus Europe: Dark clouds, no storm yet important reforms in Italy, but not enough. Temptations from the past have recently sneaked back, we would not be too surprised if Italy joins a busy 2017 political calendar with general elections in Germany and France. Rising concerns, in our view overstated, on the Italian banking system could hinder the credit recovery. Political risk is not only affecting euro-area countries. The European Union as a whole is probably facing its main existential crisis since the treaty of Rome that set the foundation of the union in 1957: ▪ The migration cusis is threatening the foundation of the European Union (Ea The EU is struggling to manage the refugee crisis. This could entail short-term costs for Europe, e.g. if the Schengen zone were to be closed temporarily. There may be other costs. For example, contrasting views among countries on how to deal with the refugee crisis may divert efforts away from important integration processes such as the Banking Union or the Capital Market Union. 1300./.! Cs a Inarr.iLi! The risks surrounding the UK's referendum on EU membership are non-negligible. Indeed, a poll taken following this week's publication of the draft renegotiation plan shows the lead for "leave" (45%) over "remain" (36%) rising from 4% to 9%. A referendum is expected in late June this year if the draft plan is ratified at the February EU Council meeting. While the risks are high for a Brexit, our base case is that the vote will be in favour of remaining in the EU. After all, when asked how the public will vote if the PM is strongly behind the renegotiation (which it sounds like he is) the polls turn very much in favour of continued EU membership (see accompanying note in this issue of Focus Europe). ECB: Avoiding a December déjà vu In a speech to the European Parliament On 1 February, Draghi said that:"While the most recent wave of disinflation is mainly due to the renewed sharp fall i