Italy & The Euro – Stormy Waters Ahead?

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With the new coalition of the Five Star Movement and the League coming to power in Italy, the question that has been at the forefront of financial discussion has been the effects that this unpredictable alliance will have on the markets.

There has been chatter among those in the know about a possible replay of the Greece scenario which caused so many problems for the EU. But Italy isn’t Greece, we’ve been told.

While that may very well be true, it’s worth noting that not all the differences between the nations are positive.

Italy In Numbers

Italy’s economy is around 10 times the size of Greece, and its public debt is seven-times larger at €2.3 trillion, making it the largest in the Eurozone and 4th largest in the world.

Italy is too big to fail, is another thing we’ve been told. Let’s hope that’s true, as Italy is possibly also too big to save.

As things stand the effects on the market have been relatively minimal. We’ve seen yields of 4.3% on 30-year Italian Government bonds, which are far below yields of 7.7% back in 2011.

That doesn’t mean that the situation can’t worsen, though.

EUR Risk

A report by the European Council on Foreign Relations showed that in Italy the sense of “cohesion” between individuals and the EU sharply fell between 2007 and 2017, so much so that apart from Greece no other EU nation saw such a decline over that time period.

This is very much a tightrope situation, with the new Italian coalition Government’s common programme looking as though it could potentially do enough to kickstart conflict with the EU & Eurozone.

Higher spending, lower taxes, and confrontation when it comes to Eurozone fiscal rules look to be on the agenda.

The question now is, what could actually happen?

Next Steps

The most welcome possibility is that new Prime Minister Giuseppe Conte goes on to lead a conventional government, although that seems unlikely when the leader of the right-wing League Matteo Salvini recently commented that: “I didn’t ask for votes to simply continue on a path of poverty, precariousness and immigration: Italians first!

There’s also the possibility that the government will back down at the first sign of the EU taking a hardline approach, but the worst-case scenario is the government triggering a run on Italian debt and Italian banks.

This could see Italy fall out of the Eurozone, and would be a catastrophic crisis.

The fact is, a lot of Italians see the EU as the reason for their plight, and believe the new coalition government is the answer to their problems.

The truth though, is that the current government will most likely not resolve their crisis. If anything they could make things much worse.

Under this new leadership, Italy’s place in Europe remains precarious at best, and the markets watch on with baited breath.

Anything can happen, and all it takes is one wrong move to send Italy down a path of destruction, and the EU will have to travel with them.

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