Why Italian Politics Keep Roiling Financial Markets
(Bloomberg) -- Discontent with the European Union is nothing new in Italy. But the arrival of a populist government prepared to channel that disaffection raised fears that the nation could eventually tumble out of the euro, even if by accident. In its first few weeks, the new administration managed to trigger several bouts of market volatility by challenging the EU on issues such as debt and migration, and by appointing euroskeptic figures to prominent positions. There’s lingering anxiety among investors of a self-fulfilling, Greek-style showdown that could upend markets the way the U.K.’s surprise Brexit vote did in 2016.
1. Could Italy leave the euro?
That’s highly unlikely but not entirely out of the realm of possibility. The two parties that took power, Five Star and the League, say they don’t want to take the country out of the euro. But they assign partial blame to the common currency for Italy having the slowest economic growth in the 19-nation euro area and an unemployment rate that’s only recently dipped below 11 percent. As they worked to form a government, they floated ideas like seeking a 250 billion euro ($300 billion) write-off from the European Central Bank and creating a new class of short-dated government notes specifically to pay state arrears, something critics saw as akin to issuing a parallel currency. Italy’s Democratic Party, which emerged as the biggest loser out of the March 4 vote, has accused the populists of having a hidden plan to pull the country out of the euro.
2. What spooked financial markets?
Uncertainty. The initial spark came after weeks of negotiations to form a government, when President Sergio Mattarella -- whose office is traditionally regarded as a restraining influence on politics -- stepped in to prevent the appointment of a euroskeptic finance minister. That raised fears of a constitutional crisis and resulted in an unprecedented collapse in government bonds for Italy. In two trading sessions, the yield on the country’s two-year note surged more than 2 percentage points to a high of 2.84 percent on May 29, part of a move that wiped out 66 billion euros from the value of Italian sovereign securities. Since then markets have struggled to stabilize, with yields again cresting on June 8 and June 26.
3. Do Italians want to drop the euro?
No. In a poll published on May 31, 72 percent of Italians backed the euro while 23 percent said they’d choose to leave.
4. So why the worry?
Italy could demand unworkable concessions from the EU for looser financial controls. In the view of Five Star Movement founder Beppe Grillo, the euro is not the primary cause of Italy’s economic suffering, but membership in the common currency deprives Italy of tools to respond to it. Like the U.K.’s Brexit vote to leave the EU, a euro exit could become a symbol in Italy of reclaiming national sovereignty. As Ferdinando Giugliano, a columnist for Bloomberg Opinion, wrote on May 29, "The genie of ‘Ital-exit’ is out of the bottle and it will be very hard to put it back in."
5. Why didn’t formation of a government settle the worry?
The coalition government of Five Star and the League has plans that pose a challenge to EU fiscal rules. They include a guaranteed "citizen’s income" for the poor and scrapping pension reform that raised the retirement age. Paolo Savona, the economist whose appointment as finance minister was vetoed by Mattarella, is in the cabinet after all, responsible for European affairs. Two more euroskeptics have been appointed to key posts in the nation’s parliament. Polls showed the party formerly known as Northern League, once known for deriding residents of the country’s south as beggars, thieves and good-for-nothing rednecks, is now ahead of Five Star, the web-based anti-establishment movement founded in 2009 that won the biggest share of the vote in the March election. The new prime minister, Giuseppe Conte, did say on June 5 that an exit from the euro is not part of the government program, and in late June he managed to negotiate a package of measures at his first EU summit to stem the flow of migrants.
6. Why the comparisons with Greece?
Italy’s populists, like Greece’s Syriza party that took power in 2015, have made promises to the electorate to undo EU-driven austerity measures that will inevitably put the country’s finances on an unsustainable track. Greece’s showdown with EU created the last round of existential worries about the common currency, a concern that’s receded but never gone away. The worry is that over time, Italy’s mound of debt -- which totals more than 130 percent of gross domestic product, second only to Greece’s burden of about 180 percent -- could become too expensive to finance. Still, Italy is the euro area’s third-biggest economy, not a minnow like Greece. And keep in mind that even after the spike in Italy’s two-year note yield, that’s still far lower than the 8.12 percent touched in November 2011 during the continent’s sovereign debt crisis.
The Reference Shelf
- QuickTake explainers on the euro’s existential crisis and populism.
- What the populists are promising Italy.
- A Bloomberg View editorial on what Europe should do about its Italy problem.
- Italy’s Donald Trump is running the show in the new government, Ferdinando Giugliano writes in Bloomberg Opinion.
- Bloomberg Economics on the breaking point for Italy’s debt.
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