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Are the Euro’s Days Numbered?

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In less than a year, Italy could have a government that is committed to either dropping out of the euro altogether, or to some other scheme such as creating a so-called ‘parallel currency.’ Either of these are obviously bad for the euro-zone as a whole. Italy is one of Europe’s largest economies, and unhinging it from the euro would be a catastrophe for the currency bloc. But political momentum points toward a more euro-skeptic party winning in Italy’s coming elections. The FT’s Tony Barber explains how that could happen:

Neither the left, nor the right nor Five Star has much hope of outright victory in next year’s election. However, a rightwing coalition might well pip its rivals to first place. For, despite a modest economic upswing, the PD government inspires little enthusiasm among Italian voters. As for Five Star, its antics — not least, the hash the party is making of running Rome’s municipal government — convey a persistent impression of amateurism.

If a rightwing coalition were to come first in next year’s election, one of its leaders would be entitled to become prime minister and to form a government. The premiership would be denied to Mr Berlusconi on account of a tax fraud conviction in 2013 that resulted in his expulsion from parliament and a ban on holding public office until 2019. But he would undoubtedly seek to influence government policy from the wings.

From this perspective it is easy to see why financial markets are rattled. There is a distinct possibility that, in less than a year, Italy will have a government that includes political forces ostensibly committed to altering the terms of the nation’s eurozone membership. It would be a reminder that, despite the stabilisation of the currency union as a whole, Italy is the one big country where the eurozone crisis never really went away.

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Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.