Hold on to your lug nuts. It’s going to be a bumpy ride!
Italy Euro Politics
Once upon a time, politicians in a given country disagreed about things. Those things were mostly domestic, although there has always been some foreign policy issues as well. What they didn’t used to do, was just throw out wholesale changes to the entire structure of the economy based upon a single election in which one side won 51% to 49%, or whatever. After the Brexit vote, all bets seem to be off in the world of political market stability.
Which brings us to Italy. It seems that within Italian politics there are those who are what they call “Euro-skeptics”, which basically means that they aren’t in favor of the Euro and/or are not in favor of all the rules they must follow to be part of the Euro.
Essentially, when the Euro was setup, everyone was very keen on all of the benefits a single European currency would drive. And, why not? There are many, many benefits. As with most things, however, there are some responsibilities too. This is because with a single currency not only are the benefits shared, but so are any negatives as well. The Euro rules are there to keep countries from suffering because of the foolishness of other countries.
The catch is that sometimes those rules don’t nicely line up with how a people wants to go about governing itself. This is what made the Euro so ambitious in the first place, and what makes keeping it together so difficult now.
There are political parties in Italy making the same kinds of noises they were making in Greece before, and in the Brexit before that, where they question whether the burdens (rules) of the Euro are worth the benefits.
The markets are freaking out, not so much because the Euro is so important, or because a breakup of the currency would be ultimately bad, but because uncertainty makes investing trickier. It is hard to price for risk, when the risks are both unknown, and very large.
United Currency Issues
In my humble opinion, the only way a modern economy can survive successfully is when the monetary system and political system line up, but I’m not in the majority, and the to-date success of the Euro suggests I may be wrong.
Traditionally, when an economy goes off-kilter somehow, it’s currency acts as a correcting force. Take on too much debt, and the markets will make taking additional debt even more expensive. When your population doesn’t care and wants more, inflation pushes them into caring. However, when your currency can’t act as a correcting force, all you have is political will, and that isn’t really a strong suit for the world these days.
Italy may or may not pull out of the Euro, and if it does, that may or may not be a terrible/brilliant/inconsequential thing for the rest of the world economy. What is certain is that market volatility will only increase until someone can get a handle on the risk profile and how to price it.