Italexit?

With potentially radical outcomes in the Dutch and French elections avoided, and Merkel’s coalition forming in Germany, it would be easy to think that the political position in Europe was stabilising. However, in Italy, there has been some papering over of the cracks since the inconclusive election in March, which is now looking a little thin. Wavering confidence in the ability to form a stable government is impacting on Italian bond spreads (highest for 4 years), in turn increasing the cost of government debt (which is the greatest in the eurozone) and supporting a downward spiral of economic health. Among the Eurosceptics, who now hold sway in the Italian parliament, there are renewed calls to leave the euro. This still feels unlikely – at least from a rational perspective – Italy continues to trade well, takes significant benefits from its eurozone membership, and neither major party campaigned on an Italexit ticket. However, as we have seen in recent years, political decisions around the world are increasingly being made for ideological rather than economic reasons and with further elections in Autumn now almost certain, there is an opportunity to amplify populist sentiment.