The market panic sparked by political turmoil in Italy and fears it may be heading out of the single currency is not over yet, economists warn.
The political crisis in Italy rocked markets across the world, with fears a full-blown meltdown in the eurozone would hammer global growth.
This would have repercussions for the UK, as its economic fortunes remain closely tied to the strength of the eurozone, regardless of Brexit.
The political crisis in Italy rocked markets across the world, with fears a full-blown meltdown in the eurozone would hammer global growth
The populist parties that have shot to power struck a deal late last week to form a government and tone down their eurosceptic positions. That has eased fears that the country may crash out of the single currency or even head for ‘Quitaly’ – an Italian version of Brexit.
Relief came when the parties agreed not to appoint a eurosceptic finance minister, who had been vetoed by Italy’s president, raising the prospect of a fresh election.
But Claus Vistesen, chief eurozone economist for Pantheon Macroeconomics, said the coalition was likely to prove unstable and there could still be new elections soon.
He said the Northern League and Five Star movement, which have formed a coalition under prime minister Giuseppe Conte, would again emerge as the biggest parties.
‘Both have shown a willingness to flirt with outlandish ideas of parallel currencies and debt forgiveness in a bid to capitalise on festering anti-EU sentiment among parts of the Italian population,’ he said.
Markets were worried last week that the coalition wanted to issue debt in a new currency, effectively taking a big step to dropping the euro. Conte has subsequently given assurances that the country would stick with the euro, but big rows over the budget lie ahead.
The market panic sparked by political turmoil in Italy and fears it may be heading out of the single currency is not over yet, experts have warned
The Northern League’s supporters want the new government to slash taxes, and there are proposals for a flat tax system in the coalition pact.
But the Five Star movement’s support base want a huge spending spree, including a €17 billion proposal for a basic income for job seekers.
Carlotta de Franceschi, who advised former Italian prime minister Matteo Renzi on banking, said the government might stir up more market panic if it tried to raise money from taxing the banks.
‘I think the market would react poorly simply because our banking system is still recovering,’ she said.
Ivo Pezzuto, a professor of global economics, said the new government needed to invest to foster growth.
‘In order to grow and prosper, Italy would need to relax fiscal rules to a certain extent that would allow the country to invest in public infrastructure and new business,’ he said.
‘That would kick start growth and shock Italy out of the its high unemployment and low productivity.’