Are you Following the Italian Saga?

Markets tumbled yesterday on Italian fears. Today, they are in recovery.

If you are not following the Italian election saga, you should.


Because Italy could very well be where the next crisis comes from, and it could be a critical step in knowing how to prepare for it.

Italy is one of the European Union’s (EU) founding members, and one of its largest economies.

And, things are heating up in Italy…

Back in March, they held general elections. The result was a hung parliament.

The big winners where the two Euro-sceptic parties. That is, Luigi di Maio from the Movimento 5 Stelle (M5S) and Matteo Salvini from Lega.

The big losers: the two former Prime Ministers. They are Silvio Berlusconi from Forza Italia and Matteo Renzi from Partido Democrata who achieved low numbers.

Party Votes

Source: The Guardian
[Click to enlarge]

Two months after the election, Lega and M5S reached an agreement to form a coalition government. A deal between these two Euro-sceptic parties could have important consequences for the EU.

For one, it could dampen the EU’s plans to reform the bloc. French President Emmanuel Macron and German Chancellor Angela Merkel were planning for more EU integration.

The other is that, at some point, they may hold a referendum on staying or leaving the euro.

You see, Lega blames the euro for increasing poverty in the country. It has vowed to rectify the mistake Italy made by joining the single currency.

Their initial joint working platform included certain points in immigration and taxes…and a parallel currency to the Euro. Something they called minibots…

According to Italian newspaper Corriere della Sera (translated from Italian):

Experts of 5 Stars and League work on a series of chapters of which for now leaked only the titles. Among these, alongside the “flat tax”, the most hermetic: “Study on minibots”, reads the note released Thursday by the two groups. This is a proposal, put forward by the League, to issue government bonds in very small denominations that spread among the population and become similar to banknotes, payment instruments parallel to the euro.

‘Issuing “minibots”, government bonds in very small cuts that citizens can exchange, is in fact tantamount to trying to create a currency parallel to the euro. Can it work? On the legal level no, because in Italy and 18 other countries the European Central Bank has a monopoly on the issue of money; any attempt to overlap the ECB would put Italy on an institutional collision course with the rest of Europe.

The final agreed program between Lega and M5S didn’t include minibots.

But, as Euronews reported, it did include a provision for reviewing EU treaties. As they wrote: ‘Measures to redefine the “common currency policy” are marked as “still under discussion”.

Anyway, the proposal to form a government between Lega and M5S fell apart last Sunday.

Italian interim President Sergio Mattarella blocked the formation by vetoing their choice for economic minister. The coalition had chosen economist and well-known eurosceptic Paolo Savona as their nominee. Mattarella cited concerns by investors and said he could not accept it.

So, when the coalition refused to back down, the whole thing fell apart.

As M5S’s Salvini said, as reported by Bloomberg:

The program of the League-Five Star government wasn’t to cause a stink in Europe, but to reopen the debate about some of its constraints. These rules are destroying the unity of the European Union: if things aren’t changed, we’re heading for disaster.

What happens now?

Mattarella has asked Carlo Cottarelli, an ex IMF official, to take over as provisional prime minister. That’s until the upcoming elections, which could happen sometime in the next few months.

Yet, things are even more complicated…bear with me.

You see, Lega and Forza Italia, Berlusconi’s party, initially ran in coalition with Forza as the leading party.

The only thing was that, if elected, Berlusconi could not lead the party. In 2013 he got convicted for tax fraud and banned from holding office until 2019.

It all changed when Lega got more votes than Forza Italia. Forza was the most voted party in the coalition and took the lead. But, together they didn’t have enough votes to form a government.

Yet, if Lega and M5S joined, they had enough votes.

To form a coalition government with M5S, Lega needed Forza Italia’s permission to leave their previous alliance which Berlusconi gave.

But, just a few days later, the courts lifted Berlusconi’s ban of running for office early.

So that means he can now run for office in the upcoming elections, and maybe even win.

And…he may also be looking to put forward a parallel currency to the euro plan in motion.

You see, a parallel currency is something that Berlusconi proposed last year to the EU. The EU shot it down, with the argument that the Euro is the only legal currency in the euro zone…no exceptions.

So, a parallel currency plan may not be dead, even if the euro sceptics lose the upcoming elections.

Things haven’t gone that great for Italy in the Union.

Take a look at the following graph. It shows the growth of real GDP since the EU introduced the euro.

GDP growth

Source: Fortune
[Click to enlarge]

Clearly, things have been going better for France and Germany than for Italy and Greece. Greece’s crash, as illustrated by the graph above, was quite dramatic.

While some countries have benefitted, others have not. Until the EU addresses these discrepancies, divisions will continue in the zone.

And, Italy has some problems.

They hold one of the world’s highest government debt to GDP ratio at 131%. And unemployment is high, at 11% and youth unemployment at 31%. The savings rate has been dropping since the 2008 crisis.

The fact is, Italians are unhappy, hence the divided election results.

A new set of elections could pretty much throw any result.

And, Italy is not the only one in Europe in the middle of turmoil.

In Spain, Prime Minister’s Mariano Rajoy’s opponents are looking to have a no confidence vote. They are looking for early elections after people linked to his party were sentenced in a corruption scandal.

Spain, like Italy, also has a high government debt to GDP ratio. More instability could mean higher borrowing costs for both countries.

And, of course, there is still Brexit…which hasn’t happened yet…

The EU could be heading for a turbulent year.


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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