Italy’s Political Uncertainty Impacts Global Markets

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Europe is a tale of two markets: the peripheral economies — Spain, Portugal, Italy and Greece — have total debt around 100% of GDP and those with much stronger economic fundamentals such as Germany

There once was a time when Italian politics led the market to a collective yawn. After all, since 1946 the Italian Republic has had more than 40 prime ministers and governments. That has changed quickly, as a populist coalition grabbing for the reins. The leftist Five Star and rightist Lega have come together over a program of tax cuts, spending increases, and Euroscepticism. Having been foiled to form a government, the risk of a strengthened mandate in a September election appears to be the leading outcome right now.

In the case of Italy, where is the growth? From 1961 to 1996, Italian Real GDP grew by an average 3.4% per annum; since then to the present, the average is just 0.5% and the country has just once beat that 3.4% prior average growth rate. Once one of Europe’s most dynamic economies, Italy has become one of the more sluggish. With the monetary lever taken from the hands of the authorities, it is no surprise that both left and right have turned to an aggressive fiscal policy (and against immigration). Here Italy again comes into conflict with the larger EU (read: Germany) opinion. The situation is quite serious, with Europe likely to try to push the Italian populists to back away from their fiscal platform. The most likely outcome at this point is a September election, effectively dragging the uncertainty out and out and out.

I expect the next few weeks will likely continue to favor safe-haven assets like the USD and Treasurys, and a fourth Fed hike to be marked down even further. In the end, I expect that there will be a solid snap back based on global growth remaining strong. However, there will be some unpleasant days in the interim. For more information on 'Eurozone Markets', please check out page 52 of the Global Perspectives book. - Special Guest Blogger: Tim Kearney, PhD

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